Choosing insurance coverage for Single Family Houses

10 Replies

Insurance Choices

What things are important to you when choosing between two policies. Which of these policies would you choose and why?

The property:

Single family, two-story home with partially finished basement.

3 Bed/2 bath 1400 sq ft. finished.

Built in 1920; stone foundation, aluminum siding.

Central air/forced air heating.

Updated kitchen, plumbing, electrical.

Additional building: barn can be used for storage with possible upgrade at a later date.

Purchase price: $94,000.

Commercial loan for 80% of value.

Rent $1050/month

The policy choices:

Cost Policy A $726 annually Policy B $1,008 annually
Coverage: dwelling $113,296 $352,300
Other Structures $2,000 $35,230
Personal Property $1,500 $3,000
Loss of Rents $22,659 $35,230
Landlord Liability $100,000 $500,000
Medical Payments $500 $5,000
Deductible $500 $1,000

From an Insurance Agent's perspective, everything there is important.  Everything there is also customizable.  I would choose Policy B based on the liability and med pay limits, but I would ask your agent why the two have such different dwelling coverage amounts.  That number should be based on the cost to rebuild from the ground up in case of a total loss (do not include the value of the land and do not base the cost on the resale value of the property).  Where I am we use a rule of thumb of $125/sqft to rebuild, but yours may be higher.  Make sure you have a trustworthy agent with good referrals, not just an insurance "salesman".

Thanks, Dan!  How "old" of a home would you consider this essential for?  Have you ever needed to make a claim of this type?  What types of things would this cover?  How much would this type of addition cost in your area?  

I live in Alaska, but our family investments are in Michigan.  There are not many "older" homes in Anchorage - most have been built since the pipeline era of the 1970's.

From another agents perspective, I am going to assume that policy A is an "actual cash value" (or ACV) policy, and policy B is a ''replacement cost'' policy.

On both ACV and replacement policies, when valuing a claim, the adjustor is going to determine the actual cash value of the property first. They will depreciate the property based on age, wear and tear, useful life left, etc. For example, a roof with a 20 year lifespan gets hit with hail when it is 10 years old. Very generally speaking for example, the adjuster will likely depreciate it by 50%. 

If it's a $10,000 roof and an ACV policy, you can expect a check for $5000 minus your deductible. That is all you will be paid, period, and you will be responsible to pay the other $5000 to replace the roof.

If it's a replacement policy, you'll get paid the $5000 minus the deductible up front, and when the roof is replaced the insurance company will pay the other $5000.

So replacement policies obviously cost more since the insurance company is willing to pay more. That's the 'safer' but more costly way to go.

Which you choose all depends on your risk tolerance and how well capitalized you are. You could go 20 or 30 years and never have a claim, in which case the ACV policy would have put several thousand into your pocket. On the other hand, if you have a considerable claim in the first couple of years, you might have to cough up a good amount of cash with ACV to repair the damage.

We recently paid a claim on a 65 year old home that had a small kitchen fire. Cabinets, countertops, appliances, clean up, smoke damage, etc added up to $50,000. Fortunately it was a replacement policy so the full claim was paid. He would not have have been a happy camper had it been an ACV policy.

In my case as a new investor, I'm going with a replacement policy for those reasons, as well as what was said above about the higher liability coverage.

I would suggest B for the following reasons:

Dwelling Coverage is Replacement cost and not ACV. In  the even of a serious loss or fire ACV would end up causing you more of a headache and OOP cost, an in my opinion not worth the $300 savings annually.

Other Structures: If you have a barn as a separate structure, would $2000 Cover its replacement? With policy B you can probably lower the coverage slightly if that limit is too high. Typically coverage B (Other structures) can be adjusted.

Personal Property: Only important if you provide things such as appliances or washer/dryer, etc

Loss of Rents: If Rent is at $1050 per month. Policy A would give you just under 2 years of lossed rent in the even of say a fire where the house cannot be lived in. So A might be sufficient. Some policies have certain restrictions on how long they will pay loss rents though i.e. 12 month cap.

Liability: I think you should always opt for higher liability limits as a landlord. I would say minimum $300k. 

Medical payments: Another important coverage to have just in case. Typically does not cost much to make the jump from $500 to $5000

Deductible: $1000 is recommended due to the fact if you have a loss that is less that $1000 it should almost always be out of pocket anyways. I think that claims should only be submitted if they are large enough to justify submitting it. Even a $1500 claim may not be  worth claiming because the payout to you would be $500 but that may lead to a rate increase the following year. Not only that but if you were to have another thing go wrong that you needed to claim and now you have multiple claims in one year you be be non-renewed. I have had customers with 2-3 claims on a property and now they are struggling to find a carrier that will accept them and their only options are typically to go to a non-admitted surplus lines carrier which has very high premiums.

Speaking as an agent i say its better to have the coverage and not need than to need it and not have it (or not enough of it). But you can look at making adjustments to Other structures, Loss of Rents, and Liability coverage on policy B to see if you can get the premium slightly lower. 

How "old" of a home would you consider this essential for? Have you ever needed to make a claim of this type? What types of things would this cover? How much would this type of addition cost in your area?

- We put it on all our quotes even on brand new homes (partly because it's not very expensive, but also because time goes by and rarely do people add on things after they purchase home ins).  Coverage will vary by local, city, county, state governments, but some examples might include requiring sprinklers, upgrade electrical wiring (older homes can have aluminum wiring which isn't used often anymore at least in CA), electrical panel upgrades, insulation / energy value requirements, different fire place construction.  

- in our area, on a typical home, the Ordinance / Law is probably $20.00 to 50.00 per year.

I live in Alaska, but our family investments are in Michigan. There are not many "older" homes in Anchorage - most have been built since the pipeline era of the 1970's.

- I'd definitely have it on a 30+ year old homes.