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Consider the consequences of a claim before you buy extra insurance
There may be some "extras" you purchase with your insurance coverage each year because they seem like a good idea at the time and are relatively inexpensive. For example, you might buy auto-glass coverage on your car insurance policy to additional coverage for your golf clubs and jewelry on your home insurance.
But filing minor claims on these coverage types can impact your home or car insurance rates for years afterward, especially if you rack up several claims.
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Here's a look at common insurance "extras" that may not be so cheap after all if claims on them cause your rates to go up.
Auto insurance extras
Coverage for roadside assistance, towing or auto-glass replacement/repair are the most common extras drivers tack onto their car insurance policies. They're also the most commonly filed car insurance claims.
"Even though those coverages are handy, especially if you're stranded, if you use your roadside assistance coverage for a tow, that counts as a claim against your car insurance policy," says John E. Dowd Jr., principal and executive vice president of Dowd Insurance Agencies in Holyoke, Mass. The same goes for auto-glass replacement or repairs.
Dowd says five is the magic number for these types of claims. "If you have five or more auto-glass or towing claims, your insurance company will probably raise your rates," he says.
Sarah Holtrup, an insurance agent for State Farm in Indianapolis, Ind., adds that "too many roadside assistance or auto-glass claims could also result in your insurer electing to no longer offer you that extra coverage.”
That's because car insurance companies typically look at two different factors in evaluating claims: frequency and severity (the dollar amount of the loss).
"Although your towing or glass claims may be relatively small dollar amounts, having claims more frequently than what would be expected may raise rates or put you at risk for having your coverage cancelled," says Holtrup.
Adding extras to your home insurance policy
If you have certain valuables like jewelry, golf clubs, laptop computers, collectibles, tools, guns or musical instruments, you may have purchased an endorsement to your home insurance policy (also referred to as riders or floaters). Not only will an endorsement guarantee you a higher replacement cost for your item if you make a claim, it may also cover loss scenarios that are excluded in a standard home insurance policy.
Homeowner policies generally provide coverage only if your item was damaged or lost due to a certain peril – like fire or theft.
But “if you accidentally drop your wedding ring down the garbage disposal and it is destroyed, a homeowners insurance policy won't cover this ‘mysterious disappearance’ loss,” Dowd says. Purchasing a separate personal articles policy or rider will cover almost any type of loss – including “oops, down the drain” loss.
The premiums for home insurance riders are relatively inexpensive and based on the insured item's value. But filing more than two claims for a lost ring, golf club or laptop can lead your insurance company to nonrenew the policy, Dowd says.
Identity theft insurance claims
Most major insurance companies offer identity theft coverage that covers credit card fraud, loan application fraud and other identity theft cases.
"The insurance amount usually ranges from $15,000 to $30,000 per occurrence," says Brian Allred of Liberty Mutual Insurance.
It's relatively inexpensive to add ID theft coverage to a home insurance policy. For example, State Farm’s coverage “provides a case manager who will contact credit bureaus and creditors on your behalf, monitor the progress of your case, and reimburse covered expenses, such as lost wages, child/elder care and certain legal expenses resulting from the theft," says Holtrup.
But Allred warns that an ID theft claim counts as a regular insurance claim on your record. "In many states, filing an ID theft claim has the same affect on future insurance premiums as filing one for a kitchen fire," he says. "One claim can cause an increase in insurance premiums for up to three years. Two claims in three years can make finding affordable insurance difficult."
Holtrup says an ID theft add-on policy usually carries a separate deductible from home or renters insurance. She advises that before you add ID theft coverage to your policy, check to see if your credit card company or employer offer similar benefits. "You may receive some of these benefits already at no cost," she says.
The bottom line
Any insurance purchase is a gamble, and all types of insurance have “winners” who were glad they bought the coverage after they had a claim. But Dowd says “you need to evaluate the premium you'll pay for the extra coverage, as well as the higher premiums you could pay if you file a claim, against what you would pay out-of-pocket to replace the item you are insuring."
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