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Frequently asked questions about homeowner's insurance

What is covered under a typical homeowner's insurance policy?
If you own a home, you need homeowner's insurance. A typical homeowner's policy provides three types of protection. Homeowner's insurance covers the cost of rebuilding or repairing your home (and surrounding structures such as the garage) if it's destroyed or damaged by disasters such as fire, theft, snow or windstorm. It covers the contents of your home up to a fixed dollar amount in the event of many of these same disasters. And it can also protect you if you are held liable for injuring people or damaging property.

What kind of home insurance should I get?
A standard homeowner's policy protects against fire, lightning, wind, storms, hail, explosions, riots, aircraft wrecks, vehicle crashes, smoke, vandalism, theft, breaking glass, falling objects, weight of snow or sleet, collapsing buildings, freezing of plumbing fixtures, electrical damage and water damage from plumbing, heating or air conditioning systems, according to the Insurance Information Institute, a Washington, D.C.-based nonprofit group for the insurance industry. Such policies are called "all-risk" policies, but there are some potentially disastrous risks that they don't typically cover: earthquakes, floods, war and nuclear accidents. A basic policy can be expanded to include additional coverage, such as for floods and earthquakes and even workers' compensation for servants or contractors. Home-based business-coverage, an increasingly popular rider, does not cover liability associated with the business. Insurance experts recommend that homeowners obtain insurance equal to the full replacement value of the home. On a 2,000-square-foot home, for example, if the replacement cost is $80 per square foot, the house should be insured for at least $160,000. For personal items, homeowners can increase their coverage beyond the depreciated value of items such as televisions or furniture by purchasing a "replacement-cost endorsement" on personal property. Some experts recommend an inflation rider, which increases coverage as the home increases in value.

What is guaranteed replacement cost insurance?
Guaranteed replacement insurance is a more comprehensive policy. They tend to cost more, but they promise to cover the complete costs -- less deductible -- of replacing a destroyed house. With these sorts of policies, limits on the policies are not as common, because complete coverage is more explicit.

What is mortgage life insurance and do I need it?
Many lenders and insurance companies offer mortgage life insurance that will pay your mortgage off if you die. For most homeowners, this is a lousy deal. Mortgage life insurance is just too expensive. If you want to make sure your heirs have enough money to pay your home-loan off when you die, it would be much cheaper to purchase term life insurance for the number of years your mortgage will last. You can consider buying mortgage insurance if you're in poor health, your medical problems prevent you from getting an inexpensive term life policy, and the insurer who offers the mortgage life insurance does not require that you take a physical examination. Otherwise, you should probably skip mortgage insurance.

How can I save money on my homeowner's insurance?
The easiest way to save money on a homeowner's insurance or renter's insurance policy is to increase the size of the deductible you must pay before the policy will cover you for a loss. However, it's important to remember this only makes sense if you have enough savings to pay the higher deductible if you have to make a claim. Also ask if you're eligible for any discounts. If you have dead-bolt locks on your doors or live in a doorman apartment building, you may be able to get a discount of as much as 10% on your premium. If you have a security alarm, a fire extinguisher, and/or a smoke detector, you can often get a discount of anywhere from 2% to 20%, depending on the type of system you have. Consider moving your automobile coverage and homeowner's or renter's coverage to the same insurance companies. Some insurers offer a dual-policy discount of up to 15%. Also contact at least three or four insurers -- including a few that sell their policies directly to the public, without paying a commission to sales agents -- as soon as your current insurer sends its annual renewal statement to see if you can get a better deal.

Do I have to insure the total value of my home?
While you certainly need to have a homeowner's insurance policy that will rebuild or repair your home if disaster strikes, it's important to remember that you probably do not need to insure the value of the lot itself. For example, say your home could sell for $150,000 today. A portion of that amount reflects the value of the land. You need a policy that would cover the cost of rebuilding or repairing your home. However, you don't need to insure the land because dirt cannot burn. This can easily trim more than $100 a year off your annual insurance premiums, depending on the location of your property.

Is there an insurance program for high-crime areas?
Many private insurance companies won't provide coverage in areas where the crime rate is high. If you find yourself in this predicament, call the federal Crime Insurance Program at (800) 638-8780. The program offers coverage in neighborhoods where private insurers won't.

What kinds of protection does the liability portion of my homeowner's insurance provide?
You might be surprised at the breadth of the liability protection provided by a typical homeowner's insurance policy. Homeowner's policies include liability protection that covers you for damage you cause inside or outside your home. If you leave a pair of boots in the middle of your kitchen floor, and your neighbor trips on them and breaks her leg, your liability insurance will cover her medical bills and other costs if you're held responsible for her injury. If you run a shopping cart over someone's foot in a supermarket, your liability coverage will pay for his or her medical expenses if you're found liable. If you have a pet, the liability coverage provided by a typical homeowner's policy will often cover the damage the pet may do to people or property.

How much liability protection should my homeowner's policy provide?
Pay particular attention to the amount of liability protection that your homeowner's insurance policy provides. Many homeowner's policies come with a standard amount of liability insurance of about $100,000 per accident. In these litigious times, this may not be enough. There is no perfect way to figure out how much you need. To get a rough idea, tally up all your major assets including your home, your car, your possessions, and your investments (don't forget about your retirement savings). The amount of liability insurance you get should exceed this amount. To increase the amount of your liability protection, simply call the insurance agent or company that sold you the policy.

What kind of off-premises protection does my homeowner's insurance provide?
If you own a home, check your homeowner's insurance policy to see what type of off-premises protection it provides. Many homeowner's policies include off-premise protection, which covers your possessions outside your home -- whether you're robbed while on vacation or mugged on your block. If, for example, your portable computer or luggage is lost or stolen when you're trekking around Europe, your homeowner's insurance should cover the loss. Although many policies automatically provide such protection, you may be required to pay extra for it if you live in a high-crime area.

Is my home computer and other equipment covered by my homeowner's insurance?
If you work out of your own home, you may need to purchase additional homeowner's insurance.Your home office equipment is usually not covered by your homeowner's policy. If the business is small, you can get additional coverage by purchasing an endorsement. For larger business you will have to purchase a separate policy. If you have any questions about whether the business-related equipment you have at your home is covered by your insurance, re-read the policy and contact your insurance agent.

Do I need special coverage for collectibles?
A typical homeowner's insurance policy offers little, if any, coverage for collectibles. To get coverage, you usually have to specifically request it and then pay extra for it. If you're planning to insure collectibles, consider getting a written appraisal of each item first. It will help to ensure that you get the proper amount of coverage and will reduce the chance that the insurer will contest your estimates if you eventually file a claim.

What is the fair market value of property?
Definitions of fair market value abound. Real estate agents define it one way. Insurance companies define it another. Jewelers, accountants and even pawn-shop owners have definitions of their own. In general, fair market value is the sum a buyer would be willing to pay for your property and that you would be willing to accept -- assuming that neither of you is under pressure to buy or sell, and that neither of you are guilty of misrepresentation.

Does my homeowner's insurance policy protect against floods and earthquakes?
Certain perils, such as earthquakes and floods, are not covered by standard homeowner's insurance policies. If you live in a region threatened by earthquakes, consider buying earthquake insurance. If your area is prone to flooding, get adequate flood insurance; call the National Flood Insurance Program at (800) 638-6620. Earthquake insurance can be especially expensive. As a result, it's best to check with several insurers before purchasing the coverage.

What is loss of use insurance coverage?
If you're forced to move out of your home while it's being rebuilt or repaired, your homeowner's insurance policy may reimburse you for some or all of the related expenses. Most policies include some loss of use protection. If your home is damaged and you're forced to live elsewhere for a while, this coverage will pay the cost of your motel bills, meals, and other basic living expenses minus your usual daily living expenses. Don't expect the policy to pay for lavish hotels or restaurants. A typical amount of coverage is 20% of the total amount of insurance you bought for your home's structure.