Lessons Learned/March 22/Home underinsured? Here are a few new guidelines 

“Never be ashamed to admit you were wrong. You’re only saying that you’re wiser today than you were yesterday.” — Dave Gilpin

By Gene Kelly —

Back in the day, when I was a young sixth-grade teacher at Grant Elementary School in Fremont, Neb., students had their own way of teaching me humility.

They would ask me the type of questions to which there are no answers. “That’s a terrific question. Give me time to do a little digging,” I would say. In effect, these clever 11-year-olds kept me busy searching for answers. Hey, you can’t know everything. Eventually, I figured out their game — and how to keep them busy.

Today, readers don’t hesitate to prod me when a column shows I haven’t dug deep enough. 

100 percent coverage? Your home may still be underinsured.  You may recall this idea from a recent Lessons Learned column: “Would current coverage rebuild your home? Periodically, ask your insurance agent to calculate whether coverage on your dwelling would rebuild the home if it were destroyed. Your homeowner’s policy may not be keeping up with rising construction costs. The National Association of Insurance Commissioners recommends insuring your home for 80 percent of its replacement value. Here’s why: Even if a home is gone, the land will still be there.”

This information “is not quite correct,” says Kerry Krause, an independent agent who’s been selling property and casualty policies for 30 years. He feels “it would be foolish to carry only 80 percent of replacement cost to save a few dollars of premium.” In an e-mail conversation, Krause said construction costs are rising so rapidly that “you could be underinsured by year’s end, even if you started the year at 80 percent of replacement cost.”

Moreover, when a home that isn’t insured “to at least 80 percent of replacement cost” suffers a loss, the owner will be hit with a penalty “based on the percentage of underinsurance,” he explained.

Krause said the insurers he works with all insist that a homeowner’s policy must cover 100 percent of replacement cost. “The value of the lot has nothing to do with the replacement cost,” he said. Neither does the appraised value, or market value. 

Replacement cost is based on repairing or rebuilding a home to similar quality and construction standards. Most insurers, Krause said, also now include the cost of teardown and cleanup in their replacement cost calculations.

In addition, many companies writing homeowner’s coverage in Nebraska offer a guaranteed replacement cost endorsement, capped at 125 percent of your policy limit, he said. Guaranteed replacement cost coverage, which promises to rebuild a home exactly the way it was, has virtually disappeared in some parts of the U.S.

Fixing your policy, to reflect the reality of construction costs, might raise the premium. The tradeoff is that after a natural disaster you’ll be able to rebuild your home sweet home.

Hunting and harvesting in a bear market: During the first volatile weeks of the current bear market, which began early last October, I suggested two ways you might take advantage of declining equity prices.

— If you have earned income, make contributions to IRA and Roth IRA accounts. Using this strategy during a market decline helps leverage your retirement dollars: You accumulate cheap shares, in a tax-sheltered account. 

— With pessimism hanging heavy on Wall Street, be ready to scoop up quality stocks that have been marked down and tossed on the bargain table.

Now that we’re about 5 ½ months into a bear market, the time may be right to use a strategy I think of as “harvesting losses.” Initially, taking a loss on an investment feels like making a step backward. Is selling the asset an admission you made a mistake? Not if the capital loss being harvested can be used to offset a capital gain.

Here’s an example: Two weeks ago, I grabbed a three-ring binder that contains taxable mutual fund statements. Two accounts that had dropped below their cost basis were harvest candidates. During a single call to the mutual fund family, I was able to sell all shares in those accounts, then immediately reinvest the proceeds in different funds.

The harvested capital loss will be available to help wipe out capital gains from other investments during the filing of my 2008 tax return.

Why harvest now? This bear market seems to be close to a bottom. If so, the strong trading surge that’s under way as I write this could be the start of something good — a new bull market.

If you have a Lessons Learned topic to suggest, you *can call Gene Kelly at 421-2861, write to him at 2611 Bretigne Circle, Lincoln 68512, or e-mail him at genekelly@windstream.net.