How to Prepare Your Home Insurance Portfolio and Future Budget

15 Nov

Climate change has made weather events more frequent and severe over the last decade and that has made homeowner claims more common and expensive. Insurers have had to absorb the cost of these additional claims and end up passing those costs onto their customers via higher premiums. 

Unfortunately, many homeowners are finding themselves unprepared for the financial and personal risks that are popping up, risks that will most likely continue to get worse due to climate change. The question is, what should you be doing now to help mitigate your risks and be financially prepared for what climate change has in store for your budget. 

Let’s have a look at a few things you can do to prepare your insurance portfolio and budget for the future:

What You Can Do Now to Protect Your Home

In a recent Business Insider article, Maryland State Insurance Commissioner Al Redmer offered the following advice:

  • Meet with a trusted risk advisor such as your insurance agent or financial planner
  • Identity any unique risks that pertain to your home or lifestyle
  • Quantify that risk exposure in dollars
  • Make a decision about what you can do to contain or mitigate those risks
  • Review your insurance policies to make sure you are fully protected

As dangerous storms become more frequent and do ever increasing amounts of damage, insurance companies are starting to increase premiums, impose larger deductibles and lower coverage levels. In certain areas (think California wildfire areas) insurers are starting to pull out of the area altogether leaving homeowners scrambling to find coverage.

If you live in an area that is prone to natural disasters, you should expect your premium will be headed up steadily as climate change worsens. Redmer advises homeowners to start putting away money to help deal with premium increases as there is little chance your premium will be headed down in the future. 

In addition to bulking up your savings, it’s time to review your insurance coverages and make sure you and your home are fully protected. Homeowners insurance doesn’t cover issues related to flooding or earthquakes so if you are in an area prone to either, it’s time to add another policy to your insurance portfolio.

Insurers have also started changing deductibles in disaster prone areas. Wind and hail deductibles can be a percentage deductible which means that instead of a set dollar amount you will be paying a percentage of the total amount of insurance you are carrying. As an example, if you have $300,000 in homeowners coverage and a 5 percent deductible, you will have to fork up $15,000 before your insurance covers the balance. 

These types of deductibles may require some additional planning and savings. If you have a percentage deductible it is always a good idea to have that money sitting in a savings account in the event you have to make a claim. 

What Exactly is a High-Risk Area?

If your home is in a storm-heavy area or even a crime ridden part of town you may be considered high-risk. Examples include Tornado Alley in the Midwest as well as numerous parts of California that are at risk from earthquakes and wildfires. Florida and the Gulf region are prone to hurricanes that often end in flooding. It should go without saying that houses in a floodplain or other high-risk flood area are an issue.

Even if you are not currently in one of these areas, the future could change your risk. Global weirding is on the horizon and could impact your area. Global weirding is defined as a complementary term to global warming that reflects the belief that climate change causes or will cause various weather-related extremes, including both hot and cold weather, to become more intense and unpredictable. 

This means that weather patterns in the future will most likely become less predictable and more violent which can be a disaster if you are not carrying the proper type and amount of homeowners insurance. Regardless of whether or not you currently live in a high-risk area now, that could quickly change in the future which makes monitoring your area and planning for future risks important. 

What Natural Disasters are Covered?

The majority of standard homeowner policies will protect against most natural disasters up to your coverage limits. This includes wildfires, wind, hail, and storms such as tornadoes and hurricanes, although there is a chance that your policy will have a percentage deductible for wind and hail damage. Check with your insurer to verify your deductible type. 

There are two major exceptions that you should be prepared for if they apply to your area:

Flood damage: Almost all standard homeowner policies exclude flood damage so if you live in a flood prone area you need to add a flood insurance policy. Roughly 20 percent of all flood damage claims come from low to medium risk areas so even if there is a small chance of flooding you may want to consider a flood policy. 

Flood damage can be very expensive, so it is important to be fully protected. Flood insurance can be purchased via standard insurance companies or the National Flood Insurance Program (NFIP). While flood insurance is expensive, it is absolutely less expensive then rebuilding or repairing your home out of your own pocket. 

Earthquake damage: Damage from an earthquake is excluded from the majority of homeowner policies. If you live in an earthquake prone area you should absolutely be carrying this coverage. Earthquakes are unpredictable and can occur when you least expect it. In addition, they can cause very expensive damage to walls and foundations, so it makes sense to have this coverage in your portfolio. 

Plan Now, Not When a Storm is Approaching

As climate change impacts weather patterns, it is best to stay ahead of the curve when it comes to insurance. Get your insurance in place well before storms start hitting because once they are formed, changing your insurance coverage is almost impossible.

The majority of flood insurance policies come with a 10 to 30 day waiting period so you cannot wait until a storm is steaming towards shore to put a policy in place. This means that it is vitally important to put a policy in place well before storm season to make sure you are fully covered. 

It is also difficult to change your coverage levels once a major storm has been named or has moved into a certain area, such as the Gulf of Mexico. Insurers will often lock out changes to policies once a storm has been named or is within a certain distance. 

This makes it extremely important to have your insurance in place before you actually think you will need it. 

Here are a few tips to prepare for the future:

  • Review your risks on an annual basis and make sure you are covered against all perils
  • Put aside money for future premium increases
  • Have money set aside for deductibles, especially if you have a percentage deductible
  • Put flood or earthquake insurance in place if you are exposed to those risks

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