Homeowner should think twice before canceling insurance escalator clause

Home prices are lower in many areas, but it doesn't necessarily mean that owners should cancel a common provision in many insurance policies that protect against the rising cost of rebuilding after a fire or other calamity.

Q. I purchased my home six years ago, when prices were going up fast. Of course, the bank required that I purchase a hazard-insurance policy to get the loan, and I chose a plan that includes an "automatic escalator" that increases my coverage amount each year. Now I am thinking about canceling the escalator (which would save me about $75 on my annual insurance premiums) because prices in my neighborhood have dropped about 15 percent in the past year or two. What do you think I should do?

A. I think you need to talk to your insurance agent before making such a major change to your insurance coverage.

An escalator provision, sometimes called an inflation-guard endorsement, allows your insurer to automatically boost your coverage each year based on increases in local labor costs, prices for materials and the like. The cost of the additional coverage is automatically added to your annual insurance bill.

With home values in your area dropping, I can understand why you're considering canceling the auto-escalator provision in your homeowners policy in order to save money. But before you do, it's important to realize that a decline in local sales prices rarely triggers a similar decline in construction costs, too.

For example, your letter states that home prices in your area have fallen 15 percent. But statistics show that rising inflation has pushed the cost of building (or repairing a home after a fire or other disaster) has increased about 7 percent in the past 12 months because most builders and contractors are paying more for materials and their workers than they were just a year ago. Canceling your auto-escalation or inflation-guard endorsement might save you $75 a year, but could cost you tens of thousands of dollars if you must eventually rebuild after a fire or other catastrophe.

Q. Is it true that Elvis Presley's longtime home, Graceland, is for sale?

A. Yes, it's true - but it's not The King's original Graceland Mansion in Memphis.

Instead, it's the 5,000-square-foot home that the rock-and-roller bought in Palm Springs, Calif., in 1970 and owned until his death in 1977. Presley and his pals spent so much time at his desert digs that it eventually became known as "Graceland West."

Real estate records show that Presley paid about $85,000 for it. The current owners bought it for roughly $1.25 million in 2003 and then began offering half-hour tours of the property for $20 each. Its asking price now, just five years later, is a staggering $17 million.

Q. I took a job with a property-management company last year, and used my own pickup truck to drive from one apartment to the next. The company agreed to reimburse me for my mileage, and everything worked fine until I was laid off in July. Now, the company is refusing to pay me the $985 in mileage it owes me for the months of April, May and June. What can I do?

A. Write a letter to the company to demand payment for the unreimbursed expenses. Send it via certified mail, and include copies of any documents that will support your request, such as receipts for fill-ups at your local gas station. It would also be helpful if you had kept a daily journal showing the properties you visited, the reason for such visits, and the number of company-related mileage that you incurred each day.

If the company again refuses your reimbursement request, your cheapest and probably best option would be to sue the firm in small claims court. It's a relatively simple process that a clerk at your local court can explain in just a minute or two. As long as you have at least some type of documentation for your expenses, the judge will likely rule in your favor and will also consider making your former employer pay all court costs.

Q. My husband and I formed the type of living trust that you often recommend, and we put our home's title into it. When we die, the home will be sold and the proceeds will be split evenly between our son and daughter. How will the Internal Revenue Service treat the money that our kids will eventually receive?

A. Your grown children probably won't owe any income taxes on the sale proceeds. That's because when you die, or your spouse passes away (depending on who goes last), the home's value will be updated to its market value on the date of the second spouse's death. So, if the children then sell the home right away, no income taxes will be owed on their respective share of the profit.

If your home is your only major asset, your kids probably won't owe any federal estate or inheritance taxes either. Still, it would be a wise investment to consult with a good accountant or estate planner for details.

• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City CA 90231-2960

© 2008, Cowles Syndicate Inc.