Home and auto insurance: Are you overinsured or underinsured?

Emmet Pierce

overinsured or underinsuredWhen you shop for homeowners or car insurance, one of your most important tasks is obtaining the right amount of coverage.

If you buy excess coverage, you'll pay too much for home and auto protection. If the amount is too low, you may save on premiums but not have enough coverage to meet your needs when you file a claim, says Carole Walker, executive director of the Rocky Mountain Insurance Information Association.

Remember, "When you file a claim, you'll need to pay out of pocket what your insurance won't cover," Walker says.

I. Rightsizing homeowners policies

1. Insure the structure, not the market value.

Consumers often confuse real estate values with the cost of replacing homes, says Karl Newman, president of the Seattle-based NW Insurance Council trade organization.

Buy only the coverage you'll need to repair or rebuild your home, he adds. That amount, which includes the costs of materials and labor, is less than the real estate value, which includes the price of land.

For guidance, consult your insurer or local building contractors.

2. Create a home inventory.

Newman says creating a home inventory is important to make sure you have enough coverage for your possessions.

Typically, a home insurance policy covers your possessions for about 70 percent of the value of the structure, says Kevin Foley, a New Jersey insurance agent.

So, if your home was insured for $200,000, you'd have coverage for about $140,000 worth of possessions.

While this is a rule of thumb that meets the needs of most people, some consumers need extra coverage.

Make a list of home contents and their values to be sure you're adequately covered. An easy way to create an inventory is to make a room-by-room video.

A variety of software applications can be used to ease the home inventory process. Some apps are free. They include:

  • Know Your Stuff: Insurance Information Institute's III) online home inventory software.
  • The Allstate Digital Locker: A free app that enables you to create an inventory on your smartphone or computer.
  • HomeIndex: A free tool from State Farm that allows you to create and save an inventory on your smartphone, tablet or computer.

3. Protect high-value items.

Walker says that home policies typically provide limited coverage for personal valuables.

According to the III, many policies restrict the amount for the theft of such items as jewelry and furs to $1,000 to $2,000.

The III says the cost for adding riders for such valuables varies, depending on what you're insuring, your carrier, where you're located and how valuables are stored.

To make sure you're properly reimbursed for a claim, have all valuables appraised by a professional.

4. Choose a high deductible.

Foley says the higher the deductible you choose, typically the lower your premium will be. He suggests a home deductible of at least $1,000.

It's cheaper to take care of minor losses yourself, he adds. Whenever you file a claim, you risk raising your premium.

Some homeowners policyholders have percentage deductibles. These are based on a percentage of a home's insured value. For example, if a house were insured for $300,000 and the insurance policy had a 2 percent deductible, $6,000 would be deducted from the amount you were paid for each claim.

Janet Ruiz, a spokeswoman for the III, says the higher the percentage you choose for your deductible, the lower your insurance premium will be. The amount you can save varies from insurer to insurer.

Percentage deductibles are most common in hurricane-prone states.

II. Rightsizing auto policies

1. Buy adequate liability coverage.

Every state but New Hampshire requires drivers to carry auto liability insurance to cover their financial obligations if they cause bodily injuries or property damage. This can include the cost of hiring a lawyer to defend against legal claims.

A policy that meets only minimum limits usually isn't adequate, Walker says. It can keep your premium low, but cost you thousands of dollars if you're responsible for a serious accident.

Although many states allow you to drive with a minimum amount of liability coverage, that minimum often falls short of amounts awarded by juries in personal injury lawsuits.

For example, Nevada requires automobile liability policies to carry a minimum coverage of just $15,000 for bodily injury or death of one person in a single accident; $30,000 for bodily injury or death of two or more persons in an accident; and $10,000 for property damage.

In a serious crash with injuries, accident victims could sue for amounts well beyond these limits.

In Somerset County, New Jersey, a jury awarded $3.5 million in February 2015 to Bonnie Dekmar, who was hurt in a head-on crash in 2010, according to news website, nj.com. It was one of the largest personal-injury awards ever given by a local jury.

2. Understand what you're buying.

Liability limits are represented by three numbers. For instance, in a 150/300/100 policy, the first number represents $150,000 in bodily injury coverage for one person hurt in an accident. The next figure gives you a $300,000 total coverage limit for all persons injured. The last number represents $100,000 in total property damage coverage per accident.

Make sure your liability policy protects all your assets. Add up the value of your possessions, including cars, your dwelling, investments and bank accounts.

3. Consider dropping collision and comprehensive.

Michael Barry, a spokesman for the III, says it often makes sense for policyholders to drop comprehensive and collision coverage on vehicles 10 years old or older.

If your car is worth $1,000 or less, the III says you should measure what you might receive in an insurance claim against what you're paying in premiums.

Collision pays to repair or replace your vehicle no matter who was at fault in an accident.

Comprehensive pays for financial losses not caused by collisions. These can include natural disasters, fires, or theft or damage from vandalism.

4. Consider uninsured and underinsured motorist coverage.

This coverage pays the difference between an at-fault driver's liability policy limits and the costs victims experience for property damage, injuries, and lost time at work. Typically, it applies if you're the victim in a hit-and-run crash.

This type of coverage also will pay your expenses if you are hit by an at-fault driver who has no car insurance.

5. Consider raising your deductible.

Higher deductibles generally reduce annual premiums, Barry says. That's because when you raise your auto deductible, you assume a greater share of the financial risk for claims.

See how much you could save today on your home insurance. Get your free home insurance quotes today!