Insurance: Save by selecting the right policy coverage © Gary S Chapman/Getty Images

The Basics

9 tips: Getting the right insurance

Tailoring your coverage to your circumstances can save you thousands a year while keeping you better protected. Here's what to look for and what to avoid.

By Forbes.com

When was the last time you took a hard look at your insurance policies? You may be paying too much to cover your house, vehicles, property or liability -- or at least paying for the wrong things.

Insurance is a big-ticket item. In 2008, the average household grossing more than $100,000 spent $2,400 for vehicle and home insurance -- more than the $2,300 the household laid out for medical insurance, according to the Bureau of Labor Statistics. (That $2,300 average doesn't include employers' usually much-larger contribution for health insurance.)

Ace Private Risk Services recently surveyed 600 independent insurance agents, those not representing a single insurer. These pros said affluent folks typically carry too little insurance for personal liability, the total destruction of their homes and damage to collectibles. On the other hand, the wealthy waste money by keeping their deductibles too low and taking on too much coverage for ordinary personal property such as furniture.

Customers also have a habit of failing to ferret out the special discounts that come with such things as having burglar alarms.

Looking for the right coverage at the right price? Here are nine pointers:

1. Don't feel locked in

A 2008 Consumer Reports subscriber survey indicated that more than half of those who had switched homeowner carriers in recent years had saved money by doing so. To be sure, this is not proof that a majority of insurance purchasers could save by switching, but it's a strong hint that shopping around is worthwhile.

After Michael Fitzhugh, a financial planner with Aspiriant in San Francisco, got a notice from Fireman's Fund in March that the combined premium for his home, auto and personal liability insurance was going up 14%, his independent agent found him a comparable Ace policy at the old price, saving him thousands of dollars a year.

"If my agent was captive to the company that had jacked up the rates, he would have spun me a web," says Fitzhugh, who advises his money management clients to use independent agents.

But there's no harm in getting quotes from both an independent agent and one representing a single insurer. State Farm and Allstate use captive agents; while these representatives are not employees of the insurers, they sell only one insurer's policies. Geico takes this integration a step further: Its sellers are Geico employees.

2. Choose the right type of carrier

Most independent insurance agents represent both companies such as MetLife and Travelers, whose primary business is in selling standard home policies, and those such as ACE Private Risk Services, Fireman's Fund, Chubb and Chartis that specialize in high-end coverage. Standard policies start 20% cheaper but have lower coverage limits on some items. For example, a piece of jewelry may have a $1,000 coverage limit versus $10,000 in a deluxe policy. With a standard policy, riders (provisions for extra coverage for specific items or circumstances) may cost more or even be unavailable.

Marc Slafsky, a Stoneham, Mass., agent representing 12 carriers, recently put a young lawyer/money manager couple with Chartis because they needed riders covering a $50,000 wedding ring and a live-in nanny and had a custom-built house that would cost $1.3 million to replace. But he insures his own $400,000 home with a standard policy from a unit of Safety Insurance, a carrier operating primarily in Massachusetts. "If you don't need the extra coverage, why pay for it?" he asks.

3. Don't skimp on replacement value

Marshall & Swift/Boeckh, a building-cost data provider, estimates that 58% of U.S. homes are underinsured by an average of 21%. The value of your house might have dropped by 30% or more, but that doesn't mean it would cost less to rebuild. Reconstruction is more expensive per square foot than new construction is.

Look into what "replacement" means in your policy. With a typical standard policy, you fill in a questionnaire, and the carrier uses software to estimate the replacement cost of your home, which is what you pay to insure. If your house burns down, the insurer will shell out, at most, 125% of the insured value; if that's too little to rebuild, tough. With high-end policies, carriers usually have appraisers determine replacement cost before you buy the insurance and then set higher caps -- or no caps -- on the percentage of insured replacement value they'd lay out.

Another difference: Standard policies specify replacement with "similar" materials. If you have fancy fixtures in your house, get a high-end policy or pay extra for replacement with "like kind and quality" materials. Pamela Cantieri, an agent with Fort Point Insurance Services in San Francisco, signed up a new client with Fireman's Fund after he'd learned the hard way the meaning of "similar." A kitchen fire destroyed a marble countertop he had bought in Italy. His insurer told him to go to Home Depot or Lowe's to replace it.

Another feature of high-end coverage that's generally not available for standard policies is a cash-out option. Such coverage allows you to take the cash instead of requiring you to rebuild on the site of your destroyed home. This is useful if you're planning to move soon anyway or if the replacement value of your home is above its market value. Yet such expansive coverage is not easy to come by; underwriters are instinctively worried about moral hazards (if a fire would leave you better off, you might not unplug the Christmas tree lights before you go out).

Continued: Cut household contents coverage 

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