Cheap Home Insurance: Bargain or Blunder?

Everyone wants cheap home insurance. Coverage is costly, and nobody likes to pay more than is absolutely necessary. And there are real bargains to be had if you shop around and get quotes from multiple insurance companies – see How to Compare Home Insurance Quotes.

But it can be tempting to pay too little, something that can see you without adequate (or occasionally any) coverage when things go wrong, or that can result in your paying way more in the long run. How can you tell what's a legitimate saving and what's a false economy? Read on to discover some key signs.

Too Good to Be True – It's a Con

Insurance is one of the most closely regulated industries in America, and the law in your state probably provides many consumer protections. But some bad players are proficient at acting unethically while remaining just within the borders of legality.

And a few are outright criminals. Those can include agents of legitimate insurance companies who take your money but don't file your policy, as well as plain old con artists who set up fake insurance companies. So make sure you get all the documentation you should. And, if you're using a company you've never heard of, check with your state's insurance regulator, who can tell you over the phone (and sometimes online) whether a company is legit.

In its report on fraud, updated in 2016, the National Association of Insurance Commissioners (NAIC) suggests three other scenarios that should raise red flags:

  1. The agent puts you under undue pressure to sign up quickly, sometimes warning that premiums (payments) will rise if you don't do so
  2. Your quote is ridiculously cheaper (more than 15-20 percent less, says the NAIC) than others offering the same coverage
  3. You struggle to get a sensible (or any) answer when you call the company with a query

Of course, totally legitimate insurance companies can still go out of business. So check the financial strength of the ones you're considering.

You Don't Have the Right Coverage

You're entitled to have the level of coverage you're comfortable with, although if you have a mortgage your lender will impose some minimum standards. Some people don't "believe" in insurance, and it's their right to avoid it altogether, providing they meet their statutory and contractual obligations.

But often consumers assume they're insured against risks or for sums of money that just aren't covered by their policies. As a rule, the cheaper your insurance, the greater the number of exclusions (events, circumstances or costs that aren't covered) and the lower the payouts your policy provides.

However, there are plenty of exceptions to that rule, and some companies are simply more competitive than others. How can you tell the good from the bad? You have to read your quotes properly and ask questions to find out the details of the deals on offer. Of course, you can still go for the cheapest, even if that does pay out less and less often. But you need to think through the implications of that decision if bad things happen.

Cheap Insurers Can Be Hard Work

One way insurers can offer cheap premiums is to cut back on their admin budgets. You may not be too bothered about levels of efficiency when you're buying a policy, but you can bet you will be if you have to make a claim. Just imagine how you'd feel if you were homeless following a fire and couldn't get any sense out of your insurance company for days or even weeks.

To be fair, some big, expensive insurers can be nearly as inefficient as the cheapest ones. So check with the Better Business Bureau and your state's insurance regulator (though not every state keeps records) to see the level of consumer complaints against your candidate companies.

Another way cheap home insurance can backfire is when you make a claim, they decide to cancel your coverage. Some companies offer cheap quotes by covering only low-risk customers. And, when you make a claim, they may drop you like a hot potato. Being let go by one insurer can make it much more difficult and expensive to get coverage from another. So you could end up paying higher premiums in the future that far exceed the savings you made in the past with your "cheap" policy.

Your Deductibles Are Too High

Deductibles are a great way to drive down the cost of your home insurance. They're the amount you agree to pay toward each claim before the insurer chips in with the rest. And the higher the deductibles you choose, the bigger the discount you're likely to get in return.

However, high deductibles are a real obligation, and you need to be sure you can comfortably afford them in the event you need to make a claim.

Insure Smartly

With insurance, as with most things in life, the cheapest isn't always the best. But that doesn't mean you should pay more than necessary for the coverage you need.

There are many ways to drive down that cost, including:

  • Bundling your policies – most insurers offer a discount if you get your home, auto and other policies from the same company
  • Taking advantage of groups discounts – Some clubs and churches, as well as unions and employers, negotiate special deals with one insurance company as a member/employee benefit
  • Maximizing other discounts – Make sure you take advantage of every discount for which you and your home are eligible by talking through what's on offer with the companies from which you have quotes
  • Driving up your credit score – Yep, that can make a big difference to your quotes

Another important way to drive down costs is to get insurance quotes from multiple companies whenever you renew or amend your policy. Your needs and circumstances change all the time, and your current insurer may become less competitive over time or assume you're going to stick with it through inertia no matter what it charges you. The only way to be sure you're still getting the best deal possible is to shop around regularly.

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