HOME INSURANCE: HOW IT WORKS, WHY YOU NEED IT, AND HOW TO MAKE THE BEST OF IT.
About six weeks ago, I woke up to bright flashing lights. It was shortly after midnight. I looked out our bedroom window and saw my neighbor running out of his home and firetrucks and ambulances arriving on scene. I assumed my neighbor, an elderly gentleman, was having a medical episode, but as the evening unfolded, I saw smoke bellowing out of his home and began smelling the smoke in our house. More fire engines arrived on scene and I watched the firefighters hook up their hoses to put out a fire. After seeing that everyone was okay, I thought to myself, “I sure hope he has homeowner’s insurance.”
Homeowner’s insurance is a tool in our plan that not only protects against damages done by fire, but many other perils. Someone trips over your cracked sidewalk and breaks their foot – homeowner’s insurance will likely provide your protection. Someone steals your computer from your home – homeowner’s insurance. Your dog bites someone: your policy provides coverage. Essentially, homeowner’s insurance provides protection from harm that occurs to your home or property or on the premises.
Now, if you have a mortgage on your home, your mortgage company requires that you carry homeowner’s insurance. Even if you don’t have a mortgage, it’s a good idea to carry a homeowner’s insurance policy. Our homes are often one of our most valuable assets and if something were to happen to our home and we couldn’t afford to repair it, we would be out that value.
How much coverage do I need?
There are three factors to consider: First, the value of your home and surrounding structures. Second, the value of your possessions in your home. Finally, how much liability coverage.
When determining the value of your home and surrounding structures, you want to be able to replace your home and the surrounding structures if something happened to them. Don’t just look at the value on Zillow or your property taxes. You should include the cost of entirely rebuilding or renovating. You can consult with your insurance company or an expert to determine this. Coverage should allow you to be able to rebuild, even when the cost of materials or rebuilding is high (like it is right now!). It is believed that about half of the homes in the U.S. have inadequate homeowner’s insurance coverage.
There are two main types of property insurance here: Actual Cash Value (ACV) and Replacement Cost. ACV will pay for the damage you sustain minus depreciation. For example, if you have a claim for your laptop which you paid $2,000 for, but it is now three years old and only worth $1,000, the ACV will be $1,000, not what it would cost for you to replace the laptop. Replacement Cost, on the other hand, will compensate you for the cost to replace the laptop ($2,000).
To determine the value of your possessions, it is recommended that you make a list of everything you own and how much it is worth. You want enough personal property insurance to cover the cost of your personal possessions if they were destroyed. If you have very valuable possessions, make sure you have enough coverage for those, too. There are oftentimes limits on jewelry.
Finally, you want to have enough liability coverage to protect you from incidents that occur on your property. Common incidents include dog bites, slips and falls, and broken or ruined possessions of your guests (maybe your toddler ruined your guest’s leather jacket) . As a general standard, most policies provide $300,000 of liability coverage, however it is often recommended to obtain at least $500,000 of liability coverage
Other considerations
Homeowner’s insurance policies often explicitly exclude damage due to floods or earthquakes, so if you live in an area where this is common, be sure to get this specific coverage.
Policies also may specifically exclude coverage for certain types of dogs. If you have a breed that gets a bad rap, make sure your insurance policy provides protection for your pup.
You may have the option to purchase Additional Living Expenses coverage. This coverage pays for your expenses if you are not able to be in your home while it is being repaired or rebuilt.
Deductible
As is true for health insurance and automobile insurance, you can lower your premium by selecting a higher deductible. Because of the small likelihood that you will have a claim, having a higher deductible and a lower premium will save you money in the long term. Just plan to have the cash to cover the deductible set aside in your emergency fund or other savings account.
A happy ending
While I haven’t visited with my neighbor about whether he was adequately covered, he did have insurance and he’s safe and rebuilding. He’s going to be making some necessary updates to his home from this experience and he’s reminded us all of the importance of preparing for the unexpected.