View Full Version : Insurance Catch-22

07-26-2010, 04:58 PM
My house is insured for replacement value which is, as you might guess in today's housing market, much higher than it's market value. I have a mortgage that is 1/4th the insured value and probably 30% of market value. I could pay it off with funds from my IRA but do not want to pay the taxes that would be owed if I withdrew them.

My mortgage company requires insurance in the amount needed to replace the house even though I only owe them a fraction of that amount.

Two questions: Why would a mortgage holder require significantly more insurance than what is owed to them?

My annual insurance bill is about $3100 including the required flood coverage. What can I do to reduce this if my insurance company won't budge from their excessive value to replace this 40 year old house?

07-26-2010, 05:23 PM
How's this for insurance company logic?...... Carter and my health ins. has a $4,400.00 deductable.... So far this year we've spent over $6,000 on Dr, visits, tests, scripts, etc. But according to AEtna, only $2,000 of those expenses count towards the deductable..... Why?...... "Those expenses are only covered after you meet your deductable".....

07-26-2010, 05:45 PM
No Donn........ You know I can't read.......
The policy was chosen by Carter's 30 year old bullet proof millionaire Hedge fund owner bosses, who have insurance policies from their trophy wives trust funds..... This was the cheapest policy they could find for the minnions....... As you know, as a "pre-existing condition"er I can't get insurance, or if I could it would be even worse......

07-26-2010, 06:10 PM
A little off topic...

To any young readers with pre-existing conditions - you can get employer provided insurance from many non-profits (e.g. hospitals, educational institutions, etc.) as well as government agencies that will cover pre-existing conditions.

I've had serious pre-existings for 35 years, and have alway been covered by employer plans. In fact, when I retire next month, I'll have a very good blue cross policy and my share of the costs will be $170/month.

So don't be discouraged by the comments on this board, and take charge of your life, rather than waiting for manna from Obama.

07-27-2010, 02:41 PM
"Replacement Value" means what it says, and should cover every eventuality.
check what they use as replacement value - I got insurance quotes recently and all of them had a replacement cost of between $370-$490 sq.ft. Actual build cost would be around $200 sq.ft. If you do have much more build cost coverage than necessary (get an appraiser to look at your house and give you a detailed cost breakdown for re-build) ask your insurer how to reflect actual cost. If you have an actual appraisal in hand with detailed build cost breakdown they may adjust the premium appropriately.

Also you may have excessive contents coverage - go through your house itemize that which insurance covers and figure replacement cost. If you don't want things replaced in a total loss situation remove them from your list. No need to insure things which aren't important to you.

Check basics like fire hydrant proximity, fireplace (a friend had his insurance go up 40% when he put in a wood stove), etc. you may have the wrong coverage because of a clerical error (wrong box checked).

Check to make sure other insured costs are what you need - i.e. in a total loss situation they'll pay to put up in a hotel - you may be able to adjust the amount they'll be on the hook for by reducing, or eliminating that coverage. Be aware though, living in a hotel for six months to a year while things are sorted out will become very expensive. Make sure you understand the costs of not having coverage.

edit: bundling your house, car, boat etc. insurance may reduce the premiums
UN-bundling your house, car, boat, etc. insurance may reduce the premiums

07-27-2010, 04:03 PM
Thanks for the suggestions, all, especially Norm for telling me to find another agent (was going to be my first step) and Braam for the detailed analytical process. I had not thought of looking at the cost per square foot to see if it's in line. My gut tells me it's way off and, if so, that will be a major talking point when I talk to the agents, both new and old.

The whole concept of excessive insurance coverage doesn't make sense, long term. Sure, the insurer gets to make more money from the higher premium but they create an incentive for an ethically challenged homeowner to cash in through some sort of illegal action.

Paul Pless
07-27-2010, 04:09 PM
but they create an incentive for an ethically challenged homeowner to cash in through some sort of illegal action.this is surely factored into their actuarial tables

07-27-2010, 04:31 PM
Dividing the insured value by the square footage resulted in a surprisingly low number, $125 per sf. Thinking costs down here may be much lower than what Braam cited I did some digging and found this site: http://www.building-cost.net/CornersType.asp

They have a free calculator to estimate building houses to various levels of finish. After answering the questions as best I could I came up with a total cost to rebuild only 10% less than the insured value! I guess I could use this data in my discussions but I'm not sure reducing the value by a mere 10% would be worth the effort.

I'm thinking an effort to get the mortgage holder to change their requirements might pay a better dividend. First step will be to contact the insurance commissioner to see if it is legal to require insurance in an amount that is four times the amount of the mortgage.

07-27-2010, 06:11 PM
Can't verify the accuracy of the web-site - it's US only. The only alarm bell that rang in my head was there was no question of number of floors - a 2000 sq.ft. two storey costs about 80% (huge generalization, all else being equal) of a 2000 sq.ft. one storey, for example.

$125 for southern US, off the top of my head with what little I've learned, doesn't seem unreasonable though. 10% is well within margins of (your ;) )error.