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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.
Table of Contents
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.
Although exact coverage and policy limits vary, homeowner's insurance usually covers damage caused by the following events or catastrophes:
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.
If you incur expenses for temporary living quarters because your home is rendered uninhabitable by an insured event/casualty, most policies will reimburse you in part for this so-called "loss of use."
There is usually a deductible of $100 to $500 for personal property losses. Raising the deductible can lower the premium.
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 a 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:
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.
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.
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:
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 totally 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 what 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.
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.
If your home is located in an area prone to flooding, contact your insurance agent or the National Flood Insurance Program (800-427-4661).
This list should include everything you and other members of your household own in your home and in 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.
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 insuring 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.
Check the limits on certain kinds of personal possessions, such as jewelry, art, silverware, and furs. This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they'll pay for computers and other home office equipment. If the limits are too low, consider buying a special personal property endorsement or rider.
The price you pay for homeowner's insurance can vary by hundreds of dollars, depending on the insurance company. Companies offer several types of discounts, but they do not offer the same discount or the same amount of discount in all states. Here are some things to consider when buying homeowner's insurance:
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.
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.
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.
Considering Buying Home And Auto Policies From the Same Insurer
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:
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?
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 another monitoring facility. 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.
No Smoking Discounts
Insurers may offer lower premiums if all the residents in a house do not smoke.
If you are at least 55 years old and retired, you may qualify for a discount of up to 10 percent at some insurers.
Investigate Group Coverage
Employers, alumni, and business associations can often benefit from an insurance package at competitive rates. Ask your company's human resources department or your association's director if such a package is available.
Stay With the Same Insurer
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.
Check Your Policy Once A Year
Compare the limits in your policy with the value of your possessions at least once a year to make sure your policy covers major purchases and/or additions to your home.
Look For Private Insurance First
If you live in a high-risk area, that is, one that is vulnerable to coastal storms, fires, or crime, and have been buying your homeowner's insurance through a government plan, you may find that there are steps you can take to buy insurance at a lower price in the private market. Check with your insurance agent or broker.
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To be sure you have adequate homeowner's insurance, ask your insurance agent questions about the issues discussed in this Financial Guide. A thorough inquiry into specific coverage and costs should result in a policy that offers the best coverage and value. It is also important to ask your agent or broker to explain what factors were used to calculate the policy limits for the dwelling.
For your convenience, several common insurance terms are defined below:
Actual Cash Value. The current value of property measured in cash arrived at by taking the replacement cost and deducting for depreciation brought about by physical wear and tear, age and other factors.
Endorsement. A written form attached to a policy that alters the policy's coverage, terms or conditions.
Floater. A policy or endorsement that applies to moveable property whatever its location. The coverage floats or moves with the property.
Guaranteed Replacement Cost Insurance. Insurance providing for payment of the cost of replacing the damaged property without deduction for depreciation and without a dollar limit
Inflation Guard Clause Provision. In a policy or endorsement that automatically adjusts the dwelling limit at policy renewal time to reflect current construction costs in your area.
Replacement Cost Dwelling Insurance. Insurance providing that the policyholder will be paid the cost of replacing the damaged property without deduction for depreciation, but limited by the dollar amount displayed under Section 1, Coverage, A. Dwelling on the Declarations Page of the policy.
Replacement Cost Contents Insurance. Insurance that pays the dollar amount needed to replace damaged personal property with that of similar kind and quality without deducting for depreciation.
Use this form to document and determine whether your personal property coverage is adequate. Go through each room and inventory your belongings. Write in the year you bought the item and how much you paid for it. Then write in the approximate cost to replace the item today. Finally, calculate the totals at the end of the form. This list will also help in case you need to submit a claim.