In this special, first-time-ever class, James shares his 8 best money-saving, risk-reducing real estate tips about insurance.
This class was taught on March 17, 2021.
A special thanks to Brain Armstrong with Arrow Insurance Professionals who added significantly to the presentation.
Penny-wise Pound Foolish
- Don’t be stupid and shop solely by lowest rate unless you’re planning to essentially self-insure
- Discuss what you want out of your insurance policy
- What do you want covered?
- What are you willing to take on yourself if it happens?
- The time to decide is now, before something happens
- Insurance is usually required if you have a loan (so the lender is protected)
- It is not required on free and clear properties (you can choose to be your own insurer)
8 Money Saving, Risk Reducing Insurance Tips
- Develop Strong Relationship With Your Insurance Agent and Understand Your Coverage
- Limit Claims Close To Deductible Amount
- Maximize Liability Coverage on Properties and Autos
- Umbrella Policy
- Compare Premium/Deductible (Especially for Deal Analysis)
- Extra Coverages Like Sewer Backup, Loss Assessment Coverage, etc
- Replacement versus Actual Cash Value
- Require Renter Policies From Your Tenants
We had a discussion about the difference between captive versus independent insurance agents.
And, then took time to discuss how insurance policies are all unique (like snowflakes) and you can't just compare one premium to another premium without diving into the details of the policy itself.
You need to read and understand your insurance policy. Ask your insurance agent for help with this.
If you are buying your insurance from a company that does not have agents, you must perform the duties of the agent yourself and read, interpret and understand your policy as the expert.
Beware of Jargon
- Some companies will create terms and use their own language to describe something
- Be aware of this type of jargon… ask your agent to explain your policy in everyday language
- Dig to the true meaning of stuff like Platinum, Gold, Silver, Ultimate, Optimum, Select
Should You Make A Claim?
We discussed whether you should make a claim or not.
- What if the insurance company cancelled your policy and would no longer insure you?
- When considering your deductible amount, consider when you’ll actually make a claim…
- Will you make a claim for a penny over your deductible amount?
- $500 over?
- Twice as much as your deductible amount?
- Three times as much?
- Reduce frequency of claims to keep your premiums down and maintain your ability to be insured
- See Asset Protection classes for details
- Maximize liability coverages on property and auto policies
- You’ll often need certain levels of coverage to even qualify to get an umbrella policy
Umbrella Insurance Policies For Real Estate Investors
- Read your policy and ask your agent
- Typically covers you beyond your other property and auto coverages
- In other words, the non-umbrella policies pay out first
- Then, if your liability is more than that, your umbrella kicks in and pays out up the amount of your umbrella
- My understanding is that they don’t “stack” so ask your agent about your policy. Most people on the webinar including the insurance agent disagreed with me on this one point so check with your agent to verify.
Cost/Value For Umbrella Insurance Protection
Umbrella Insurance – Might cost about $1,200 per year for:
- $4 million
- Picks up where auto and property policies leave off for liability
- Devil is in the details, but typically covers…
- Lawsuit settlement from accidents in your covered home and properties
- Medical expenses or damages if a visitor is injured
- Damages you make to someone else’s property (car or home)
- Some judgments from defamation
- Does not typically cover:
- Business losses, contract disputes, personal belongings, criminal or intentional acts
- Remember, your umbrella is not the amount of your equity… it is the amount you want to insurance company to cover if you’re sued
- You’ll end up paying everything over this amount
- Over-simplification… might be more than just premium/deductible
- Read and understand you policy
- In general, the higher your deductible the lower your premium will be
- Your deductible discourages you from making small, trivial claims
- Insurance typically covers the amount OVER your deductible amount so you will need to pay the amount of your deductible first before your insurance company kicks in
- What do you call it when you work a deal with your contractor so that you don’t need to pay a deductible?
- Answer: Insurance Fraud
- Loss Assessment Coverage
- Sewer Backup
We discuss some additional ones later in the presentation as well.
Replacement Cost vs Actual Cash Value
- Rebuild entire dwelling and, sometimes separately, the roof (hail/wind)
- Replacement could be significantly higher premiums because you’d get significantly more in the case of a claim
- You need to decide what you want to happen by paying now versus possibly paying later
What if the “calculator” they used to determine how much you should get is off? Or, there is a spike in the cost to rebuild before you make a claim?
- Extended Replacement Cost and Guaranteed Replacement Cost
- Extended: 25%, 50%, 100% – adds this amount in addition to your existing coverage
- Guaranteed: read your policy details very carefully and discuss with your agent
- Wind/Hail Deductibles
- Flat Amounts ($1K, $2.5K, $5K), or
- Percentage of dwelling amount (like 1% of a $400K property = $4,000)
- Replacement Cost vs Depreciated Value vs Actual Cash Value
- Unless replacement cost, you’re getting depreciated value AFTER your deductible
- Example math:
- $10K roof that has hail damage after 15 years
- 1% Deductible on $400K policy
- $10K * 50% life = $5K – $4K deductible = $1,000 from insurance company and $9K from you!
- Replacement Cost and Undamaged Roofing and Siding – Insurance can replace even the undamaged sections so it matches your newly replaced sections
- Unless you have this, they only need to replace the damaged parts.
- Read your policy and discuss with your agent.
- May not apply to all investors, but discuss getting replacement cost coverage on the contents on the property
- May be important for furnished rentals, VRBO, house hackers
- Covers thinks like clothes, furniture, electronics, kitchen stuff
Require Renter Policy From Tenants
- $500K liability (or more if possible)
- Name you as “Additional Insured” so loss caused by them hits their policy first, instead of yours
- Covers their “stuff”
We had a brief discussion about each of these additional insurance related items:
- Private Mortgage Insurance
- Loss of Income Insurance
- Loss of Use/Additional Living Expenses
- Meth Insurance
- Flood Insurance
- Earthquake Insurance
- Hurricane Insurance
- Home Warranties
- Title Insurance
- Owner’s Extended Coverage
- Hold-Open Policies
Final/Miscellaneous Insurance Tips For Real Estate Investors
- Class IV Shingles Required in FoCo (new builds/replacements)
- Get certificate of completion and call agent to update year of installation/proof of Class IV for possible discounts
- Update insurance company when the loan is sold/transferred to avoid paying for insurance out of pocket and getting reimbursed from escrow
- Beware of conflicts: pit bulls (restricted breed from insurance, banned in city limits but emotional support animal)
- Disclose to your agent stuff like trampolines, hot tubs, pools, etc to make sure you have appropriate coverage
- Often discounts by bundling your insurance with the same company