As part of our ill fated house purchase late this summer, we did a lot of thinking about home insurance policies. A truly riveting topic, to be sure. Nevertheless, we discovered a few interesting things about the subject:
Most home insurance companies offer about the same rates for the same coverage. This is not terribly surprising when you think about it. These guys' jobs is to estimate risk and then to price their plans a bit higher than the expected pay-out, such that they generate a profit for their companies. Since this is an extremely competitive market, prices should gravitate to more or less the same level, and they more or less do.
The biggest impact on your home insurance premium seems to be your deductible... that stands to reason as well. The insurance companies are in the business of making money. If you can sue them for every little thing that goes wrong with the house two things happen: one, you are more likely to sue. Small things go wrong all the time. Second, when you sue, they not only incur the cost of paying you for your loss, they also have a considerable administrative cost. However, if you are willing to take a higher deductible, things look much brighter from the insurance company's perspective: you are less likely to sue and you are less likely to be able to manufacture false claims. In addition, the insurance company knows that you are motivated to reduce the likelihood of damage, since you bear a larger percentage of the cost.
The difference in insurance premiums is dramatic. We found that by increasing our deductible from $2,500 to $5,000 we could roughly double our liability coverage for the same premium.
My philosophy about insurance is a simple one: you insure only risks you cannot afford to bear yourself. The window is broken? No problem. Repair it yourself. You don't need insurance coverage for that, and you certainly don't need to pay for the insurance company's profits. However, most people (ourselves included) can't afford to replace a entire house lost to major disaster. That's what insurance is for.
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