The key to getting the right type and amount of insurance coverage is education. It is imperative that you learn everything you can and then make your own informed decisions. With the wealth of knowledge available on the Internet today, no one has an excuse not to be informed. Even if you prefer to seek help from a professional, you should at least understand the terminology as well as the basics so that you know that you are getting the right product at the right price.
Homeowner's Insurance Basics
Most standard policies will provide coverage for damage to your home (and many of the items in your home) caused by:
- Fire and lightning
- Frozen pipes
- Ice and snow
Homeowners insurance also provides coverage for liability claims, medical payments to third parties, and legal costs if a lawsuit is brought against you. The most common amount of liability coverage included in a homeowners policy is $100,000, but you may need much more, depending on your circumstances. Umbrella policies are inexpensive and can provide millions of dollars of added liability protection.
What's not covered?
Read your insurance policy to find out exactly what is and is not covered. Do this before you suffer a loss, so you won't be surprised. Most insurers exclude damages caused by an act of war, nuclear accident, flood, earthquake, and terrorism, although you may be able to purchase special policies or endorsements that will cover these events.
Some items have limits
Most homeowners policies limit coverage for certain high-priced or hard-to-replace items. Additional endorsements or floaters will be necessary to protect items like rings, watches, furs, antiques, and other valuables. Check your policy to see how much will be paid for these items in the event of damage or loss. For example, your policy might pay $3,000 for jewelry. This means that if everything is lost or stolen, the most the insurance company will pay for all of your jewelry is $3,000, and that will depend on whether or not you have receipts to verify the purchase or appraisals to validate the value. Therefore, if you have jewelry worth more than the stated limit, or for that matter any item that exceeds the stated limits, you will need to consider an endorsement or policy rider that will ensure your valuables for their true value. Of course, you will have to pay extra for this additional protection.
How much coverage you really need
Mortgage lenders require that borrowers purchase a minimum amount of homeowner's insurance, typically equal to the appraised value or the purchase price of a new home. But this is often not the amount of coverage you truly need. The value of your home typically increases every year, and your insurance coverage must be increased to keep pace with these higher values. The best bet is to know how much it would cost to totally rebuild your home, and consider insuring it for that amount.
Actual value versus replacement value
When it comes to valuing property, insurers generally use one of two methods. The first, actual cash value, pays you an amount equal to the replacement value of the property, minus depreciation for the years you owned the item. The second, replacement cost, is more expensive, but it pays you the full value of the item today, so that you can replace the old item with a new one.
You will have a deductible
Every homeowner's policy will have a deductible, basically an amount that you have to pay to be reimbursed for a claim. In truth, you don't pay the money, but it is deducted from the amount you would have received for your loss. Deductibles range from $100 to $1,000, and it is usually your choice since your annual premium will greatly depend on the size of your deductible. The higher the deductible, the lower your premium. Raising your deductible from $500 to $1,000 can cut your premium by as much as 25%.
The deductible serves two purposes: 1) to lower the cost of the insurance since you are paying part of the loss, and 2) to minimize the number of claims you file. For example, if you have $1,000 deductible, you won't benefit by filing a claim for $500 since it is less than your deductible which means you would have to pay it yourself anyway.
In addition to choosing a high deductible, there are other ways that you can reduce your insurance costs. Insuring your automobile(s) with the same company will usually save 10% on your homeowner's policy (and also on your automobile policy). Most insurers offer discounts for safety features such as home security system, fire extinguisher, smoke alarms, etc. These could save you another 10% on your premium, and up to 23% if you have automatic sprinklers. Homes with superior construction (e.g., masonry) or fire-resistant materials could be discounted another 15%, and new homes (0 -7 years old) also may be discounted up to 20% (decreasing as your home ages. Further, there are discounts available if you live near a fire department or hydrant. Finally, most companies give discounts of up to 10% for longtime customers, and some may not raise your collision premium for the first accident, so consider this when you want to switch just to save a few dollars. Above all, make sure that each of these items is considered in determining your homeowner's insurance premium.
Step 3 - Determine Your Insurance Needs