In_Case_of_a_Fire_What_You_Need_to_Know_About_Your_Home_Insurance_v3
00:00:00.000 | Hello everybody, it's Sam from the Financial Samurai podcast.
00:00:04.240 | And in this episode, I want to talk about our home insurance policy.
00:00:08.720 | What is it?
00:00:10.280 | What goes into it?
00:00:11.640 | What are the various line items?
00:00:13.940 | We need to know what we're paying for because the Lahaina Maui fire disaster, that was terrible,
00:00:21.080 | terrible.
00:00:22.080 | And it's a wake up call, another wake up call to know that anything can and will happen.
00:00:26.920 | These fires, they just came out of nowhere.
00:00:29.120 | It was dry, it was hot, the winds were gusting at 60 plus miles an hour, maybe a spark flew
00:00:35.880 | and started the fire.
00:00:37.440 | Who knows?
00:00:38.440 | But one day it's paradise, the next day it's a disaster.
00:00:43.300 | My hope after you listen to this podcast is to call your home insurance company and understand
00:00:50.160 | what the heck your policy covers.
00:00:53.040 | Because it is pretty confusing and I want to go through some of the main points.
00:00:57.720 | The main points in this episode.
00:01:01.120 | So you basically have coverage A, which is dwelling, coverage B, which is other structures,
00:01:07.240 | coverage C, personal property, and coverage D, loss of use.
00:01:13.120 | Then you've got a policy deductible where you've got to pay out of pocket before the
00:01:17.600 | home insurance policy can kick in.
00:01:21.040 | Then you've got coverage E, which is personal liability.
00:01:25.560 | And then you have coverage F, medical payments to others.
00:01:29.460 | And then you have all these other additional coverages in your home insurance policy.
00:01:32.700 | You may or may not have it.
00:01:34.360 | Building ordinance or law coverage, extended replacement cost coverage, limited sewer or
00:01:40.200 | drain backup coverage, loss assessment coverage, actual cash value, roof endorsement, property
00:01:47.640 | held by trust or LLC, and then workers' compensation.
00:01:52.820 | So the most important coverage is coverage A, which is dwelling.
00:01:57.400 | Coverage A dictates how much the insurance company pays for rebuilding a home.
00:02:01.940 | If you haven't updated your home insurance policy recently, I highly recommend doing
00:02:07.320 | it.
00:02:08.320 | Building costs have shot up since the pandemic began in 2020.
00:02:12.920 | Home values have also increased for the past three years, four years actually, for the
00:02:17.160 | past since 2012.
00:02:19.320 | So if you haven't updated your dwelling amount coverage, you need to do so because you don't
00:02:24.200 | want to be stuck short in case of a fire or something else bad happening.
00:02:28.760 | There's also this thing called extensions.
00:02:31.120 | Could be automatic or you might have to ask for it.
00:02:33.880 | But in general, the average extension is about 125% of coverage.
00:02:38.320 | So if you have a million dollars of coverage, well, if something bad happens, total destruction,
00:02:44.240 | the coverage amount will go up to 1.25 million.
00:02:47.920 | And you can ask for additional extension coverage.
00:02:51.560 | So up to 150,000.
00:02:52.560 | I just checked with my insurance company.
00:02:55.080 | But you have to pay a premium for that.
00:02:57.000 | There may also be what's called a "guaranteed replacement cost extension."
00:03:02.640 | And if you got that, well, there's no question or debate about how much to rebuild.
00:03:07.680 | They'll just guarantee the total cost to rebuild your house.
00:03:11.400 | But I don't know if there's no debate.
00:03:13.880 | There seems to always be a debate when it comes to filing a claim with your insurance
00:03:19.760 | company.
00:03:21.040 | Another important thing to know about coverage A dwelling is to be insured for "replacement
00:03:27.280 | cost," not actual cash value.
00:03:30.880 | You can do actual cash value, but the coverage is not as good.
00:03:34.980 | So replacement cost is replacement cost.
00:03:36.840 | Whatever it costs to replace your home, that's what the insurance company is going to pay.
00:03:41.640 | But actual value only pays the depreciated cost of the home.
00:03:46.360 | Meaning the insurance company will only pay for a, let's say, 20-year-old roof and not
00:03:51.140 | the cost of a new roof.
00:03:52.700 | So that difference could be huge, especially if you have a very old home.
00:03:58.480 | With the preferable replacement cost policy, the insurance company may depreciate the home
00:04:03.660 | for the initial payout, but will pay that actual replacement cost once the item is built
00:04:10.360 | or purchased.
00:04:11.400 | So this difference could be in the thousands or hundreds of thousands.
00:04:14.120 | Probably not hundreds of thousands, but thousands.
00:04:17.240 | And it also shows that there are two payouts.
00:04:20.200 | Initial payout and then once it's done.
00:04:22.160 | I mean, it could take two years to rebuild your home.
00:04:24.440 | All right.
00:04:25.480 | Coverage B, other structures.
00:04:27.520 | The reason why price point of coverage A is important is because all of the other coverage
00:04:32.840 | limits are set by the coverage A limit.
00:04:35.660 | So for instance, let's say you have coverage B that includes patios, external fireplaces,
00:04:43.160 | fences, and an outdoor kitchen.
00:04:45.440 | Well, the maximum insurance that coverage B will pay for is 10% of your coverage A amount.
00:04:52.900 | So if you have a million dollars of coverage A amount dwelling coverage, then coverage
00:04:57.760 | B is $100,000.
00:05:00.740 | So look around your home, see what you got, other structures besides your main house to
00:05:05.260 | see what you need covered.
00:05:07.540 | Now let's move on to coverage C, personal property.
00:05:11.760 | This is coverage amount given for all of the items lost.
00:05:15.940 | T-shirts, speakers, kitchen appliances, furniture, all that stuff we accumulate over a lifetime.
00:05:22.220 | Just think about turning your house upside down without a roof and whatever falls outside
00:05:28.660 | your house, that is covered under coverage C, personal property.
00:05:34.100 | Now it is highly recommended, please do this after you listen to this podcast, to walk
00:05:38.580 | around your entire house with your phone and video record everything in every room in your
00:05:45.020 | house.
00:05:46.140 | At least do that.
00:05:47.560 | You can take it a step further by itemizing every single item and putting a price and
00:05:52.160 | date of purchase and the estimate value into a Google spreadsheet, for example.
00:05:56.940 | But at least record with a video everything around your house because if goodness forbid
00:06:03.280 | something happens, a fire or whatnot, you can at least show video evidence of the personal
00:06:09.020 | property you own.
00:06:11.340 | Now let's talk about coverage D, which is loss of use, use of your house and paying
00:06:16.780 | for a rental.
00:06:18.220 | So in the land of fire and mass chaos, owning is sometimes better than renting.
00:06:23.900 | It seems counterintuitive, but it could be true.
00:06:27.620 | One reader who lost his home to a fire talked to many people who were renters who were evicted
00:06:32.180 | since the fire.
00:06:33.500 | The landlords asked their tenants to leave so that either the landlord or one of their
00:06:37.740 | friends or family members who lost a home could move in.
00:06:41.580 | And this puts tenants in a bad situation because now they are stuck in a town with a housing
00:06:46.660 | shortage and now higher prices.
00:06:50.220 | This is something counterintuitive, but maybe it is intuitive.
00:06:54.340 | If there is mass devastation and a fire, the supply of homes goes down.
00:06:59.740 | Therefore the price of homes and rents may go up if people want to stay.
00:07:05.900 | And most people do want to return and want to stay.
00:07:08.300 | And that's what happened in the Tubbs fire in Northern California in 2017, 18, 19, 20.
00:07:15.120 | So if your house becomes uninhabitable, smoke damage, everything burns down, your home insurance
00:07:21.180 | policy due to coverage D will cover the cost of you renting a place somewhere else.
00:07:28.060 | And the standard is 12 months.
00:07:30.260 | There's an amount you can pay for rent and it's 12 months.
00:07:33.860 | Sometimes it goes up to 24 months.
00:07:35.860 | It depends on how much that coverage D amount is.
00:07:39.720 | So double check that.
00:07:41.240 | You may want to see how much a house of your similar quality rents for in your neighborhood
00:07:47.180 | or somewhere close by.
00:07:49.180 | And then use that amount times by 12 to figure out an appropriate coverage D amount.
00:07:55.740 | Now 12 months might not be enough folks because it could take six months alone to go through
00:08:01.900 | the insurance policy to file the claim and agree on a settlement.
00:08:06.020 | And then it could take one or two years to build.
00:08:10.060 | Building times have elongated since the pandemic began in 2020.
00:08:15.540 | And so I don't know if 12 months is enough.
00:08:17.420 | I would shoot for 24 months when you call your home insurance company.
00:08:23.020 | Next up is coverage E, personal liability.
00:08:26.180 | This is if someone falls on your property and sues you.
00:08:31.040 | This is something that you should get covered for.
00:08:33.500 | And then coverage F is medical payments to others.
00:08:37.000 | This is if I guess they sue you, they have to go to the hospital, or maybe they don't
00:08:41.340 | sue you, they go to hospital and you don't have money to pay.
00:08:44.420 | Well, your home insurance policy will kick in.
00:08:46.900 | But remember, there is the policy deductible.
00:08:50.500 | Deductible amount could be 500 to 1000 to 1500 and up to 5000 to maybe 10,000.
00:08:57.500 | Every home insurance company is different.
00:08:59.620 | So that's why you've got to call and ask what your deductible amount is.
00:09:04.460 | If you're wondering how much a home insurance policy costs, well, it's correlated to the
00:09:10.660 | cost of your home, the cost to build your home, the value of your home.
00:09:14.260 | The higher the price of your home, the more your home insurance policy is going to cost.
00:09:19.020 | But it doesn't cost that much.
00:09:20.900 | So one example of a reader who said that he had a $1.2 million home, he paid about $1,200,
00:09:26.620 | no $1,300 a year with a $1,500 deductible.
00:09:32.100 | Then I looked online for how much it would cost to insure a $3 million home.
00:09:36.620 | I've seen $1,750 annual premiums with a $10,000 deductible.
00:09:42.340 | So maybe with a lower deductible, it's closer to 2000.
00:09:46.020 | And then I checked how much it would cost to insure a $5 million home.
00:09:49.940 | And that was about $3,000 annual premium and a $5,000 deductible.
00:09:56.220 | So the amounts, it costs money, but it doesn't seem like it's that expensive to get home
00:10:02.140 | owners insurance coverage, especially if you are living in an area that's prone to flooding,
00:10:08.180 | fire, other natural disasters.
00:10:11.060 | Earthquake insurance is completely separate, folks.
00:10:13.540 | So you've got to get a new policy for that.
00:10:15.900 | But insure your homes.
00:10:17.060 | It's worth it.
00:10:18.060 | And shop around for insurance policies, because if you haven't shopped around for a couple
00:10:22.380 | years, you can probably get a better deal.
00:10:25.380 | The easiest way to do it is through Policy Genius.
00:10:27.900 | You go to financialsamurai.com/pgh, stands for Policy Genius Home, and you can get real
00:10:35.300 | quotes all in one place.
00:10:37.580 | And of course, you should call your existing insurance company to see if you can get a
00:10:41.500 | better deal.
00:10:42.780 | But the likely answer is no.
00:10:45.060 | They will likely want to raise your premiums because they'll ask you for an update on your
00:10:49.580 | home, you know, building costs and all this random stuff.
00:10:53.780 | And if you want more coverage for extension and so forth.
00:10:57.700 | So you will likely not get a better deal with your existing home insurance company.
00:11:01.900 | You'll likely have to shop around.
00:11:03.700 | That's why going online is a smart idea.
00:11:06.620 | I just realized I didn't address whether home insurance covers fire.
00:11:12.100 | In California, all home insurance policies cover fire, fire damage, fire smoke, and so
00:11:18.820 | forth.
00:11:20.060 | But double check anyway.
00:11:21.820 | I'm not sure what it's like for every single state.
00:11:25.180 | You need to ask your insurance company whether there is "fire exclusion" in your home insurance
00:11:31.740 | policy.
00:11:33.380 | So if there's fire exclusion, it means your home insurance policy doesn't cover your home
00:11:39.700 | for any fire damages, which is a no-no.
00:11:43.540 | So if that is the case, you've got to get a new policy or you've got to get fire specific
00:11:49.380 | fire insurance coverage.
00:11:52.100 | I'm assuming every single state has different home insurance laws.
00:11:56.420 | So please ask specifically whether there is fire insurance coverage or if there's fire
00:12:03.060 | exclusion.
00:12:04.420 | You don't want to be caught with a surprise that you aren't covered for what you thought
00:12:09.820 | you were being covered for.
00:12:12.300 | Very important.
00:12:13.300 | And also, for California residents, listeners, it is absolutely true.
00:12:17.220 | A lot of large insurance companies are no longer issuing new home insurance policies
00:12:22.180 | for homes.
00:12:23.180 | So if you're buying a home with a mortgage, you might have to shop around.
00:12:27.500 | You actually have to shop around.
00:12:29.500 | Now what's the reason for not insuring new homeowners in California, for example?
00:12:34.060 | Well, the insurance companies are saying they have concentration risk in California and
00:12:38.100 | therefore they're trying to diversify away from California.
00:12:41.540 | They don't say they're never going to insure new homes in California again or make new
00:12:45.380 | policies again.
00:12:46.460 | They're just saying they need to diversify more and when their book of business is more
00:12:51.700 | diversified so that they can make money appropriately, because at the end of the day, insurance companies
00:12:57.740 | are in it to make money, then they will start renewing policies.
00:13:01.820 | Start renewing policies, issuing new policies.
00:13:05.180 | And not all is lost, folks.
00:13:06.420 | If you live in California, you will be able to get another home insurance policy just
00:13:12.220 | from a different company that you might not have heard of, which could be dicey.
00:13:17.420 | I'm not sure.
00:13:18.420 | Obviously, the larger their insurance company, the bigger the balance sheet, the longer it's
00:13:22.060 | been around, the more comfort you will feel that the insurance company will actually pay
00:13:26.100 | out.
00:13:27.100 | There are many, many smaller insurance companies that will cover new policies and also the
00:13:33.500 | price.
00:13:34.500 | The price of insurance isn't skyrocketing as far as I can tell in California.
00:13:38.980 | They seem quite reasonable because I checked around and not only could I find a new policy
00:13:45.020 | just with a different carrier, but the price is totally reasonable.
00:13:49.340 | They weren't price gouging me at all.
00:13:52.060 | So don't worry there.
00:13:53.740 | Just like how we diversify our investment portfolios, insurance companies are diversifying
00:13:57.700 | their exposure across the country.
00:13:59.980 | And over time, I think a lot of these large folks will come back.
00:14:03.980 | But do be aware.
00:14:04.980 | Thanks so much, everyone, for listening.
00:14:06.860 | I hope you learned a lot from this podcast episode.
00:14:10.220 | I spent an hour talking to my insurance company, going through every single coverage amount,
00:14:15.260 | trying to understand what it is and whether I have enough coverage and whether the price
00:14:19.820 | is reasonable.
00:14:21.980 | Please do the same.
00:14:23.460 | If you're looking for a new home insurance policy, check out Policy Genius at FinancialSamurai.com/PGH.
00:14:29.180 | Basically, if you haven't shopped around for two, three years, you can probably get a cheaper
00:14:39.220 | insurance policy, whether that's life insurance, homeowners insurance, and so forth.
00:14:43.860 | If you enjoyed this podcast episode and learned a lot, please share, rate, review, subscribe.
00:14:49.600 | Every single review means a lot.
00:14:51.580 | And finally, if you want to sign up for my free weekly newsletter, you can join 60,000
00:14:57.180 | plus others by going to FinancialSamurai.com/news.
00:15:03.300 | Thanks so much, everyone.
00:15:04.900 | Mahalo.
00:15:05.900 | Take care.
00:15:06.900 | Be safe.
00:15:07.900 | Support one another.
00:15:07.900 | one another.