Insuring Your Possessions

Gary,
When I moved into my new three bedroom apartment, the insurance agent asked me questions about my property and said I should increase my coverage from $29,000 to $40,000 (a $2.63 a month increase) based on my belongings (including a lot of antiques). I did as she suggested. Do you think this is a reasonable expense? Also, how do I document my belongings (antique pieces as well as other furniture, accessories, clothes, electronics, food in freezer etc.) in case I would ever have to make a claim? How do they determine the 'costs' to replace my belongings should I ever need to?
LB

LB doesn't say whether she's purchased or renting her new apartment. If she owns the apartment, a standard policy will cover possessions up to 50 percent of the value of the structure. So if you've insured your home for $100,000, you won't collect more than $50,000 for your possessions.

Is 50 percent enough? Or should LB spend the extra $2.63 per month for additional coverage? The first thing to remember is that you buy insurance to cover losses that you can't afford yourself. So you don't want to be underinsured.

Chances are there's a lot of stuff in your home. Furniture, everything hanging on your walls, stuck in your closets and cabinets are all considered household possessions. And, don't forget appliances, clothing and toys, too.

The only way to know whether LB can justify the additional coverage is to take an inventory and put a value on her stuff. The list should include prices paid and when the item was purchased. Model numbers should be noted. Pictures or videotapes of the items are also helpful. Don't make it overly complicated and give up on the process. Any information is better than no information. Guess where necessary.

Once LB has totaled the value of her possessions, she can talk with the agent about how much coverage she needs. Ask about more than just the total covered. Some categories aren't covered adequately by standard homeowners' policies. Many of us have jewelry or some type of collection. Even though you might not spend that much on any one item, it's possible that the entire collection has a significant value.

LB should also ask about exclusions. Are there specific things that your policy won't pay on? Antiques are commonly excluded. So anything over 25 years old would be a problem for LB. It also could exclude any keepsake items. Grandma might not have been wealthy. But some of her things could have appreciated significantly since they were purchased many years ago.

Most policies will not pay more than $2,500 for any individual item. Thresholds vary with insurers so ask your agent.

Back to the inventory for a moment. It makes it easier to collect on your policy if you suffer a loss. Sit back and try to think of all of the contents of your bedroom. Difficult? Now imagine doing that for every room of the house after a fire or burglary. That's what you'll need to do after a loss.

Remember to store your list somewhere outside your home. Keep it at your place of work, safe deposit box or with a friend or relative. If you must keep it in your home, buy a fireproof box or store it in your freezer.

Talk to your agent about how much you'd be paid if a loss occurs. Most policies cover your possessions for 'actual cash value'. For instance, your clothing would be valued as 'used' clothing. Never mind that you'd be hard pressed to replace all of your clothing at thrift store prices. Realistically, you'd have to buy some items at full retail. LB might want to consider getting 'replacement cost' coverage. That would pay her enough to buy a new replacement for lost items.

But even that doesn't eliminate every problem. Replacement cost doesn't apply to some categories like antiques and collectibles. For antiques, LB will probably need to either be able to demonstrate the value through comparisons to other similar items, or, better still, have an appraisal done.

If she has items that are valuable, LB might need to get 'agreed value' coverage for them. That's when the company and LB agree on the value of an item now. If it's lost later, that's how much she'll receive for it.

Obviously, we hope that LB never needs to collect on her policy. But if the worst happens, we hope that she has the right coverage and the proper documentation to assist in starting over.

Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.

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