One need only turn on the nightly news with its never-ending list of disaster stories associated with fire and weather to know the value of home insurance. If you own a house or condo, you are protecting what is likely to be your most valuable asset, along with all your possessions. If you rent, you still have furniture, clothes, electronics and other important belongings to protect.
Home insurance helps protect your assets by providing the money you would need to rebuild your home and/or replace your valuables should disaster strike. Home insurance makes sure that you will not be held responsible for damage to your home, providing that the damage is outside your control (ex: fires).
About Homeowners Insurance
Homeowners will want to protect both their physical property and possessions. If you have a mortgage, you likely already have at least the minimum coverage required by your mortgage company. The questions you should periodically ask yourself are:
Do I have the right coverage for my current situation?
The average length of home ownership is about 7 years, although many people stay in the same home for 15, 20 or more years. The key point is that your life changes over this long period: Your house increases in value, you have more possessions to protect and/or your net worth increases --- assets that could be exposed in a liability situation. This is the more difficult question to answer, as everyone's situation is a bit different. However, it can be just as expensive to be overinsured as underinsured: read this example in our blog.
Am I paying as little as possible for the above coverage?
As with other types of insurance, different homeowners insurance companies will evaluate the same risk differently. Once you have an idea of the coverages you want, the easiest way to get the lowest premium is to use an online quote service to compare. Fill out just one form --- and let the insurance companies come to you. This approach also makes things easier for the future --- you can just return to your profile and periodically check to make sure you have the best price.
Coverage Issues to Consider
Homeowners insurance basically covers you for things outside your control: fire, weather, someone who falls on your property and sues you. It doesn't cover you for normal wear and tear or negligence. Make sure you understand what is and isn't covered in your policy.
- Most standard homeowner policies have limited coverage for valuables such as jewelry, furs or expensive silverware. To the extent you have these items, you should consider adding an endorsement, which will list the specific items you have, and provide a higher level of coverage (for an additional premium).
- Damage due to floods or earthquakes is not covered by standard homeowners insurance policies. If your home is in an area prone to these natural disasters, consider a separate policy with these coverages.
- Motor vehicles are generally not covered, as they are covered by auto insurance.
Understand the difference between Market Value, Replacement Cost and Actual Cash Value as you choose your homeowners coverage. This will save you from a nasty surprise down the road. Replacement cost is highly recommended.
- Replacement Cost coverage insures you for the COST to replace your loss. For example, your home is destroyed. It had a market value of $500,000, but will cost $300,000 to rebuild today in a similar way. You would get $300,000. The market value of your home includes the value of the land and/or location, which aren't insurable because they wouldn't be destroyed in a fire or other covered loss.
- Actual Cash Value insures you for the replacement cost less depreciation. This insurance costs less, but here's why: Let's say your living room furniture, that you bought 5 years ago for $4,000 is destroyed. Based on the depreciation schedules, the insurance company might determine that the current value of these items is only $500. That's all you would get.
Condominium insurance is a hybrid form of homeowners insurance. Most of the issues described above will apply. However, your condo association's master policy will cover the overall building and common areas. What you will want to insure is everything inside the bare walls --- including the cabinets, appliances, and any improvements you have made.