Over the next few weeks, we’ll revisit our multi-part series on risk management and the basics of different insurance plans! Over the next two weeks we’ll discuss homeowner’s insurance.
While most of us know what homeowner’s insurance is, not everyone knows what it entails. Most homeowner’s insurance policies include six different coverages.
First is coverage for damage to your home or dwelling itself as well as any attached structures such as an attached garage. To be considered fully covered, you generally need to insure for at least 80% of the house’s total replacement value, otherwise you run the risk of only getting partial payments for losses. As an example, let’s say you have a home with a replacement cost of $200,000. To be fully covered, you would need to purchase coverage of at least $160,000. However, let’s say your insurance policy will only cover up to $120,000 of damages or replacements. Now let’s say you have a fire that causes $60,000 in damages. At first glance, you would think you’re fully covered for this. However, with the typical 80% rule, what would generally happen is you would only be covered for the proportion of the 80% coverage you had – so in this example, you are covered up to $120,000 of the $160,000 needed to be fully covered, so your insurance would only pay 75% of the damages. In the case of this $60,000 fire, you would be responsible for $15,000 yourself for being underinsured!
Second is coverage to any structures other than your home that’s located on your property. This can include things like detached garages and sheds.
Third is personal property coverage. Personal property covers the contents of your home such as furniture, appliances, clothing, and possibly jewelry and collectables. However, to be sure there’s no issues with potential claims for your personal property, be sure to annually take an inventory of anything you would like to be covered, including their value or cost. This includes personal property not only in your house, but items in your garage, shed, and yard. Be sure to get appraisals for the value of jewelry, antiques, and any collectables. Also, you will often have the option of guaranteed replacement cost or cash value. While replacement cost will generally be more expensive, it will pay for the cost to replace any furniture or appliances instead of just paying for the current cash value. For instance, if a ten-year-old refrigerator is damaged during a fire, a guaranteed replacement policy would pay for a new fridge, while a cash value policy would only cover the market value of your old refrigerator.
The fourth coverage is for any loss of use of your dwelling from a covered event. For instance, if your home is unsafe to live during repairs from fire damage, your homeowner’s insurance policy will often cover the cost for you to stay in a hotel during the interim.
Next week, well return and discuss the last two coverages of a homeowner’s insurance policy, and what events and sources of damage your insurance policy will typically cover.