Confused about Home Insurance? Here are some tips to understand it better
The first thing you need to know about homeowner’s insurance is that it’s not optional. Any lender you work with will require that your new home be adequately insured before they will write you a mortgage. You’ll need to show proof of insurance come closing time or it’s no deal. So the real questions become what’s the best homeowner’s insurance policy for you, how much coverage do you need, and how much will it cost you?
There are three different types of protection that make up a typical homeowner’s insurance policy. The first protects you when your home is damaged. A basic policy, known in the industry as an HO-2, will cover damage caused by fires and smoke, wind, indoor flooding caused by sudden plumbing problems, and other common perils. Driveways, pools, and outbuildings are also protected under these accidental circumstances.
If you live in a flood zone or hurricane-prone region of the country, you should know that a standard policy does not protect you against water damage caused by those natural events. You may want to consider adding specific flood coverage to your insurance plan. Most policies exclude coverage for mold damage caused by poor maintenance, as well.
There are two different types of property damage coverage you can choose from. The first is actual cash value coverage. Under an actual cash value policy, your insurance company will reimburse you the “going rate” for your home or possessions at the time of the loss. If your gourmet fridge is 10 years old, you’ll be reimbursed the amount a 10-year old fridge will fetch at a used appliance store. If your home features fine craftsmanship that would be insanely expensive to recreate in today’s marketplace, that won’t be reflected in the amount you are reimbursed in the event your house burns down. In each of those examples, however, you would be fully protected under a replacement value policy.
Standard home insurance policies also protect the personal property you keep in and around your home. If thieves break into your home, garage or outdoor shed, your homeowner’s insurance will cover the cost of replacing the stolen items. Having a record of your possessions will make the claims process much simpler.
The other critical part of any homeowner’s insurance policy is the liability portion. Liability insurance protects you in the event that someone is injured on your property. It also protects other people’s personal belongings if they’re damaged while on your property. The classic example of a liability claim is the friend who slips on your icy steps and sues you for such damages as the cost of setting his broken arm. Liability insurance would also kick in if that same friend’s car was crushed in your driveway by a falling tree limb.
But these are comparatively minor incidents. Some accidents are very, very serious. Courts routinely award damages in the millions of dollars for accidental deaths and catastrophic injuries, so liability insurance is absolutely crucial to protect you against financial ruin. High net worth individuals will often—and smartly—carry far more than the minimum liability insurance required by law or their lenders.
If you are concerned about monthly costs, you can choose a higher-deductible plan, banking on the chance that you won’t need to make a lot of claims. Significant discounts are often awarded when you “bundle” your home and auto policies together with one insurer. Certain steps you take to make your home more “disaster-resistant,” such as installing storm shutters, putting on a new 50-year-warranty roof, or purchasing a home security system can also lower your premiums. But the best strategy of all is to shop around. Compare quotes from several different providers. Online shopping has made that pretty simple to do. And, by all means, ask your real estate agent to point you in the direction of the most reliable insurance companies they know. After all, reliability is the name of the game in insurance.