Can I lower the contents coverage on my million dollar home insurance policy?
It is very common for the contents coverage limit to be higher than what is needed by owners of million dollar homes, and most insurance companies do not allow this limit to be lowered.
What is contents coverage?
Contents coverage is included with your homeowners policy and will pay to replace your personal belongings up to the limit of coverage in the event of a covered loss. Your personal belongings include; furniture, clothing, electronics, kitchen gadgets, rugs, artwork, musical instruments, decorative art and other items you would take with you if you moved to a new home.
Mass produced policies - It is what it is!
The majority of homeowners policies use a formula to determine the contents coverage limit. They typically generate the contents limit by multiplying the dwelling replacement cost by 70%. Here are some examples:
- Dwelling replacement cost - $1,000,000 * 70% = $700,000 contents limit
- Dwelling replacement cost - $3,000,000 * 70% = $2,100,000 contents limit
- Dwelling replacement cost - $5,000,000 * 70% = $3,500,000 contents limit
- Dwelling replacement cost $10,000,000 * 70% = $7,000,000 contents limit
Higher dwelling replacement costs result in a higher contents limits regardless of the coverage amount the homeowner actually needs. Some homes may need this level of coverage, but many do not. Some insurance companies allow you to lower the contents limit to the level of coverage needed and provide a reduction in premium for doing so.
Most Million Dollar Home Policies Are Over Insured for Contents
Below is a chart from the Insurance Information Institute showing the top ten insurers of homes in the United States along with their respective premium volumes. Nine out ten of these insurance companies determine the contents limit with a formula like the one discussed above. These numbers indicate many high value homeowners are over paying for their contents coverage.
Top 10 Writers Of Homeowners Insurance By Direct Premiums Written, 2015
(1) Before reinsurance transactions, includes state funds.
(2) Based on U.S. total, includes territories.
(3) Data for Farmers Insurance Group of Companies and Zurich Financial Group (which owns Farmers' management company) are reported separately by S&P Global Market Intelligence.
(4) Chubb Ltd. data reflect the 2015 merger with Ace Ltd.
Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.
The cost of contents coverage
There is a cost associated with your contents coverage limit, which means the higher limits will cost your more money. Basically, if you have a $1,000,000 replacement cost for your home, a mass market insurance company will give you a $700,000 ($1,000,000 * 70%) limit for your contents. If you only need $500,000 of coverage, you have $200,000 more coverage than you need. Based on my experience adjusting contents limits, I think a rate of $3 per $1,000 of contents coverage is reasonable. If we apply that rate to this example, you are overpaying for your insurance by $600 per year because you are not able to lower your contents limit.
Contents coverage increases automatically each year
Most people own a home for several years and each year your home insurance company will increase your home's replacement cost to ensure it remains properly covered. As your dwelling limit increases, so does your contents limit, because it is set as a percentage of the dwelling limit. If you let this go unchecked, you may be spending a lot of money on unnecessary premiums every year you own your home.
Vacation homes may not have the same level of furnishings and personal belongings that your primary residence does and therefore does not need as much coverage for contents. Despite this reality, most insurance companies will still apply the same 70% contents coverage limit to the policy and charge more than is needed for that home policy as well.
Determining The right amount of contents coverage
You may have a general sense for what it would cost to replace all of your belongings, but it can be very difficult to determine the cost to replace everything you have. It gets even more difficult when you own valuable items like art, jewelry, antiques and other collectibles that carry high values. There are a few ways to gain a better understanding of what it would cost to replace all of your contents. They are as follows:
- Prepare your own home inventory with tools like Encircle App, Knowyourstuff.org, Collectrium, and even your own video camera.
- Have appraisals done for high value items like art and jewelry. Justappraisers.com specializes in appraising jewelry collections. Gurr Johns, The Winston Art Group, and New York Fine Art Appraisers specialize in appraising art and other valuable items.
- Hire Collectrium to do the home inventory for you, for an hourly rate.
- Do a quick walk through of your home while doing a rough evaluation of the cost of the contents of each room.
The dangers of customization
If you take the time to understand the cost of replacing your contents by doing a home inventory, you will be well situated to customize your contents coverage with little risk of being under insured. However, if the home inventory is not done and a rough estimate is used instead, your personal belongings can easily be undervalued. I advise using caution when reducing your contents limit and taking the time to think critically about what it would cost to replace all of your belongings if they were destroyed or stolen.
The contents coverage is an extremely important part of your personal insurance program and I hope this article has provided you with insights that will help you better manage your risk and insurance in the future.
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