Maintaining adequate homeowner’s insurance is a vital part of owning a residence and your homeowner’s policy should be chosen carefully. This Financial Guide discusses the policy provisions to consider when deciding which homeowner’s insurance policy to buy to be sure that your home is adequately insured and that you are getting the most insurance value for your money.
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Table of Contents
- What Homeowner’s Insurance Generally Covers
- Policy Coverage: What To Consider
- Shopping For A Policy
- Glossary
- Inventory of Belongings
This Financial Guide offers guidance about homeowner’s insurance such as what questions to ask your insurance broker or agent and how to find the best insurer for your needs. It also explains why you need to keep a list of personal possessions and provides a homeowner’s inventory sheet for you to use to make a list of your belongings, as well as offers useful tips on how to qualify for a discount and helps you purchase the policy that best fits your needs at an affordable price.
What Homeowner’s Insurance Generally Covers
It is equally important that renters maintain insurance. Many renters neglect to obtain insurance, perhaps deterred by cost or because, unlike homeowners, they are not required to maintain insurance. Studies show that about three-quarters of all those who rent a residence do not have renter’s insurance. Adequate replacement cost coverage and liability insurance can be obtained for about $200 per year–less if combined with an auto policy for instance since most insurers offer discounts for multiple policies.
Homeowner’s insurance is usually required by mortgage lenders
What’s covered?
Although exact coverage and policy limits vary, homeowner’s insurance usually covers damage caused by the following events or catastrophes:
- Fire
- Lightning
- Explosion
- Smoke
- Vandalism
- Theft, including check forgery and counterfeit currency
- Unauthorized use of credit cards
- Falling objects
- Ice, snow, or sleet weighing on vehicles
- Windstorm
- Hail
- Riot
- Volcano
- Freezing of plumbing
- Flooding due to plumbing overflow
- Water heater bursting
- Heating system malfunction
- Power surges
Basic coverage may also include food spoilage, lock replacement, temporary repairs, and removing debris. If these items are not initially included in your basic coverage, it is possible to have them added.
Actual Cash Value Or Replacement Cost
If you insure your belongings for their “actual cash value,” you will not get their replacement value at the time of a loss. Actual cash value refers to the value of your belongings after taking into account depreciation and wear and tear. this is also known as Fair Market Value (FMV). For instance, the actual cash value of the television you bought ten years ago may be worth only $50. On the other hand, “replacement cost” coverage provides you with the costs to replace your belongings. Thus, you would get the $500 you need to replace that ten-year-old television, not the $50 “actual cash value.”
Limits on Coverage
You choose the limits on the amounts of coverage on your home and personal property. The premium you pay depends on the limits you choose. Regardless of the policy limit, there is a separate limit on the replacement of high-value items, such as jewelry and artwork. If you want increased coverage for certain items, you must purchase an endorsement or floater (also known as a “rider”). You must generally pay extra for the following:
- High-value items (e.g., jewelry, furs, silverware, weapons)
- Personal computers and other home-office equipment
- Waterbeds
- The business operated in the home
- Earthquake, flood, and hurricane (depending on location)
Policy Coverage: What to Consider
If your home is damaged or your possessions are stolen, will your homeowner’s policy pay as much as you are expecting? If you are willing to pay the premium for full protection, here are the policy coverages you might consider.
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100 Percent of Rebuilding Costs
The amount of insurance that you buy should be based on the cost of rebuilding–not on the price of your home. The cost of rebuilding your house is usually higher than the price you originally paid for it, and often, even the price you could sell it for today. Most insurance companies recommend you insure your home for 100 percent of the cost of rebuilding it.
Your insurance agent or company representative may be able to help you calculate rebuilding costs. If not, you could hire an appraiser to do this. Real estate agents can provide you with the names of appraisers.
The cost of rebuilding is affected by local construction costs and by the type of house you have; however, the following are some of the factors that enter into the calculation:
- The type of exterior wall construction such as wood frame, masonry (brick or stone), or veneer
- The square footage of the structure
- The style of the home, ranch or colonial, for example
- The number of bathrooms and other rooms
- The type of roof and materials used
- Whether the home was custom built
- Whether the home has an attached garage, a fireplace, exterior trim, or any special features such as arched or bay windows
For a rough estimate of the cost of rebuilding your house, calculate the square footage and multiply it by local building costs per square foot for your type of house. Ask a real estate agent or appraiser for average building costs in your area.
If you already have homeowner’s insurance, it’s very important to make sure that you have enough. If your home is one of the few that are destroyed, and it is insured for less than 100 percent of the rebuilding cost, you risk not having enough money to replace it with one of similar size and quality.
Make sure your insurance agent or broker knows about any improvements or additions to your house that have been made since you last discussed your insurance policy. If you haven’t increased your policy limits to cover the cost of rebuilding that new deck, a second bathroom, or other improvements that have increased the value of your home, then you risk being under-insured. If you lack sufficient insurance, your insurer may pay only a part of the cost of replacing or repairing damaged items–depending on the kind of policy you have.
Look at your policy to see the maximum amount that your insurance company would pay if your house was damaged and had to be rebuilt. The limits of the policy usually appear on the Declarations Page under Section 1, Coverage A Dwelling. Your insurance company will pay no more than this amount to rebuild your home–no exceptions.
Some banks require that you buy homeowner’s insurance to cover the amount of your mortgage. However, if the limit of your insurance policy is based only on your mortgage, your policy is unlikely to cover the cost of rebuilding. Make certain that the value of your insurance policy keeps up with increases in local building costs.
Replacement Cost
Consider buying replacement cost coverage for structural damage. A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality. The insurance company will not deduct for depreciation. Depreciation is the decrease in value due to age, wear and tear, and other factors.
If you own an older home, you may not be able to buy a replacement cost policy. Instead, you might buy a modified replacement cost policy that will pay for repairs using standard building materials and construction techniques in use today, rather than repairing or replacing features typical of older homes, like plaster walls and wooden doors, with similar materials.
Insurance companies differ greatly in the way they insure older homes. Some refuse to insure older homes for 100 percent of replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for 100 percent of replacement cost as long as the dwelling is in good condition.
Guaranteed Replacement Cost Insurance
A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or another disaster, even if it exceeds the policy limit. This policy protects you against sudden increases in construction costs due to a shortage of building materials, for example, or other unexpected situations, but generally, does not cover the cost of upgrading the house to comply with building codes.
Flood Insurance
If your home is located in an area prone to flooding, contact your insurance agent or the National Flood Insurance Program (800-427-4661).
Your homeowner’s insurance policy does not cover flood damage. If you buy a federal government flood insurance policy, consider insuring your home for 100 percent of replacement cost and buying insurance to cover the contents of your home as well as the dwelling.
Home Contents Insurance
This list should include everything you and other members of your household own in your home and other buildings on the property, except your car and certain boats, which must be insured separately. Among the items, you should include are indoor and outdoor furniture, appliances, stereos, computers and other electronic equipment, hobby materials and recreational equipment, china, linens, silverware and kitchen equipment, and jewelry, clothing, and other personal belongings.
Estimate the value of your personal possessions at current prices and not what you paid for them. The total is the amount of insurance you would need to replace the contents of your home with new items if everything was destroyed.
Check your homeowner’s policy to find out how much insurance you have for the contents of your home. The limit of the policy is shown on the Declarations Page under Section 1, Coverage, Personal Property. The contents limit generally is 50 percent of the amount of insurance on the dwelling. For example, on a home insured for $100,000 the contents would be limited to $50,000. Now compare the contents limit with the total value of the items on your list of personal possessions. If you think you are under-insured, give your insurance agent or broker a call.
As discussed before, there are two ways of ensuring your personal possessions. If you have a homeowner’s insurance policy, find out whether claim payments for damage to your personal property would be based on replacement cost or actual cash value. Check your policy under Section 1, Conditions, Loss Settlement, or ask your agent. As with insurance for the structure, a replacement cost policy pays the dollar amount needed to replace a damaged item with one of similar kind and quality without deductions for depreciation. An actual cash value policy pays the amount needed to replace the item minus depreciation.
Shopping for A Policy
Although it may take a few phone calls to shop around for the best insurance, you could save a few hundred dollars by taking the time to do so. Conduct a preliminary search by compiling a list of possible insurers. Check with your insurance broker or agent, ask your friends, check the Yellow Pages, search online, check consumer guides, and/or call your state insurance department. A thorough investigation of available insurers will give you an idea of price ranges and tell you which companies or agents have the lowest prices.
Do not consider price alone. The insurer you select should offer both a fair price, good coverage and excellent service. Quality service may cost a bit more, but it provides added conveniences. Talking to insurers will give you a feel for the type of service they offer.
When talking to insurers, ask them what they would do to lower your costs. Once you’ve narrowed your search to three companies, get price quotes.
Cost-Cutting Insurance Tips
While it never pays to play it cheap with coverage, there are ways to cut down on insurance premiums.
Increase Home Security
You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm, or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or central station. Although these discounts are incentives to invest in home security and yard maintenance systems, be aware that these systems are not inexpensive and that not every system qualifies for the discount.
Before you buy an alarm system, find out what kind your insurer recommends and how much you’d save on premiums.
Raise Your Deductibles
Deductibles on homeowners’ policies typically start at $250. You might save up to 12 percent of the premium by increasing your deductible to $500, up to 24 percent by increasing it to $1,000, up to 30 percent by going up to $2,500, and 37 percent by raising it to $5,000.
Look for multiple policy discounts
Many companies that sell homeowner’s, auto, and liability coverage will take 5 to 15 percent off your premium if you buy two or more policies from them. This is called a multiple policy discount.
Consider Insurance Cost Before Buying A Home
When buying a home, don’t overlook the insurance costs. These may affect the price you are willing to pay for the home. Among the factors to consider:
- The home’s construction about the geographical region. For example, brick houses may result in less costly premiums in the East whereas frame houses are less costly in the West. Choosing wisely could cut your premium by 5 to 15 percent.
- Whether the area is prone to floods (if so, you will have to pay additional money for an endorsement). Visit FEMA’s National Flood Insurance Program (NFIP) to determine your flood risk and find out whether you are in a flood zone.
- Whether the home is new or used (insurers may offer you a discount of 8 to 15 percent for a new home).
- The electrical system, plumbing, and structure.
- Whether the town has full-time or volunteer fire service and whether the home is close to a hydrant or fire station (the closer it is, the lower your premium will be).
Don’t Insure Land
When deciding how much homeowner’s insurance to buy, do not include the value of the land under your house. If it is not at risk of theft, windstorm, fire, or other disasters, then why pay for wasted coverage?
No Smoking Discounts
Insurers may offer lower premiums if all the residents in a house do not smoke.
Senior Discounts
If you are at least 55 years old and retired, you may qualify for a discount of up to 10 percent at some insurers.
Plan ahead for renovation
If you plan to build an addition or adjacent structure to your home, consider the materials that will be used. Typically, wood-framed structures will cost more to insure because they are highly flammable. Conversely, cement- or steel-framed structures will cost less because these are less likely to succumb to fire or adverse weather conditions.
Another thing most homeowners should, but often don’t, consider are the insurance costs associated with building a swimming pool. In fact, items such as pools and/or other potentially injurious devices (like trampolines) can drive the annual insurance costs up by 10% or more.
Pay off your mortgage
Obviously, this is easier said than done, but homeowners who own their residences outright will most likely see their premiums drop. Why? The insurance company figures if a place is 100% yours, you’ll take better care of it.
Make regular policy reviews and comparisons
No matter what initial price you’re quoted, you’ll want to do a little comparison shopping, including checking for group coverage options through credit or trade unions, employers, or association memberships. And even after purchasing a policy, investors should, at least once per year, compare the costs of other insurance policies to their own. In addition, they should review their existing policy and make note of any changes that might have occurred that could lower their premiums.
Stay With the Same Insurer
Loyalty often pays. The longer you stay with some insurers, the lower your premium can become, or the lower your deductible will be. If you’ve kept your coverage with one company for several years, you may get a reduction in your premiums of 5 or 10 percent, depending on the insurer.
