Buying a home is one of the most nerve-wracking items that a person can do over the course of his or her lifetime. There’s the stress of coming in with the perfect bid, aligning your assets, and sifting through an avalanche of paperwork. There’s also homeowners insurance to deal with. While we know it is an important part of the home buying process, it is arguably the most convoluted part of property acquisition.
The best way to deal with homeowners insurance is to jump right in and get to know all of the ins and outs of how it works, and more importantly, how it can work for you.
The Basics of Homeowners Insurance
Before you even go seeking out homeowners insurance, you should know why its purchase is so essential to home ownership. There are two core reasons why homeowners insurance is important to possess:
- Protection of your assets. Homeowners insurance is designed to cover your home’s structure and all of the personal property contained within its walls. It is also designed to hold you personally liable for any injuries that may occur to other people while they are on your property.
- The satisfaction of your mortgage lender. Most mortgage lenders will require you to have homeowners insurance as part of the mortgage policy. Most likely, the lender will incorporate the cost of your policy into your monthly mortgage premium. This will actually make your premium significantly more affordable than it would be if you were to purchase it outright.
The term ‘homeowners insurance’ is typically so broad it is easy to lose sight of what exactly is covered in a policy. Essentially, homeowners insurance covers the following:
- Dwelling: This coverage pays out for damage to your house and to other structures that are connected to your house. This would include damage done to fixtures like plumbing, heating, electrical wiring, and permanently installed air-conditioning systems.
- Other Structures: This coverage pays for structures that are on your property but not attached to your house. This would include damage to tool sheds, fences, freestanding garages, and guest cottages.
- Personal Property: This coverage would reimburse you for the value of any damaged or lost possessions. This would include furniture, appliances, electronics, and clothing. This could also apply to items that are not physically on your property, such as possessions that are in an off-site storage locker or with your child at college.
- Loss of Use: This coverage would pay some of your additional living expenses that you may incur while your home is being repaired.
- Personal Liability: This coverage would protect you from financial loss in the event that you are sued and found liable for injuries or damages to a person while he or she was on your property.
- Medical Payments: This coverage would cover medical bills for people that are hurt on your property or injured by your pets.
The Perils of Home ownership
Arguably, the most important word that lurks within a homeowners insurance policy is “peril.” This word defines a specific risk or reason for a loss. Because there are many parts to a homeowners insurance policy, some perils may be covered more readily than other, depending on the type of homeowner insurance plan you aspire to attain. Different types of peril include fire, smoke, theft, vandalism, civil unrest, explosion, trees and other falling objects, and other acts of nature. They can also include issues that form from within the home, such as the freezing, rupturing, or sudden and accidental overflow of a plumbing unit or a household appliance. While some homeowners insurance policies encompass a broad coverage of perils, others forms are truncated to provide a smaller level of peril protection.
Regardless of what level of coverage you seek, you should note that your homeowners insurance will not pick up flood as a peril. If you want to protect your home from flood damage, you must purchase a separate flood insurance policy.
Know Your Worth
If your house is hit with peril, what you actually receive back is determined on a state by state basis. Because no two states govern how losses are calculated the same, your insurance company may use a different method to determine your replacement value than it does one state over, even though the resulting damage was similar.
There are two methods that are used to calculate the replacement of property lost or damaged by peril:
- Actual Cash Value: This method determines the cost of an item minus its depreciation. For example, if you bought an $800 laptop five years ago, it may be determined that the value of the laptop has decreased by 50%. Therefore, you would get paid $400 for the loss of the laptop.
- Replacement Coverage: This method calculates how much it would cost to replace an item without factoring depreciation. In this method, the present cost for a laptop containing similar features to the one that was lost would dictate the payout amount. If is determined a similar laptop costs $500 in today’s market, you would receive $500.
You should also bear in mind that these dollar amounts do have limitations on them. These limitations are in place to keep the universal cost of insurance premiums down.
You should also keep in mind that homeowners insurance policies contain deductibles. Basically, a deductible is the cash that you have to pay out of your own pocket on a claim before the payout from an insurance policy kicks in. For example, if you have a $1,000 deductible on your homeowners insurance policy, and you have an act of peril that causes $5,000 worth of damages, you would have to shell out that first $1,000 before the insurance company comes in and pays out the remaining $4,000.
There is a significant measure of risk/reward when it comes to deductibles. If you set your deductible low – and you can set it as low as $0 in some cases – your monthly premiums on your homeowners insurance will be higher. However, if you have a high deductible, you will have a lower monthly premium to worry about. The downside to this is, you need to always make sure that you have enough money lying around in order to cover that deductible in the event that your house encounters an act of peril.
Talk to a Professional
As you can see, homeowners insurance is a pretty complex beast to deal with. Because of this, you really should not try to tame this on your own. Even if you have done your due diligence, followed through with a thorough amount of research, and think you have a firm grasp on all of the intricacies that are involved with homeowners insurance, you are undoubtedly bound to miss certain things that a savvy professional with years of training and experience would be able to pick up on a snap. Therefore, it is vital that once you seek out an insurance company, you sit down with a representative and pore over every nook and cranny of each homeowners insurance related policy they offer, just so you can make sure that you are protected in the manner that you desire. If you do not, you could very well end up paying for this lack of discussion at a later date.