Home Insurance is a Marathon, Not a Sprint

iStock_000023048880XSmallWhen making decisions about home insurance, many homeowners take a very short-sighted view of the policy and their insurance needs. Unfortunately, this approach can have some serious negative consequences over time. When you consider that you will own your home for many years and your mortgage is also similarly long, why would you think about your insurance in any other terms? However, that’s exactly what many homeowners do, either in an attempt to save some money or simply out of a lack of interest. When making decisions about your home insurance, you should really think in the long term instead of just making a quick, temporary decision.

One of the common mistakes homeowners make when purchasing home insurance is basing their decision solely on cost. While cost is very important, you should never choose a policy merely on the basis of cost without evaluating and understanding what is covered. Because not all insurance policies are identical, there is quite a bit of variation from one policy to another. Therefore, unless you are comparing policies of similar coverages, you cannot really make that evaluation. The key things you should always look for in policies are the limits of coverage and the perils covered. Having the proper limits ensures that you will have sufficient insurance to make you whole in the event of a loss. Understanding the perils covered means you won’t be surprised when a claim takes place. A good number of homeowners think everything is covered and are then surprised when their policy excludes certain types of losses.

When evaluating the coverage and cost of your home insurance, try to think in the big picture. What does the value of your home mean in your overall financial planning? For many people, it’s the largest single asset in their life. As such, they would want to protect it as best as they can. Just as you would not deposit your money in a bank that isn’t insured by the Federal Deposit Insurance Corporation (FDIC), why would you allow an asset as large as your home go uninsured or even be underinsured? Taking in the big picture can help you see the role of your home’s value in your life and allow you to make smart choices when it comes to insurance.

Another short-term perspective that people tend to take when viewing insurance is the idea that they have to earn back in claims the amount they paid in premium. When you consider this concept, it really is quite silly. If you pay $500 a year for up to $200,000 of insurance, do you think it’s realistic to expect that you will get at least $500 a year in claims? If so, what would be the point of buying insurance and how can the insurance companies survive? Instead, you should consider that $500 of premium as an investment in the future of your home. $500 a year in premium would take 400 years to reach $200,000. Even adjusting for interest, it’s unlikely that you can effectively invest your insurance premiums each year in lieu of buying insurance and have enough money in the bank to pay a catastrophic claim.

When you really consider how little your premium is relative to the potential value of your home insurance policy, it’s not a bad investment at all.


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