Filing small insurance claim can lead to big problems later

Homeowners who file just one or two insurance claims, no matter how small, sometimes risk a huge increase in their annual premiums or even cancellation of their policy.

Q. We didn't know that we had some loose roof shingles over our bedroom until a summer storm arrived and water leaked in, causing about $1,100 in damage to a few of the ceiling's tiles and a small portion of one of the walls. Can we file a claim with our insurer for the damage?

A. Yes, you can file a claim for the needed repairs, but it probably wouldn't be worth it.

For starters, the $1,100 damage you suffered is a relatively small amount. If you have a standard $500 deductible, the most you could hope to recover from your insurer would be $600. That's really not worth the risk of seeing your future premiums rise, perhaps by hundreds of dollars a year, because you would have a fresh claim on your record.

More importantly, there's a chance that filing a claim might well result in the insurer canceling your policy altogether, especially if you have filed another claim in the past two or three years. That's because insurers figure that if you have made more than a claim or two in the recent past, no matter how small, you're more likely to file again in the future.

It's also worth noting that most insurers are particularly wary of customers who file claims for water-related damage. They'll often pay for the repairs but then cancel the policy in order to reduce the chance of getting hit with an even costlier mold-related claim later.

Because it's becoming increasingly unwise to file small claims, homeowners should consider raising their deductibles in order to trim their annual insurance costs. Insurance experts say that owners who have a typical $500 deductible but raise it to $1,000 or $2,500 easily can slash more than 30 percent off their bill, which can save them hundreds of dollars a year while still providing adequate coverage if they later suffer a major loss.

Q. I would like to refinance my mortgage because rates are so low, so I have followed your previous advice to contact several lenders and mortgage brokers to find the best deal. One lender would charge me a $300 "document preparation" fee; another would charge $250; while others wouldn't charge such a fee at all. What is this fee for? How come some lenders charge it but others do not?

A. A document-preparation fee is a one-time charge that some banks levy to ostensibly cover the cost of preparing the mortgage contract and other paperwork needed to complete a loan transaction. But the truth is, the mortgage business has become so automated that the vast majority of documents can be quickly prepared and then printed out on the bank's computer system with the stroke of a few keys. The days when a loan officer or secretary would have to spend countless hours typing up contracts and the like have gone the way of, well, typewriters themselves.

Some banks don't even try to collect so-called doc-prep fees anymore. Even those that do often will waive the charge if the borrower is savvy enough to ask.

Q. I recently inherited a small home that is several hundred miles away from my current residence. I don't want to move into the (inherited) home and don't want to hassle with renting it to tenants, so I intend to sell it immediately. Would I owe any federal taxes on the sale?

A. Probably not. That's because when a property changes hands through inheritance, the Internal Revenue Service allows its value to be "stepped up" to reflect its current market value. This means that no federal taxes will be owed if the home is sold immediately.

To illustrate, say the person who left you the home paid $100,000 for it several years ago but that it was worth $175,000 on the day he died. The IRS would allow you to step-up its cost basis to reflect its current value, so no taxes would be owed on the profit if you sold it for $175,000 or less right away.

Conversely, if you rented the property to tenants for a few more years and then sold it for $210,000, you would be liable for taxes on $35,000 of the profit - the difference between the resale price and its $175,000 value on the day that you inherited it.

Inheritance rules are tricky, so it's important to consult a tax professional before you sell.

• For 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.

© 2009, Cowles Syndicate Inc.