MSU Extension

Homeowners insurance or hazard insurance, as it is called by some, is a needed and most often a required element of homeownership. If you had to borrow money to purchase your home (most people do), the lender required you to protect the collateral, your home. In case of a fire, storm or other hazard, the risk of damage to your home is just too great not to be protected by an insurance policy. Therefore, the basic elements of a mortgage payment, principal and interest usually also include taxes as well as insurance. You will hear the acronym PITI which stands for the above.

Sound money management principles dictate that you pay your mortgage on time every month. As part of a healthy spending plan, the house payment has high priority. If you are following your plan, you may have developed a healthy habit of making your mortgage payment every month. In fact, you may have even set up automatic payments made from your bank or credit union so that you do not have to worry about your house payment. All of the above is good and should be followed. However, if your payment is figuratively or literally automatic, you may be missing out on the opportunity to save money.

When it comes to financial transactions, people often skip reading the fine print. In our “cell phone society” the opportunity to check (√) the box “agreeing to the terms and conditions” of the latest download without reading a word of them is far too simple. Likewise the temptation to skip reading the latest insurance policy renewal information may be business as usual. Nevertheless, your homeowners’ renewal policy will contain important information in regard to your property insurance and liability coverage.

Some questions that you should ask: If my dwelling or personal belongings are destroyed or lost due to fire, theft, vandalism or other event, what will I receive? Will my property be replaced, rebuilt or repaired according to what it actually costs? Or will my policy only pay what it costs to replace, rebuild or repair my property to a condition similar to what it was before the damage or loss? The answers to these questions depend on whether or not you have a replacement cost policy or a repair cost (market value) policy.

According to the Michigan Department of Insurance and Financial Services (DIFS), you should consider what your house is worth and what it would cost to replace it. In addition, you should look at your budget to determine what you can afford. Depending on the age of your home, you may be able to save money on one type of policy over the other. Remember, your lender requires you to insure the collateral up to the amount of the loan. If you have reduced your principal amount considerably, you may be able to adjust your insurance coverage amount to suit your needs.

Another area to review is the deductible – the amount out of pocket that you pay in case of damage, destruction, theft or other event. When shopping for home insurance in anticipation of your home purchase, you may have talked to an insurance agent about different deductibles and the effect on your insurance rate. You may have even tried to save money by attempting to purchase a policy with a high deductible only to be told by the Lender that it was unacceptable because you lacked sufficient savings to cover the out-of-pocket costs of a covered event. But how have things changed? Have you regularly set aside money for home repairs as part of your spending plan? You may be able to increase your deductible and satisfy both the Lender and your needs.

Bottom line: review your home insurance policy, talk to your insurance agent and determine if you are missing out on possible insurance savings. DIFS has information on the different types of coverage, including a helpful document that explains the differences between replacement and repair policies, liability and property coverage as well as other types of insurance.

Making financial changes can take time and be challenging. Sometimes it helps to have help from a professional.