At the very top, your homeowner's insurance policy statement probably screams in all capital letters, "It is important that you occasionally review the coverages and limits in your homeowner's policy to be sure your needs are being met." You may wonder exactly what those needs are. After getting a mortgage to buy your home, since your mortgage lender requires you to carry homeowners insurance on your property, you may even assume that your policy will automatically cover any catastrophe that befalls the four walls that you call home.
Think again. A residence is a valuable property costing hundreds of thousands of dollars. That's why the bank can add required private mortgage insurance (PMI) to your monthly house payment if your equity is less than 20 percent of your home's appraised value. That's why you had to pay the fee for title insurance when you closed on the property. You may even carry a home warranty to repair or replace your home's operating systems and appliances.
Homeowners insurance is additional protection that you must pay for through premiums. While it's often another annual fee, much like taxes, that yet again raises your mortgage payment, it's an important financial instrument that can stand between you and fiscal disaster. Do you ever notice that some of the most devastating, most moving news stories are those when victims lose their home but have no insurance? Here at Get.com, we'll give you the lowdown on why you need that homeowners insurance and why you should review your policy closely every single year.
In this homeowners insurance guide:
How Do Insurance Companies Determine My Premium?
Why Replacement Cost Matters To Homeowners Insurance Coverage
What Are Homeowners Insurance Endorsements?
How Does My Deductible Affect My Premiums and Claims?
How Do Insurance Companies Determine My Premium?
According to the National Association of Insurance Commissioners (NAIC) and figures it released in 2015, the national average cost for homeowner's insurance premiums in 2012 was $1,034. When the NAIC calculated averages by state, however, it documented wide disparity in costs thanks to geography and weather. While Idaho had the lowest premiums, averaging $538 a year, many states' annual premiums averaged closer to $1,000, with the priciest at over $2,000 in Florida.
An Adjustable Package
Your homeowner's insurance policy is actually a bundle of selected options that you can add to or subtract from, usually at any time. You can adjust dollar amounts for itemized coverages or request reductions in your premium if you upgrade safety features for your dwelling. You can even attach riders that cover situations beyond the boundaries of your home. It's a living instrument, but it will cover only those losses caused by the "perils" specified in your policy. Even when some perils or hazards are listed, they often have exceptions. When money is in the balance, every detail matters.
What Costs More?
Actuarial calculations of risk applied to your home's attributes determine your premium. What insurance protections you buy and where you buy them play a role as well as the dollar replacement values you maintain. Some things to know include:
- Replacement cost. When you bought your property, it may have come with land. If it did, the value of the land is not included in the replacement cost value. However, you need to be certain that the dollar amount on your policy really would be sufficient to reconstruct your home if disaster completely destroyed it. Over time, construction industry costs are likely to increase even if real estate market values decrease. If your replacement cost figure doesn't keep pace with increases in inflation and costs of living, you might not be able to rebuild a comparable home. Remember that you're not buying your home, you're rebuilding it, possibly from scratch.
- Home characteristics. If your home is older, built of less durable materials like wood or in declining repair, insurance premiums may be higher than those for new, well-maintained homes of brick or stone, for example. If you have a pool, certain pets, trampolines, wood-burning stoves or other sources of potential danger, those features may increase your premiums.
- Neighborhood claims. If you live in an area with historically high claim rates, your premiums will reflect that risk. Insurance companies may refuse to issue some otherwise standard coverages in certain geographic areas or require separate endorsements or policies.
- Home business. You may have to purchase additional insurance if you operate a business from your home.
What About Discounts?
One of the best things you can do to keep your premiums as low as possible is to maintain a healthy credit score. Premiums increase as credit scores decrease. In addition, most insurance companies offer clients discounts if they:
- Maintain other insurance policies with the company, such as automotive or life insurance.
- Are loyal customers. Discounts may increase over time for years of coverage with the same company.
- Have safety or protection measures for their homes, such as fire alarms, security systems or sprinkler systems, for example.
- Improve their homes with safer or more energy-efficient infrastructure or amenities.
- Are senior citizens.
- Do not smoke.
Taking advantage of discounts can save you a lot of money over the life of your insurance policy.
Why Replacement Cost Matters To Homeowners Insurance Coverage
Your basic homeowners policy should detail values and coverage, or reimbursement, amounts for your dwelling as well as other structures or outbuildings on the property, your personal property within your dwelling and elsewhere, and your loss of use. You should also include personal liability and medical liability coverage.
What is most important to understand is that many or even all of your coverages and endorsements may be based on your dwelling's replacement cost. While a dwelling is considered the primary concern and covered for 100 percent of the replacement cost value, other coverages are often defined as a percentage of the dwelling's replacement cost. If your dwelling replacement cost is $200,000, then 10-percent coverage, for example, would be just $20,000:
- Dwelling. The insurance company typically will reimburse you for the replacement cost of your house and "attached structures" as the dwelling was at the time of the peril's occurrence. The amount should cover your home's construction and its infrastructure, such as plumbing, wiring, and central air-conditioning and heating systems.
- Additional structures. Your coverage depends on the types of structures on your property. If you have a guest or in-law cottage with modern amenities on the property, you'll need a higher percentage of coverage than what would be needed to replace a potting shed, for example. You need to consider this figure carefully, however; how much money would you need to replace that detached brick garage with the slate roof?
- Personal property. All the contents in your home are covered as personal property: furniture, clothes, appliances, and your jewelry or computer equipment, for example. Items you have at other locations may also be covered, depending on your policy's terms. You need to be careful with this percentage because insurance companies often have set limits for conventional personal property coverages. If you have valuables that exceed those limits, you'll have to attach additional endorsements for reimbursement of those items.
- Loss of use. If the unthinkable does happen, you'll need living expenses while your dwelling is uninhabitable. Loss of use coverage may represent those costs as a percentage of your dwelling replacement cost. How much money would you need to live while your home is being repaired or replaced?
- Personal liability. Homeowners usually determine a dollar amount of protection they want in case someone successfully sues them for injuries or damages. This is another amount that you determine but will also pay premiums for. While some people feel comfortable with $100,000 of coverage, others may carry $500,000 or more as well as an additional umbrella policy to protect assets. Litigation is expensive, and awards are usually financially weighty.
- Medical payments. Somewhat like personal liability but a coverage of its own, medical payment insurance pays medical bills if someone is injured on your property or by your pet, for example. Contractors, guests and children all are common sources of claims for slips and falls, drug overdoses, poisoning or food accidents, drowning, electrical burns, cuts and pet mishaps.
What Hazards Are Covered?
Insurance companies use the term "form" to distinguish types of homeowner's policies. Basically, each form offers varying inclusions and exclusions of property and perils, or hazards. This is where many homeowners think they're covered when they're really not. No matter what form of regular homeowner's insurance policy you have, it will not cover floods. According to the NAIC:
"Homeowners policies don't cover flood damage. Depending on where your home is, you may qualify for flood insurance through the National Flood Insurance Program or through a private insurer . . . If your home is in a flood plain, your mortgage lender will usually require you to buy flood insurance."
Perils and Hazards. Dangers to your dwelling come in every venue, but for insurance companies, they tend to fall into tiers, or levels, of perils that usually include:
1. Fire, smoke, windstorm, hail, lightning, explosion, vehicles and civil unrest.
2. Theft and vandalism.
3. Trees and other falling objects.
4. Weight of ice, snow or sleet.
5. Freezing, rupturing, or sudden and accidental overflow of a plumbing, heating, air-conditioning or fire-sprinkler system or a household appliance.
6. All perils except flood, earthquake, war, nuclear accident and other perils specifically excluded in your policy.
Note that in some locales where certain perils are prevalent, you may need specific riders, articles or endorsements to have coverage on some of the otherwise standard hazards included in these tiers. Such exclusions are especially common for coastal areas.
Your personal contents are considered separate and apart from your dwelling within each form, so forms vary not only on which perils they cover but also by whether they cover your dwelling, your personal property or both:
- The Dwelling Fire Form covers only your dwelling for the perils listed in tier 1.
- The Basic Form typically covers tiers 1 and 2 but includes personal property as well as your dwelling.
- The Broad Form usually covers tiers 1 through and including 5 for both the dwelling and your personal property.
- The Special Form is the most commonly used option. For personal property, it covers tiers 1 through and including 5. However, the Special Form covers the dwelling through and including tier 6, excluding only those perils specified as exclusions within your policy.
- The Tenants Form or Condominium Unit Owners Forms cover only personal property for tiers 1 through and including 5. In some cases, a master association policy may cover dwellings; if this is the case, understand any financial responsibilities you may have.
- Mobile homes and farms may require different types of policies.
What Are Homeowners Insurance Endorsements?
Industry-standard policies are crafted to serve the broadest client base, but you may want additional safeguards or coverages that extend beyond what your homeowners insurance policy normally covers. Endorsements, which are also known as riders, amendments, or articles, provide a way for you to buy that extra protection. Over 100 different kinds of endorsements exist, but here are some of the most common ones.
All your reimbursements depend upon your dwelling's replacement cost. While construction costs and other expenses will continue to increase thanks to inflation, your policy's established replacement value will remain static unless you add an inflation guard endorsement. The endorsement will allow your homeowners insurance company to automatically adjust your replacement cost value annually. Usually you can determine the percentage of inflation to apply – often 4-6 percent. If your replacement cost is $150,000, for example, but you had a 5-percent inflation guard, at the start of the new year, your replacement cost would automatically adjust to $157,500.
Ordinance Or Law
If your home was built before current building codes or local ordinances were in effect, you can add an endorsement to ensure reimbursement at a level of repair or construction that would be up-to-date and in compliance. This may be especially useful for owners of older homes with outdated infrastructure, as the codes weren't in effect when the dwelling was built.
You can add a personal umbrella policy, often called a PUP, to cover liability expenses that exceed what your homeowners and other insurance policies don't include. While a personal umbrella will not cover damage to your own personal property, it will cover unintentional damage to others' property. Personal umbrella policies are limited, as they won't cover business losses, personal injury issues, criminal behavior, contractual disputes or issues of personal injury.
While homeowner's policies usually provide coverage for bodily injuries, they don't cover "violations of a person's right to privacy." Personal injury endorsements can protect you from issues like slander, defamation, false arrest, wrongful eviction or entry, and other injuries that don't affect the body but are problematic. The caveat on personal injury coverage is that you cannot intentionally personally injure someone, and it won't cover illegal activities. Check a policy closely for exclusions before you purchase.
Home Business Or Day Care
Homeowners insurance policies typically offer little coverage to businesses that you operate from your home, and some states require by law an additional endorsement or separate policy. With a home business endorsement, you can usually gain coverage for lost income, property and extra expenses due to a covered loss. Legal liability is complex. While liability usually includes bodily injury, property damage and personal injury, you would still have to purchase separate professional malpractice insurance. Check with your insurance provider, as state requirements vary, and business liability endorsements differ by profession.
Earthquake endorsements usually carry any type of "earth movement," including landslides and volcanic eruptions. These additions usually carry percentage deductions that may be as little as 5 percent or $250 or as much as 25 percent in high-risk areas like California. Premiums for these endorsements may be pricey – several hundred dollars annually even in low-risk areas.
Scheduled Personal Property
If you have personal items valued beyond your policy's normal limits, you can insure them under an endorsement or personal article floater. This rider is often used to cover jewelry, furs, stamps, coins, musical instruments, guns, computers, antiques or other high-value items.
How Does My Deductible Affect My Premiums And Claims?
Just as health and automotive insurance policies have deductibles that you must pay out of pocket, so do homeowners insurance policies. That deductible represents a dollar figure that you must pay before the insurance company begins reimbursement for a loss. If your deductible is $1,000, for example, and a tree falls on your home and causes $20,000 in damage, you'll have to pay $1,000 while the insurance company pays the remaining $19,000.
Calculating The Deductible
Increasing your deductible usually lowers your premiums. Raise that deductible too high, however, and your out-of-pocket costs may make repairs too costly to sustain. Too, your deductible will apply to each loss that you incur in a year; if you're unfortunate enough to suffer three or four different perils, you'll also suffer through paying three or four deductibles.
When determining your deductible, you might also want to consider what amount is worth not having to file a claim. Each time you turn in a claim, you add to your claim history, and claim frequency correlates to premium amounts.
That said, most insurance companies have minimum deductible amounts – usually $1,000. A common figure is half a percent of your replacement cost. For example, if your house is insured for a replacement cost of $300,000, your calculated deductible would be $1,500. In some cases, raising your deductible may not provide a sufficient return on investment. Reducing your premiums by $120 a year, for example, would allow you a $10 break monthly but may cost you far more in out-of-pocket expenses. In other cases, such as certain endorsements, the insurance company may set non-negotiable deductibles.
Making A Claim
Contact Your Agent Immediately. If a hazard or peril befalls you, even if it seems small, you have two immediate responsibilities: contact your insurance agent as soon as possible, and protect your home from further damage. That may mean turning off the main water supply, mounting boards or tarps to keep weather from worsening the problem or cleaning up standing water. Be sure to take pictures or video of the damages as well as any measures you take to mitigate them.
To Claim or Not To Claim. Even when you're not sure whether an event is serious enough to exceed your deductible and make a claim necessary, you still should contact your agent. What happens next usually depends on adjusters, assessments of the damages and professional estimates for repair or replacement. If a repair estimate quotes a cost that's within or near your deductible, you might want to simply pay for the repair and forego making a claim. In contrast, if something is actually worse than it initially appeared, if you contacted your agent right away, you'll be covered; if you waited, filing a claim may be difficult or even impossible.
Disputes. Especially in cases of high-value claims, you'll need to keep documentation for all conversations or other correspondence you have with your insurance agent and adjusters. Unfortunately, home owners and insurance companies don't always see eye to claim-settlement eye. While even a fairly simple claim may take weeks to resolve, complicated ones often take longer. You may need to request multiple estimates from several contractors, and be prepared to work with your agent, the person who sold you your policy. If you're not satisfied with the settlement process, you can contact your insurance company's claims manager; use formal written correspondence, and include copies of all documentation.
Choose Wisely. Remember, too, that your homeowner's insurance policy protects more than just the physical construct of a dwelling and the possessions within it. With the proper endorsements, it acts as a safeguard for your lifestyle and standard of living, so be selective. Deal only with reputable, credible insurance issuers:
- Legitimate companies and agents don't try to sell you expensive coverages or policies you don't need.
- Legitimate companies will be licensed through your state's insurance department and should be in good standing with the Better Business Bureau.
- Legitimate insurance agents will be more interested in answering your questions with facts than collecting your money.
Experts and agents all agree: Whether you're choosing a policy or settling one, the worst thing you can do is rush. Do your homework. Research your choices, and compare costs and benefits carefully. Read your policy all the way through, right down to the fine print, and do it again every year. You might just be surprised at what you're covered for, and what you aren't covered for.
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