A Quick Guide to Homeowners Insurance

contributed by Susan Doktor

Protecting what we love comes naturally to us. But in the case of protecting our homes, there’s a little more to it than intuition. Homeowners insurance is a bit of a puzzle, especially for first-time homebuyers. Let’s take a look at some of the things you need to know when considering coverage and budgeting for your policy.

Do You Need Homeowner’s Insurance?

The short answer is absolutely. For one thing, if you’ve taken out a mortgage to purchase your property, your lending institution will insist on it. That’s because, until you pay off your home loan, they are protecting their own investment. Most of the time, your homeowners insurance premium will be included in your monthly mortgage statement. You’ll pay it right along with your principal, interest, and taxes. That’s how mortgage lenders ensure your policy isn’t allowed to lapse.

But even if you don’t owe a cent on your house, you owe it to yourself—and others—to insure your property. Chances are, your home is among your largest assets. A fire or hurricane could devastate its value. What’s more, homeowners are often held legally responsible for injuries and damages suffered by other people on their properties. If a neighbor or worker was hurt on your property, wouldn’t you want there be funds available to cover their treatment or other losses? And that leads us to a discussion of the various types of homeowners insurance you should carry. The best homeowners insurance covers a wide range of mishaps and even disasters you may encounter as a homeowner.

First, You Need Liability Insurance

The concept of fault is big in legal matters. And often a matter of contention. Liability insurance is there to protect you should a person get hurt or someone’s property be damaged while on your premises—when it is your fault. Let’s say someone slips and breaks a leg on your icy stairs. Or a dead tree in your backyard crushes a car that’s parked in your driveway. It’s likely you’d be held liable under both of those circumstances. Jury awards for serious injury—or, unthinkably, we know—death cases routinely amount to six- and seven-figures. Without homeowners insurance, you might lose your house and your savings. No one likes insurance premiums. But we encourage frustrated homeowners to consider the worst that can happen and continue to write those checks.

So if liability insurance protects your assets, it makes sense that if you have a lot of assets, you should also carry a lot of liability insurance. But bear in mind, your mortgage lender only cares about one of them: your home. So the minimum amount of homeowners insurance required by lenders may not sufficiently cover you in the event of a serious accident. So when you buy a liability policy, consider what all your assets are worth in total and opt for coverage limits that meet or exceed them.

Next, You Need Property Insurance

Unlike liability insurance, which is there to protect you and other people, property insurance is all about you, your home, and the things you keep inside it. Property insurance covers damage to your home, both major and minor. If a pipe bursts and ruins the carpet in your basement family room, your property insurance policy would pay to replace that orange shag that’s been there since the 1970s. Not a bad deal!

But on the more serious side, if a hurricane bears down on your town and rips the roof off your home, your property insurance would pay for a new roof. It would also pay for most damage caused by the storm inside or around your home. Your clothes and your piano would be covered. So would your garage, your gardening shed, and your pool would be covered. Property damage insurance extends to all of your outbuildings, landscaping, fences, and more.

Particularly if you’re buying a home in a coastal or low-lying area, there’s one exception built into standard property insurance that you should be aware of. Flood damage is excluded under most policies. If you live right near the beach or in a known flood zone, you may want to invest in separate flood insurance.

Standard property insurance covers most stolen or vandalized property. But there are exceptions to this rule, too.

If you keep expensive jewelry or antiques in your home, chances are they won’t be covered if you’re burglarized. The solution to that problem is to purchase a separate insurance rider for these high-value items. You’ll be required to submit photos of your beautiful baubles to purchase a jewelry rider and, in some cases, you may need to have your jewelry appraised. But speaking of photos, insurance experts recommend that you keep a photo inventory of your valuable possessions to make filing insurance claims easier. Keep your inventory on the cloud, of course. The computer you might otherwise keep them on is also a magnet for burglars. By the way, every policy places limits on stolen cash, generally in the neighborhood of a couple of hundred dollars. So keep your at-home cash stash under the limit to avoid an uncovered loss.

Shades of Gray in Property Insurance

When purchasing property insurance, you have a choice to make. You can elect either actual cash value (ACV) coverage or replacement cost value coverage (RCV). ACV coverage is less expensive and here’s why. Under an ACV policy, you will be reimbursed for stolen or damaged property at something you might think of as the “going rate.” If, for example, you spent $2000 on a flat-screen TV five years ago, your ACV policy would pay out the amount they figure it would cost you to buy a 5-year old flat screen at a used electronics store. The same would be true of your 10-year old Subzero fridge if it were damaged in a fire. It may have worked perfectly but you’d be hard-pressed to replace it with the amount you’ll be reimbursed. And that’s where your other option—replacement value coverage—comes in.

Under RCV, an insurer does not “depreciate” your property when figuring its value. As its name would indicate, you are reimbursed the amount it would cost to replace your property with new, like materials. RCV coverage makes particular sense if you live in historic or artisan-built homes. You chose your home for its quality materials and architectural charm. We’re guessing you might not feel satisfied with standard-profile, machine-cut replacement ceiling molding if you once had delicate dentil work crowning your living room. RCV coverage can cost up to 25% more but for some homeowners, the original look of their homes is priceless. Incidentally, RCV coverage would also buy you a new flat screen and gourmet fridge.

Saving Money on Insurance

As much as we’ve emphasized that having adequate insurance coverage is essential, we’re all in favor of reducing insurance expenses where you can. One way to do that is by electing a high deductible when you purchase your policy. Some policies set a flat deductible rate while others set your deductible as a percentage of your home’s insured value. Higher deductibles mean lower premiums. But a good rule of thumb is not to set your deductible at an amount higher than you could afford to pay on an average day. The last thing you want is to be sitting in a damaged home saving until you’ve saved enough money to pay your deductible.

You can also bring your homeowners insurance premiums down by installing a security system in your home. If the property you’re purchasing already features a system, be sure to let your agent know before he or she writes your policy so a security system discount is included. Discounts for living in a gated community, bundling your home and auto policies with one carrier, being a non-smoker, or even being retired or married are common in the homeowners insurance market, so try asking your insurance agent broadly, “What discounts do you offer?” as you’re shopping for a policy. You might be surprised by what you learn.

You can also get credit for improvements you make to your home that reduce the probability that you’ll need to make a claim. Replacing old plumbing, upgrading your electrical service, or putting on a new roof are all investments worth mentioning to your insurer when it comes time to renew your policy. Some insurance companies also reward loyalty with lower policy costs as the years go by. When it comes to saving money, it never hurts to ask.


Author bio: Susan Doktor is a journalist and business strategist who hails from New York City. She covers a wide range of subjects including finance, real estate, technology, and food and wine. Follow her on Twitter @branddoktor.