A colleague called me a few weeks ago. He was helping a new client who was relocating to Dallas with their home and car insurance. My friend asked me if I would quote the family’s boat insurance. It turns out, the insurance company my friend is with doesn’t write a standalone boat policy, they place it as option on the home policy. This approach raised the home insurance too high and caused the mortgage ratios to be out of whack (see https://wiseinsurancegroup.com/home-insurance-mortgage-ratios/).
A few companies have followed suit and are combining their boat insurance with the home insurance. The companies who do this don’t write a lot of boat insurance as a percentage of their auto and home policies. Writing the boat as an optional coverage on the home policy saves them money by reducing the administrative and overhead cost of having to manage another policy line. Since all insurance lines are written on a state specific basis, this provides a nice savings for the insurance company.
But is writing the boat insurance as a home policy option, much like scheduled jewelry or artwork, a good thing for the policy holder? It depends on the answers to these three questions.
- How does the addition of the boat impact the mortgage ratios on a new home purchase or loan refi?
- How the boat and home impact each other now?
- What is the potential future impact on each policy?
Mortgage ratios consists of a borrower’s debt to income ratio. In order to qualify for a home loan, all debt should be no more than 43% of the total income. This consists of a person’s entire total monthly debts including installment loans, credit card minimums, car payments, student loan repayments, and the house payment. Mortgage lenders refer to this ratio as the back end ratio.
The front end ratio is made up of the total house payment which includes principal, interest, PMI, HOA dues, and home insurance. Lenders want this ratio to be no more than 30% of a person’s monthly income. If the cost of adding the boat insurance to the home policy throws either of these ratios out of line, it will prohibit the borrower from qualifying for the loan. The obvious solution is to separate the policies.
If the ratios are in line, then I recommend prospective clients compare the cost of the combined policy to the total insurance cost of separate boat and home policies. Whenever I am reviewing an existing or prospective client’s insurance, I believe it’s important to evaluate it on the combined total, or sum, of all their insurance policies. This ultimately helps both of us determine what the best value is for their insurance dollars.
The concern I have is on the future impact of the home on the boat insurance and vice versa. Should a boat claim cause the home insurance rate to increase? Should a hail claim on the home impact the cost of the boat insurance? I believe neither should impact the other which is why I recommend separate policies for both types of insurance. This, along with the mortgage ratios, gave me the opportunity to help my colleague by writing a boat insurance policy for our new client.
What do you think? Share your comments, questions, or experience with me on our Google +, Facebook, or LinkedIn pages. I’d love to hear from you!