With the increase in Social Security taxes going into effect this month, financial advice, including recommendations on CNBC and US News and World Report, is focusing on ways that Americans can offset the financial hit. One popular suggestion: shop your home insurance coverage. While I always recommend shopping for the best rates and prices on any purchase, I have caveats for those who are shopping for new home insurance coverage.
Three years ago, I received a large increase on my homeowner's policy. My policy had been in place for several years, and I had never filed a claim against it. I decided to shop around. I received a much lower quote from another insurance agent, and changed coverage and carriers. I soon learned that a cheaper quote does not always mean a lower premium.
Do Not Depend on the Rate Quote
About 45 days after changing policies and paying my annual premium in full, I received a notice from my new insurance company. An insurance representative, who never spoke to me or looked inside my house, determined that my home was worth $20,000 more than my coverage.
The value used in my quote was the same as my original insurance policy. Despite the housing downturn and property devaluations, according to the insurance appraiser, my home's replacement cost had soared.
The increased premium brought my new policy up to the same price as the old. In the process, I had traded in my old insurance agent for one who was less customer service oriented.
Underwriting Guidelines May Change
Returning to my old insurance agent was not as easy as it might seem. It seems underwriting guidelines had changed since I had contracted on my original policy, and my old agent could not get me the same deal I once had.
Effect to Insurance Escrow
Since my mortgage company pays my homeowners insurance, the additional premium was billed directly to my escrow and paid before I even knew there was an additional charge. In order to get another policy, my escrow would have to pay a second premium. This would have put my escrow into a negative position and most likely resulted in increased mortgage payments for the following year. While my payments and escrow would have eventually balanced out, payment of two insurance premiums in one year can cause a temporary increase in mortgage payments if the cancelled policy's refund is not immediately credited back.
I still advocate paying the best price for any insurance product, but I have learned that cost is not the only consideration. In the future, I will ensure any policy clears underwriting and any required inspections are performed before committing to any change.
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