We already know that higher homeowners insurance premiums (and out-of-pocket expenses, if you file a claim) are a reality for Minnesotans. Here are the reasons why homeowners insurance is getting more expensive in Minnesota, which include inflation, more weather events that lead to claims, and insurance company losses. 

As a result, insurance companies are making changes that affect the coverage homeowners can receive, such as: 

• Actual cash value payouts (instead of replacement cost)*
• Deductible minimums starting at $5,000
• Exclusions for “cosmetic” damages**
• Tightened restrictions on full roof replacements
• Matching exclusions, which means your carrier is not obligated to match non-damaged materials when replacing damaged materials.

*What is “Actual Cash Value” vs. “Replacement Cost” for Damaged Roofs?

Understand that when it comes to your roof, insurance payouts have largely changed from a replacement cost to an actual cash value. What does this mean? Well, if your policy indicates ACV instead of replacement cost, this means your insurance company will only pay the depreciated value of the roof, not the full cost to replace it. 

If you experience roof damage, your policy might only pay 50-70% of the actual cost of the repair, and the rest will be your responsibility. 

**What is a “Cosmetic Damage Exclusion”?

Another way that insurance companies reduce their liability is through exclusions. One that affects many Minnesota homeowners, especially when we have hailstorms, is the “cosmetic damage exclusion.” 

What is that? According to the American Adjuster Association, “Cosmetic damage exclusions usually apply to metal roofs but also siding, windows, and other exterior components. If the insurance carrier determines the damage is cosmetic, they don’t have to cover the repair costs. Unfortunately, this leaves the policyholder to pay out of pocket for repairs.”

SO, WHAT CAN YOU DO?

Unfortunately, there isn’t much that homeowners or insurance agents can do to change these facts! But it IS possible to mitigate the effects that these rising costs have on your monthly budget. 

Build an Emergency Fund to Cover Out-of-Pocket Costs

Under these new home insurance policies, with all their new exclusions and restrictions, homeowners who must file a claim are faced with out-of-pocket expenses that are two to four times more than they were before. In addition, larger deductibles mean that you need to have more cash on hand to pay the bills. 

In my estimation, homeowners should have at least $20,000 readily available as an emergency fund. 

Gretchen Rehm, LUTCF®, is the Agency Owner and Investment Adviser Representative at Gretchen Rehm Financial. She has the following advice for families trying to build an emergency fund. 

• Set aside a separate bank account for savings. This makes it easier to track how much you have set aside and lessens the temptation to view that money as “available” to you. 
• Try to find small amounts each month that you can dedicate to the emergency fund. Perhaps the electric bill is down this month. Consider adding that difference to the fund. Maybe you can cut back on one or two streaming services that you don’t use very often. Take those small amounts and put them into your savings account, every month.
• Another way to accomplish this is through direct deposit. Many employers allow you to designate your paycheck to different accounts. If you can’t do this automatically with your employer, you can set up an auto-transfer through your online banking. Out of sight, out of mind!
• Pick up a side hustle. If you’re a teacher, the website “Teachers Pay Teachers” allows educators to sell their lesson resources for profit. You can also join an app like Uber or Lyft, teach an online course in the evenings, or sell items around the house (and then find deals to flip). All of these side hustles have the potential to help you build your emergency fund to a comfortable level.

Read more on this topic. 

Adjust Your Monthly Budget

The next thing you can do is budget your income to account for the additional expenses that you might face in the future. You will need the extra funds for higher premiums, higher deductibles, and building up your emergency fund for out-of-pocket expenses that might accompany your claims. 

Gretchen Rehm has this practical advice for putting together a sustainable household budget:

• Be Realistic: The first rule of budgeting is to be realistic. Try setting aside $50 a paycheck to start, and slowly increasing over time. In order to find a budget that works for you and your household, it is important to set goals that you can achieve, then increase over time.  

• Bring the Family Together: Be sure all members of the family are involved with budgeting and are committed to keeping it. Yes, even include the kids! Learning about finances early in life can help your kids be more prepared for their own household budgets. Including all family members can help you also stick to the plan, together. It shouldn’t be a task assigned to only one person. Instead, working together as a family team, you can help each other stay focused on your financial goals. 

• Follow the 20/30/50 Rule: If you aren’t sure where to even begin with planning out a family budget, consider the 20/30/50 rule. Here’s how it works:  

• • Determine the amount of funds you bring home (your net income) after taxes. Half of that figure should go each month to the things you MUST have, such as the rent or mortgage, utilities, food, debt, etc. With the other half, split it 30/20. 
  • Thirty percent of the income should go to WANTS, including dining out, entertainment, streaming services, or fun outings. In theory, these are bills that, should you have a difficult month, you could live without.
  • Lastly, the final 20 percent of the income should go toward savings. This can be an emergency savings (aim to have three to six months of savings reserved for emergencies) for unforeseen incidents. 

Read more on this topic.

Reach Out to Discuss Options

While not everyone is eligible for a rewritten homeowners insurance policy, it doesn’t hurt to have me check for you. Reach out to my office to talk about your options for a different policy, what your current policy does/doesn’t cover, and other ideas for saving money in your insurance budget.