5 common insurance mistakes you should avoid

Chris Kissell

We all mess up from time to time. But making a mistake on your insurance policy can prove particularly costly.

Some people fail to buy enough coverage. Others make poor decisions about the type of insurance they need.

The nonprofit Insurance Information Institute has identified the five most common insurance mistakes made by U.S. policyholders. Steering clear of these errors can ensure you have the right coverage should disaster strike during 2014.

The 5 most common insurance mistakes

1. Insuring a home for its market value.

Ever since the nation’s housing bubble burst a few years ago, millions of homes across the country have seen their market values plunge.

Policyholders may be tempted to reduce homeowners insurance coverage to the level of their home’s current market value. But such logic is faulty, says Lynne McChristian, Florida representative for the Insurance Information Institute III).

“A home’s real estate value has absolutely nothing to do with rebuilding costs,” she says.

McChristian says most insurers require you to insure your home for the full cost to rebuild, or something close to that amount. This requirement is known as a “co-insurance clause,” or an “insured-to-value clause.”

Typically, insurance companies require you to insure your home for at least 80 percent of its cost to rebuild. Failure to do so could result in a penalty that reduces the amount of claim money paid out to you after a loss. If you’re unsure about how much insurance you need, talk to your agent.

2. Choosing an insurer on price alone.

Janet Patrick, spokeswoman for the Illinois Insurance Association, understands why so many people focus on price when shopping for insurance.

“Nobody wants to overpay for insurance,” she says.

But some policies are priced lower because the coverage they sell is less comprehensive. Before purchasing any insurance policy, Patrick urges you to identify your insurance needs as specifically as you can. Then, make sure your insurer offers coverage that meets those needs.

Also, check to see that the insurance company is licensed to operate in your state ask your state insurance department) and that it’s financially stable research at credit-rating agencies such as A.M. Best).

McChristian says it is important to make sure you are comparing insurers on an apples-to-apples basis.

For example, note whether each company is offering you actual value coverage — which only reimburses items at their depreciated value — or more comprehensive full-replacement cost coverage, which pays out at an amount sufficient to pay for brand-new versions of your lost items.

Lori Conarton, spokeswoman for the Insurance Institute of Michigan, urges you to speak with others who have purchased policies from potential insurers.

“Talk to friends and neighbors and ask for recommendations, especially from those who have made claims,” she says.

3. Forgetting to purchase flood insurance.

Standard home insurance policies don’t cover flood insurance. Homeowners who don’t live next to large bodies of water may be tempted to skip this coverage.

But that can be a mistake, McChristian says.

“If you don’t live on a mountaintop, you should consider flood insurance,” she says.

Flooding is the most common type of natural disaster in the U.S. and 20 percent of flood claims are paid to people who live in low- to moderate-risk zones.

The federal government provides flood insurance through the National Flood Insurance Program NFIP).

Even if you want to roll the dice and skip coverage, you may not be allowed to do so. Homes with mortgages from federally regulated or insured lenders that are located in in high-risk flood areas must have flood insurance, according to NFIP.

Private lenders also can require homeowners to purchase flood insurance.

4. Buying the minimum required amount of auto liability insurance.

Most states require all drivers to carry a minimum amount of liability insurance coverage. The amount ranges from state to state.

For example, Maine requires you to carry $50,000 in liability coverage for the injury to or death of any one person; $100,000 liability for one accident resulting in injury to or death of more than one person; and $25,000 liability for property damage.

By contrast, California reduces those limits to just $15,000 for injury or death to one person; $30,000 for injury or death to more than one person; and $5,000 for damage to property.

However, simply buying a state’s minimum amount of required coverage can be foolish, Conarton says.

“Chances are that drivers will need more liability insurance than the state requires,” she says.

Drivers who merely purchase the minimum level of coverage could face huge bills if they are responsible for an accident that injures another driver, or wrecks his or her own car.

In such instances, the driver will be financially responsible for any gap between what the insurance policy agrees to pay, and the total damages suffered by victims of the accident.

“This could financially wipe out a driver,” Conarton says.

Patrick agrees, adding, “Medical bills can easily exceed $20,000 per person in a serious crash.”

5. Skipping renters insurance.

If you rent a home or apartment, many items — including televisions, computers, furniture, housewares and clothes — could be at risk if a fire, tornado or other disaster strikes the building that houses your rental unit.

Don’t skip purchasing renters insurance in the hopes that your landlord’s policy will protect you, Patrick says.

“The landlord’s insurance doesn’t cover the tenant’s belongings or liability,” she says.

That means tenants who don’t carry renters insurance must pay out of pocket for any losses they suffer.

A 2013 III survey found that just 35 percent of tenants have renters insurance. Many people skip renters insurance because they underestimate the value of their possessions.

Fortunately, renters insurance is relatively cheap, with coverage typically costing between $15 and $35 a month, according to the National Association of Insurance Commissioners.

See how much you could save today on your home insurance. Get your free home insurance quotes today!