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Emergency Savings vs Insurance: Have You Budgeted for a Fire or Flood?

When you are choosing a home insurance policy, there is always an important choice you have to make. Do you pay higher premiums for better coverage, or do you decide to save more money to put toward an emergency fund?

There is no easy answer to that question. There are a number of variables, including your own financial habits and relationship with money.

When it comes time to renew your fire insurance policy, it makes sense to review your premiums, your coverage limits, the state of your emergency savings, the costs you could face if a loss were to happen, and the risks that you could experience a loss.

#1 Re-evaluate Your Risks: Wildfires, Floods, and House Fires

Some homeowners may go their whole lives without having to worry about electrical fires or a fire in the kitchen. However, no one ever expects a fire to break out in their home, and they will catch you by surprise. Despite your best efforts to reduce fire risks, they can still happen, and you will need your fire insurance policy when they do.

When you review your insurance coverage, you may also want to re-evaluate the risk of natural disasters to your home. Natural disaster risks are on the rise in many parts of the world as wildfires become more common and more development happens in flood-prone areas. The World Economic Forum predicts that increasing hot and dry conditions will result in increasing wildfire risks in certain global regions that include the U.S. and Canadian Pacific Forests.

Another way you can re-evaluate the risks your property faces is to consult flood maps of your area. New flood mapping even shows areas which may become flood zones in the future.

#2 Are Your Deductibles Too High?

Home insurance policies almost always come with a deductible. This is an amount you have to pay to repair your home and replace your belongings before your insurance kicks in. This prevents policyholders from claiming every single loss.

There is an easy well to tell if your deductibles are too high. If you were to experience a total loss, would your emergency savings be enough to cover your deductibles and still leave enough room for you to feel financially secure?

If not, you may want to talk to your insurance provider about reducing your deductible in exchange for raising your premiums.

#3 Are Your Coverage Limits Enough?

Not only is there a minimum you will have to pay before you can receive an insurance payout, but most policies also have a maximum that they will pay you out. In the event of a total or major loss, a low coverage limit can quickly become an expensive mistake.

Policyholders can often reduce their coverage limits in exchange for savings on their premiums. It can be tempting to save on your home insurance every year, but you should make sure that the cost to rebuild in the event of a total loss does not exceed your coverage limits.

You can do this by getting construction quotes from local construction companies and creating a home inventory of all of your belongings.