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Insurance: Do your eyes glaze over just reading the word? It may not be the most thrilling subject, but
it's essential for new home buyers to understand the nuts and bolts of their homeowners insurance.
Virtually all mortgage lenders require insurance coverage to protect their investment. If the house you
live in is destroyed, the real owners - and in most cases, that's the bank - would suffer a huge monetary
loss if not for insurance. You don't even have to "own" your home to need homeowners insurance;
many landlords require their tenants to have coverage. But whether it's required or not, it's smart to
have this kind of protection anyway. We'll take it step by step as we walk you through the basics of this
type of policy.
What the Policy Provides
The elements of a standard homeowners insurance policy provide that the insurer will cover costs
related to:
• Damage to the interior or exterior of your house - In the event of damage due to fire,
hurricanes, lightning, vandalism or other covered disasters, your insurer will compensate you so
that your house can be repaired or even completely rebuilt. Damage that is the result of floods,
earthquakes and poor home maintenance is generally not covered and may require separate
riders to provide that protection.
• Loss or damage to your personal belongings - Clothing, furniture, appliance, and most of the
other contents of your home are covered if they're destroyed in an insured disaster. You can
even get "off-premises" coverage, so you could file a claim for lost jewelry, for example - no
matter where in the world you lost it. There may be a limit on the amount your insurer will
reimburse you. Even if your Rolex or mink coat is damaged at home, there will be a limit on the
coverage for that, too - unless you purchase a separate "floater" policy that insures the item for
its full appraised value.
According to the Insurance Information Institute, most insurance companies will provide
coverage for 50-70% of the amount of insurance you have on the structure of your home. If
your house is insured for $200,000, there would be up to about $140,000 worth of coverage for
your possessions - would this be enough for you? In order to answer this question, you would
need to have a list of all your possessions and their value, also called a "home inventory". You
can download free home inventory software at www.knowyourstuff.org that allows you to make
a simple list of your belongings room by room; the software also provides lists of items that are
typically found in certain rooms as a base of reference.
• Personal liability for damage or injuries caused by you or your family - This clause even
includes your pets! So, if frisky Fido bites your neighbor Doris, no matter where the bite
happens to occur, your insurer will pay her medical bills. Or, if Junior breaks her Oriental vase,
you can file a claim to reimburse her. And if Doris slips on the broken vase pieces and
successfully sues for pain and suffering or lost wages? You'll be covered for that, too, same as if
someone is injured on the premises of your home or property. While policies start in the range
of $100,000 coverage, experts recommend having at least $300,000 worth of coverage
according to the Insurance Information Institute. For extra protection, a few hundred dollars
more in premium may buy you an extra $1 million or more through "umbrella coverage".
• Hotel or house rental while your home is being rebuilt or repaired - It's unlikely you'll ever
need this protection, but if you do find yourself in this situation, it will undoubtedly be the best
coverage you ever purchased. If your house has been completely destroyed or is so damaged
that it's uninhabitable, you may need to rent another house or live in a hotel until it's repaired or
rebuilt. This portion of homeowners coverage would reimburse you for the cost of rent, hotel,
restaurant meals and other incidental costs because you were unable to live in your house.
Before you book a suite at the Ritz-Carlton and order caviar from room service, however, keep
in mind that policies impose strict daily and total limits - but, of course, you can expand those
daily limits if you're willing to pay more in coverage.
Different Types of Coverage
All insurance is definitely not created equal or, put another way, you get what you pay for. The least
costly homeowners insurance will likely give you the least amount of coverage, and vice versa. There
are essentially three levels of coverage:
• Actual cash value - This value covers the house plus the value of your belongings after
deducting depreciation (i.e., how much the items are currently worth, not how much you paid
for them).
• Replacement cost - This is the actual cash value without the deduction for depreciation, so you
would be able to repair or rebuild your home up to the original value.
• Guaranteed (or extended) replacement cost - The most comprehensive, this inflation-buffer
pays for whatever it costs to repair or build your home - even if it's more than your policy limit!
Certain insurers offer extended replacement, meaning it offers more coverage than you
purchased, but there is a ceiling; typically, it is 20-25% higher than the limit.
How Much Does It Cost?
Premiums vary widely and depend on multiple factors. First, of course, price will be determined by
how much coverage you buy, a decision you can only make after evaluating the market value of your
house, completing a household inventory, and deciding how much liability protection you want.
Other variables that need to be considered include your zip code. If you live in a high-crime area, for
example, insurance premiums will be higher. Companies also take into account the size of your house,
how close it is to a fire hydrant, the condition of your plumbing, heating and electrical systems, how
many claims were filed against the home you're seeking to insure, and even details like your credit
score that reflect on how responsible a consumer - and, therefore, a homeowner - you are.
No matter what initial price you're quoted, you'll want to do a little comparison shopping. And don't
forget there are many other ways to slash costs, such as raising deductible levels, buying multiple
policies from the same insurer, getting all available discounts (for security devices, such as burglar
alarms, for example), checking for group coverage options through credit or trade unions, employers,
or association memberships, and boosting your credit score.
Selecting an Insurance Company
Price is important, but it is not the only or even the most important factor. When it comes to insurance,
you want to make sure you are going with a provider that is legitimate and creditworthy. Before you
sign on the dotted line, first contact your state's insurance department to make sure the company is
licensed, as all insurers are required to be. Second, check its financial strength by going to websites of
the top credit agencies (ex. A.M.Best, Moody's, Standard & Poor's) and searching their financials.
Finally, consider asking relatives, friends and coworkers for referrals. It always makes sense to benefit
from the experiences of others, so ask someone you know who has filed a claim about an insurer's
customer service representatives, the speed with which a claim was appraised, processed and paid, in
addition to your friend's general level of satisfaction with the insurer.
Conclusion
As with all insurance policies, they are under-appreciated until they are needed, and then they quickly
become a godsend. Getting yourself set up with a comprehensive homeowners policy can go a long
way toward making your home truly a place of comfort and security. |
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For Individuals and family |
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