Getting the right type of homeowners insurance is a must to be able to put your life back together should a tragic event strike your home.
Imagine this scenario:
You awake from a drowsy sleep at 2 AM to the blaring noise of an alarm. Your eyes are stinging and you begin to cough as you are forced to breathe in the smoke filled air. You leap from the bed as your survival instincts kick in. Grabbing anything of value you quickly rush to the nearest exterior door and head into the yard. In horror you watch as flames are emanating from your attic.
Fortunately no one is hurt and emergency services arrive in time to keep the home from being a total loss. But the damage is severe and you wonder how you will recover from this tragedy.
I’ve known a few people who have lived through a house fire, flood, tornado or other significant event that damaged or destroyed their home. I can’t imagine the emotion that comes with watching your possessions being destroyed. We pour so much time and effort into making our home an enjoyable space in which to exist that they really become an extension of ourselves. Losing them means losing a piece of who we are.
The silver lining is that life can be put back together. You might not be able to recoup all the possessions you lose but you can move on with the help of a good homeowners insurance policy. If you own a home – or are even a tenant renting a home – having homeowners insurance is a must.
What Is Homeowners Insurance and What Does It Cover?
Homeowners insurance is the coverage you purchase to protect the major asset that is your home and it’s belongings. Like all other types of insurance, you will pay an insurance company a monthly premium in exchange for a financial payout should you make a claim.
A standard homeowners insurance policy includes coverage for:
1) The structure of the home. This section of the policy covers any damage to the physical structure due to fire, lightning, hail or any other item listed within the policy. They will usually cover damage to other structures around the home like a detached garage, shed or a fence.
Typically it does not include damage due to normal wear and tear or for disasters such as floods or earthquakes. These natural disasters typically require the purchase of an additional policy.
2) Personal belongings. Items inside the home such as furniture, clothes, electronics, personal collections and any other insured items are covered if they are destroyed by a disaster or even stolen. You can even get “off-premises” coverage so that you can insure valuables like jewelry should they be stolen from you any place in the world.
According to the Insurance Information Institute, most companies provide personal belongings coverage from 50 – 70 percent of the amount of insurance on the structure of the home. So if your home were insured for $250,000, then you’d have up to $175,000 of coverage for your personal belongings.
3) Liability protection. The liability portion of the homeowners insurance policy covers damage or injury caused by you or any member of the family. This coverage even extends to pets. So if grandma breaks her arm tripping down your stairs or if Buster the bulldog bites the neighbor kid’s leg, then you have coverage (up to the limits of the policy) to help pay for medical bills and lawsuits that might arise from such actions.
4) Additional living expenses. If you are displaced from your home for a time you’ll incur additional living expenses. This section of the policy would cover those items including hotel costs and food.
Insurance policies vary from company to company. And the premiums will be different based on what level of coverage you desire. The biggest thing to realize though while shopping for homeowner’s insurance is that there are different types of coverages to choose from.
What Are the Types of Coverage?
When shopping for homeowners insurance it’s important to know the three levels of coverage available. Choosing the right one for your situation is quite critical as the different in the amount of payout could be large for a significant claim.
On the market you will find:
Actual Cash Value Insurance: This type of plan covers the house plus the value of your belongings after taking into account depreciation (depreciation meaning a reduction of the value of an asset with the passage of time). So you would receive money for the current value of the item not for what you originally purchased it for.
Replacement Cost Insurance: According to this plan, you would receive a payout to repair, rebuild and refurnish without taking into account depreciation. You would be able to fund the purchase of new items based on how much they cost right now.
Extended Replacement Cost Insurance: In this instance the insurance company would extend the payout beyond the limits of the policy, typically 20 to 25 percent more.
Guaranteed Replacement Cost Insurance: This type of plan offers the most protection. Under it you would receive whatever amount necessary to rebuild and refurnish your home even if it exceeded the policy limits.
You are probably realizing that extended and guaranteed replacement cost plans will typically be more expensive. The insurance company is taking on more risk to cover you in that fashion. But as a homeowner this protects you from sudden increases in market prices. This might prove valuable in situations where there is widespread damage such as a flood or hurricane and building materials are in short supply.
How Much Homeowners Insurance Do I Need and What Does it Cost?
Ideally, if you can afford the premiums, you would want coverage that replaces 100% of the home along with your belongings. This would mean choosing one of the more expensive replacement cost options. How much that policy will be is determined by many factors.
First you will have to estimate the level of insurance by multiplying the total square footage of your home by the building costs per square foot. You could track down this information in your local area by contacting a construction association, real estate or insurance agent.
As outlined on their website the Insurance Information Institute stipulates these things will determine the cost of rebuilding your home:
- Local construction costs
- The square footage of the structure
- The type of exterior wall construction–frame, masonry (brick or stone) or veneer
- The style of the house (ranch, colonial)
- The number of bathrooms and other rooms
- The type of roof and materials used
- Other structures on the premises such as garages, sheds
- Fireplaces, exterior trim and other special features like arched windows
- Whether the house, or parts of it like the kitchen, was custom built
- Improvement to your home–adding a second bathroom, enlarging the kitchen or other additions that have added value to your home
In addition, your cost might also be affected by the neighborhood, crime rates, the likelihood of a disaster in your area, the current condition of the home and your credit score.1
How does all that translate into actual cost?
ValuePenguin.com has accumulated some results that give us an answer. According to their 2015 research report, the average cost of homeowners insurance was $952 a year in the United States. That’s up over 50% in the last ten years.
As I already mentioned one of the outlying factors in that yearly premium is the state in which your home is located. Florida tops their list at an annual premium of $1,991. They are followed by Louisiana, Texas, Mississippi and Oklahoma. At the bottom of the list – those states with the cheapest rates – we find Washington, Wisconsin, Utah, Oregon and Idaho bringing up the rear at only $534 per year.
Keys to Saving on Homeowners Insurance
Like all other insurances it will be key for you to shop around for the best rates. Sites such as insweb.com can help you compare quotes from various companies. But there are additional things that can help you save money.
For starters, you can consider carrying a higher deductible. This is the amount you will pay out-of-pocket for any incident before the homeowners insurance plan begins to cover the costs. For example, if your plan deductible is $5,000, you will pay the first $5,000 of expenses. The insurance will then kick in and pay for expenses above $5,000 according to the terms of the plan. Generally speaking, the higher the deductible (the more you are willing to pay) the lower your monthly premium.
Also conduct routine maintenance inspections around the house. Catching that basement wall crack or the blown off shingle early on may help you avoid bigger costs down the road.
One of the best things you can do to save money on your premiums is to install safety and security devices. Some companies offer up to 15 percent discounts if you install deadbolt locks and fire extinguishers and have smoke, burglar, and fire alarms that alert the police or fire station if they detect an issue. You’ll need to check with your agent to see if there are any specific requirements to qualify for these type of discounts.
Another option may be to combine all your insurance policies (home, health, life) under the umbrella of one company. You may receive a multi-policy discount for doing so.
Finally, you may look to invest in hail or fire resistant roofing materials. Many companies consider the roofing materials used into your premium. They consider it the most vulnerable part of the home so high-risk materials like wood shingles or shakes may cause a spike in your premiums.
Additional Homeowners Insurance Tidbits
Some final issues to consider in regards to homeowners insurance include:
1. Special addendums/riders. As previously mentioned, the standard insurance policy does not cover damage due to floods or earthquakes. If you live in a region prone to these natural disasters it would be prudent to pay for the additional insurance.
2. One of the best steps you can do to protect your belongings is to create a home inventory list. While very time consuming it will prove beneficial when making a claim with the insurance company. Having the proof you need of what you did own will expedite the process and bring cash into your pocket faster.
3. Knowing what to claim is always tricky. As a general rule, it’s best to avoid filing claims unless you have to. If an insurance company sees that you’ve filed two or three claims in a year, your rates will rise. They may even cancel your policy. That is where a higher deductible helps – you should have no reason to file for lower-cost claims because you haven’t reached your deductible.
Your home and what’s inside it are very precious to you. The correct homeowners insurance plan can help you sleep better knowing that if something devastating does happen you will be able to piece your life back together.
Questions: Has your homeowners insurance ever helped you recoup a loss? What type of replacement value insurance do you have on your home? What other considerations can you offer to help save money on your premiums?
Prior Post: A Beginner’s Guide to Home Remodeling Costs