Before you can even sign the papers on your new home, you must arrange for a homeowner’s insurance policy. A paid policy or paid receipt is even required at closing. Lenders want assurance that their mortgage loans are protected. And you, as a homeowner, will want to continue to protect your asset long after the mortgage is paid.
Standard Insurance Coverage
A standard homeowner’s policy supplies a specified amount of financial protection for the house. It provides coverage–usually a percentage of the insurance on the home–for its contents. Homeowner’s insurance also provides some liability for injuries and property damage a homeowner or his or her family cause to other people. A good policy also includes living expenses if the house is temporarily uninhabitable due to damage from an insured disaster.
Appreciation and depreciation figure into insurance policies. Properties appreciate, or rise in value, when there is a demand by homebuyers. Even if a house is maintained and not improved, it probably will appreciate because the costs of materials and labor to repair or replace it continue to rise. Properties depreciate, too, with normal wear and tear as they age and with lack of maintenance.
Appreciation and depreciation are one area homeowners want to be clear about in their coverage. For example, roof shingles might have an expected life of 20 years. If a 20-year-old roof were damaged, the cost to replace or repair it would be determined by the type of coverage specified in the policy. A policy that deducted depreciation might result in no payment while another policy might pay for replacement.
Policies for Loss and Replacement
State requirements, policy costs and coverages differ. It pays to shop around.
Typical coverages available are:
- Actual Cash Value. This will pay to replace your home or possessions–minus the deduction for depreciation.
- Replacement Cost. This will cover the cost–to the policy limit–of rebuilding or repairing your home or replacing your possessions without deducting for depreciation.
- Guaranteed Replacement Cost. This coverage pays whatever it costs to rebuild your home to before the disaster, even if it exceeds the policy limit, but does have some limitations such as updating to building codes.
- Extended Replacement Cost. It’s similar to guaranteed replacement, but this coverage pays just to a specific percentage over the limit to rebuild a home
Beware of Exclusions
When considering a policy, be aware of what is and is not covered. For example, while damage or destruction from fire, hail, and lightning is usually covered, there are other damages that are exceptions–as some homeowners have unpleasantly discovered. These exceptions, called exclusions, are specific situations written in the policy that tell when benefits will not be paid. Sewer backup is one example.
Purchasing Insurance Riders, Extra Policies
An agent can help determine whether extra coverage is needed. Endorsements, which are amendments or “riders” on the policy, may be added to the policy to increase coverage. Separate additional policies may also be written. For instance, expensive jewelry and silverware covered to a standard limit can be insured to full appraised value with a special endorsement. Flood damage, not covered in a standard policy, can be covered with a separate flood policy. A separate policy for earthquakes is also available.
Consider Other Policies
Homeowners with extra assets will want to consider an umbrella policy to help shield them beyond standard liability limits. For example, if a neighbor’s child falls off the trampoline in a homeowner’s yard and is seriously injured, the resulting bills could exceed the homeowner’s standard limits. By paying perhaps $200 to $300 for an umbrella policy, a homeowner might obtain $1 million in coverage that kicks in after standard policy limits are exhausted.
Life and disability are other home-protecting insurance policies to consider to cover the mortgage when the person who pays the bills dies or is incapacitated.
Factors Used to Determine Cost
The price of homeowner’s insurance continues to creep upward. The Insurance Information Institute projects the average cost for homeowner’s insurance in 2005 will be $677, up $17 from 2004.
Several factors determine a policy’s price. Obvious factors are square footage, age and condition of the plumbing, heating and electrical systems, and proximity to a fire hydrant or fire station. Variables include area crime rate, chance of damage from natural disasters, and area building costs. Factors within the homeowner’s control include the type of coverage wanted and his or her credit score.
Saving on Insurance Costs
Homeowners who want to reduce insurance costs should shop around. Prices do vary. Of course, price should not be the deciding factor. Enrolling with a company that has financial stability is important. Several firms, such as Weiss Ratings Inc. and A.M. Best Company provide ratings and can be accessed via the Internet. It’s also important to have an agent who is accessible and will answer your questions.
Consider enrolling with an insurer that offers a discount to cover both home and auto. Many do. Also look at the benefits of raising your deductible, or the amount the homeowner pays toward a loss before the insurer starts paying. The higher the deductible, the more money your are likely to save on annual insurance premiums.
Insurers also offer discounts for certain protection devices installed in the home. Increasing your home’s security above and beyond necessary smoke detectors – check those batteries! – may include installing sprinkler and security systems. Check to see if increasing your home’s protection might reduce premiums and make financial sense in the long run.
Finally, remember that insurance is to protect your property and possessions for the life of the home. It is not something you should plan to reduce or cut out over time. Many homeowners think that once a mortgage is paid off the premiums can be reduced. The truth is, you should probably consider reviewing and possibly increasing coverage periodically since the cost of replacement will only increase.
Credit: Renovate with Tommy Mac