Anyone who has owned a home has undoubtedly in the past scratched their head in disbelief as to why their homeowner’s insurance premium always seems to increase when policy renewal time comes around. You may also think that your homeowners insurance agent is in your corner when you find yourself in this predicament.

Let’s get one thing straight to start: Your insurance agent does not work for you. They work for themselves and their business which is selling insurance. I have heard more lines of bovine excrement from insurance agents than I can shake a stick at (except, of course, maybe from real estate agents.)

Ok, now that we have that straight…I have a friend who recently bought a single-family home and paid cash for it (not hard in today’s real estate market.) My friend, of course wanted to insure the property against fire, weather and the ever looming threat of a liability (slip and fall) lawsuit. When he received the proposal for the new insurance policy, the replacement cost of the property was roughly double what it would actually cost to rebuild the property from the ground up.

When he inquired with the insurance agent as to why the agent “passed the buck” saying that  they use a company who provides a “replacement cost estimator” calculation based on local construction costs and materials. The insurance agent also mentioned that there is nothing they could do to reduce that amount. For the uninitiated, the replacement cost of a building is usually an amount the whole policy premium is based on. Most of the premium line item amounts are simply a percentage of the replacement cost. So by keeping that amount high (and increasing it every year), the insurance agent and insurance provider is assured of higher and higher premiums. I should also mentioned that the agent handed my friend a line of garbage which included the fact that she, the insurance agent, was “in the same boat” and there was nothing she could do about it either, as if that was any consolation. When my friend looked into the company providing the “replacement cost estimator” the company’s main selling point was to “increase the premiums” charged by the insurance agency and “insure a more stable cash flow” for the business. That nugget was stated right on their web site, not hidden in the fine print of a contract. By the way consumers have no choice in the matter either. As in, they can’t demand that the insurance agent use a different company’s “replacement cost estimator.”

Not wanting to play that game, my friend asked the agent about increasing the “hurricane deductible” (windstorm coverage) as a way to reduce the premium. In Florida, the “windstorm portion” of a homeowners insurance policy is a large part of the premium. By doubling the windstorm deductible, the agent was able to reduce the premium by only by about 10%. Typically, in Florida anyway, the windstorm insurance will be used to replace your roof if it’s damaged in a storm. Well, by reducing the policy premium by 10%, my friend’s windstorm deductible was double what it would cost to replace the entire roof.

In the end, my friend opted for a liability only policy and decided to “self insure” the property itself thereby reducing his premium by 75%. Now the reason I call this a “racket” is because my friend owned this property outright, as in, without a mortgage. If he had a mortgage, he would have had no choice BUT to buy full insurance coverage thereby perpetuating this huge money suck. Just lovely, isn’t it?

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    As a seasoned real estate investor I have used bank financing, hard money financing, mortgage loan brokers to fund my deals. Because these are very limited in the type of "loans" they are allowed to sell they can only accommodate a certain few types of real estate deals.

    For individuals who like to "keep their money working" through these "lenders", thinking that their investment money is more secure through them miss out on investments "secured by real estate", (just as secure as the lenders deals) some deals will have much greater returns under terms that can keep your money longer and that you decided upon.


    January 2014