One yearly expense of owning your own home is the cost of homeowners insurance. Though it may seem costly, a good policy is well worth the price. Since not all policies are created equally, it is a good idea to review it yearly to be sure that you have enough coverage and are paying a fair price.
Four Areas of Coverage
A good policy will cover the following four areas:
- Your Actual House – This coverage pays to repair or rebuild your house in case of damage due to a disaster like a fire. You should have enough coverage to rebuild your home, as well as any other buildings on your property like a detached garage, shed, mother-in-law apartment, or office.
- Personal Belongings – This coverage helps you replace personal items like furniture or clothing destroyed by a disaster. If you have expensive jewelry or art, you will want to purchase a special policy called an endorsement that covers these items for their appraised value.
- Liability Protection – This covers you against lawsuits for bodily injury or property damage caused by you, your family, or your pets. It covers court costs and court awards. Standard policies start at $100,000. This policy also covers injuries that happen in your home to someone not living in your home. For instance, if a neighbor fell in down your front stairs, this insurance would pay for their medical bills.
- Additional Living Expenses (ALE) – This coverage pays for your costs of living away from home while your home is repaired or replaced. It includes things such as hotel and restaurant fees. ALE coverage usually has a time limit.
Checking the Policy Limits On Your Home
You need to check your policy every year to be sure that you have the right amount and kind of insurance. If you don’t, you can waste money on insurance you don’t need or pay higher premiums than are necessary, or even worse, find you don’t have the coverage you need when a disaster strikes.
When it comes to insurance, a report by Marshall and Swift shows that 2/3 of homes do not carry enough insurance. According to them, the coverage for your home should be as close to possible the actual cost of rebuilding your entire home.
You can do this by:
- Working with an agent as they gather all the information about your home.
- Have a professional appraiser estimate the replacement cost of your home.
- Use online software that calculates replacement.
- Calculate the amount yourself. You will need to know the rebuilding cost per square foot in your area, and you can get this by talking to a local contractor. Take that cost per square foot and multiply it by your square footage of your home to get the amount of replacement coverage you will need.
Since the cost per square foot for replacement changes as prices for materials change, it is important to review this number yearly.
Checking Your Personal Belongings Coverage
It is important to determine if your coverage replaces personal belongings based on actual cash value (ACV) or on depreciated value. ACV replacement means that if your computer gets ruined, the insurance company will replace it with a new computer of similar style and function. However, with depreciated value coverage, you will only be given money for what your computer was worth at the time it was destroyed. This can really affect a claims payout.
The next important factor is to know what you have that will need replacing. You should create a home inventory, preferably with photos, that lists the contents of your home. Each year, you will need to add items to this inventory that you’ve purchased throughout the year and subtract those you no longer own. This will help you know how much coverage you will need.
Look At Your Deductibles and Discounts
Homeowners insurance is costly, but there are ways to make your insurance reasonable while still fully insuring your home and belongings. One way is to look at your deductible. This is the amount of money you have to pay if there is a loss before the insurance company will begin to pay. The higher the deductible, the lower the yearly premium.
If you can reasonably afford to pay $1000 out of pocket, then you can lower your premium compared to someone that only has a $250 deductible. Be sure that you are really capable of paying the deductible before setting something too high. It will do you no good to have low premiums if you can’t afford to pay the $1000 if you have an issue.
Another way to save money is through discounts. Many insurance companies will give you a discount on your premiums if you have more than one type of policy with them. Another way to get a discount is to have your insurance with a company for a long period of time without having many claims. Other credits can be gotten due to the safety of your home. These include living in a gated community, having an alarm system, being part of a homeowners association (HOA), being a non-smoker, installing high-tech sensors, replacing your roof, or upgrading your wiring, plumbing, or heating.
Check with your insurance company to see if they have any new discounts or if you now qualify for one you did not get last year.
Look For Gaps in Your Coverage
Standard homeowners insurance policies do not cover certain disasters and understanding this before you have a problem is essential. Knowing these holes and then adding extra coverage is will keep you from paying for the costs of repair out of your own pocket.
- If you want flood insurance, you will likely have to get it through the government’s National Flood Insurance Program. If you live in an area prone to flooding or hurricanes, you will want to check into adding this coverage.
- Another uncovered event is an earthquake. Check with your provider to see about the costs of adding earthquake coverage to your policy.
- Finally, if your home needs repairs and new laws now require an upgrade to a system in an undamaged part of your home, your insurance policy will not cover these costs. You can take out “ordinance or law” coverage to cover these additional costs.
A policy with one agency does not always cost the same with another agency. Perhaps they offer different discounts or their fee structure is different with different deductibles. Maybe their bundling discounts are different. Perhaps the company has better rates overall. Just because the company you chose had the best plan and prices one year, does not mean that they will continue to do so.
Know what you want in a policy and then shop around. Be sure, however, that the policies quoted are exactly what you need.