Buying a home might be the single largest investment that you'll ever make. Protecting that investment is essential—and that's where homeowners insurance comes in.
What is Home Insurance?
Required by most mortgage lenders, most standard home insurance policies will provide coverage for damage to your home (and many of the items in your home) caused by:
Home insurance also covers injuries and property damage caused by you, your family (or pets) to other people. This liability coverage for will pay for medical payments to third parties, and legal costs if a lawsuit is brought against you. The insurance will also usually cover any living expenses you incur, if you're unable to live in your house because of a fire or other covered incident.
What's not covered?
Read your home insurance policy to find out exactly what is and is not covered. Typically, 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. Also, any damage caused by wear-and-tear isn't covered—this is considered maintenance, and is assumed to be the responsibility of the homeowners themselves.
How much is enough?
Mortgage lenders require that borrowers purchase a minimum amount of home insurance (typically equal to the appraised value or the purchase price of the home). But this is often not the amount of coverage you truly need. Instead, find out how much it would cost to rebuild your home, and consider insuring it for that amount. When you apply for a policy, your agent will help you establish the replacement cost by asking for detailed information about the construction and contents of your new home—and possibly by completing a home inspection.
The liability limits on a standard homeowners policy are typically $100,000, but this may not be enough to protect all of your assets. For an additional charge, you can increase this coverage to $500,000. You may also choose to buy an umbrella policy to add coverage in increments of $1 million. Generally, you would buy the umbrella policy from the same company that insures your cars.
You get what you pay for
Are you willing to pay more to have damaged personal property replaced? If so, consider purchasing replacement cost coverage with your home insurance. 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.
Most home insurance policies limit coverage for certain high-priced or hard-to-replace items. Additional endorsements or floaters will be necessary to protect items like jewelry, furs, antiques, guns, and other valuables. You may need an appraisal for some items before the company will provide a rate.
How deep are your pockets?
To save money, consider choosing a deductible of $250, $500, or even $1,000. In the event of a loss (e.g., damage from a winter storm), you'll be required to pay this amount out of your own pocket before your home insurance takes over, but in the meantime, this could reduce your homeowners premium.
Sound the alarm
Don't forget to tell your insurer if you have a home security system (e.g., fire, burglar, emergency). Most insurers offer discounts for such safety features. You may also qualify for a lower insurance premium if you live near a fire department or hydrant, own a newer home, own a home built out of fire-resistant materials, or get your auto insurance from the same company.
Get quotes from several insurance companies when shopping for home insurance. But remember, the lowest price does not always equal the best deal. Compare the coverage each policy offers, and check with your state's department of insurance to make sure that each company you're evaluating has a good reputation in the industry.
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Originally posted August 4, 2004.
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