Unlike the Declaration of Independence, all homeowners insurance policies are not created equal. Review of your coverage and policy components will help you ensure you have the proper type of policy and proper amount of coverage to meet your particular needs.
How Much Coverage Do You Need?
After excluding the value of your land, determine how much it would cost you to rebuild your home in the event of a total disaster. Your insurance professional or a property appraiser can provide an appraisal based on building costs per square foot. Make sure not to over-insure or under-insure; minimum protection is approximately 80% of the replacement cost. Some mortgage lenders and insurance companies recommend insuring at 100%. The choice is yours, but if you choose 100%, consider seeking an additional guarantee that ensures full replacement, even if the cost increases after the policy is written.
What Types of Policies are Available?
Basic form is the most common type. It covers the house, its contents, shrubs, trees, and other outside structures such as a tool shed or garage, and insures the same against 11 major hazards. Note, however, that it has been withdrawn from use in some states because it has such limited coverage.
Broad form adds seven more hazards common enough to be worth consideration: hot water system leaks; plumbing; heating; air conditioning; freezing pipes; faulty electric wiring; falling objects; weight of ice, snow, or sleet; or collapse of the building.
A special policy provides extensive coverage to the house, but less to its contents, thus cutting down on the premium.
All risk covers both house and property, all dangers, and gives maximum protection (except those risks such as flood, earthquake, war, or nuclear accident specifically excluded in all policies). Note: This policy type has been withdrawn from use in many states. It can be replaced by adding a special personal policy endorsement to the special policy mentioned above.
How Much Loss is Paid?
There are two types of coverage plans for loss. One is on a cost basis, the other on a replacement value basis. If you are paid on a cost basis, this means you get your original cost minus the depreciation over years of use.
Replacement value means that whatever the cost is today, that is what you receive. For instance, if your television set is ten years old, it may be worth almost nothing today. Therefore, it might be appropriate to change a policy from the cost basis to replacement value since most homes are equipped with modern appliances. This change may add about $50 to $100 per year to your premium, but could well be worth it.
How are Valuable Possessions Covered?
Standard policies insure personal property for 50% of the coverage on the house. This means that if your house is worth $100,000, the contents are worth $50,000. If you take an inventory of your personal belongings and estimate their replacement cost today, this will give you a good idea of whether or not you have sufficient coverage. If you do not, contact your insurance professional to discuss special provisions available to cover valuable items separately.
How Limited is Coverage on Personal Items Stolen or Lost Away from Home?
Family belongings are generally covered, but the total amount of coverage is limited. For example, a $100,000 homeowners policy with $50,000 property coverage would pay $5,000 for the loss of property at a second home. Or, a CD player stolen from a college student’s room will only be reimbursed up to 10% of the value of the parents’ personal property coverage.
How Much Compensation is Provided for Living Elsewhere During Home Repairs?
Most policies do not cover full living costs. They pay the difference between normal living expenses and the cost of living elsewhere. Most set maximum dollar limits (20% of your total coverage, for instance), while others set time limits (generally six or nine months).
How Much Liability Coverage Should You Have?
The liability portion of homeowner policies covers everyone in the family, including pets, against personal injury or property damage to others due to negligence on or off the premises. This basic coverage may be beneficial because it includes medical expenses as a result of injuries and pays any legal fees in the event you are sued. Coverage generally allows $100,000 for the liability and $1,000 for medical expenses.
How is Insurance for Apartments or Condominiums Different?
There are special policies for these types of dwellings. They cover personal possessions from theft or fire and provide liability coverage. Some condo policies have “permanent additions” coverage for such things as built-in cabinets or shelves. These policies may be relatively inexpensive because they do not require total coverage of the structure itself. Condo policies, however, have a “master policy” whereby the basic structure and common areas are covered.
How You Can Save Money on a Homeowners Policy?
You might want to share some risks with your insurance company by accepting a higher deductible. If you do, it is possible that a $250 deductible instead of a $100 deductible could save you about 10% of your premium cost. The higher the deductible, the greater the reduction in your premium.
Some companies offer discounts for clients who secure their homes from theft or fire. The installation of deadbolt locks or fire extinguishers, for instance, could reduce your premium as much as 5%. It is worth noting that some companies have discounts for nonsmokers, as well.
Retired homeowners and owners of homes less than six years old may save money. Coverage by the same insurance company for both automobile and homeowners insurance may provide additional discounts. Each state has its own insurance regulations, however, so these savings may vary.
Review your homeowners policy at least once a year. Be certain that your coverage is keeping up with inflation. If you put an addition on your home or buy a personal computer, add this coverage to your policy. In addition, read all of the enclosures that accompany your policy. They may be informing you of some new discounts or policies that are essential to your coverage. In this case, paying attention may indeed “pay off.”
This material was prepared for Jeffrey Carolos's use.