With all the hurricanes, forest fires, even an earthquake on the East Coast, now is a good time to start paying a little more attention to the homeowner’s insurance coverage you carry on your property.
Most people select their homeowner’s insurance policy when they buy property and just pay the bill each year, giving little thought to keeping the proper coverage in place. Rarely do they understand, or even look at, their coverage in following years. And as long as they don’t have a loss, they don’t even notice. The problem is once you have a loss, it’s too late!
Considering that your residence is probably your largest and riskiest investment, it really makes sense to better understand how insurance works to ensure you have the right type and enough coverage in place for your specific situation.
The objective of insurance coverage is to try to assist policy holders in avoiding major financial issues and disruptions to their lives if they have a loss. Insurance companies know that losses are generally predictable in total relative to a population of properties, but they are not foreseeable as to which specific property will incur the loss. You have insurance so that when that specific loss happens to you, the coverage will help ease the financial burden.
That loss could be a variety of different issues: a tree falls through your roof, a broken water line could cause a flood, or your playful golden retriever mistakenly bites a neighbor’s child.
Reviewing your homeowners policy, or renter’s insurance, is something you should do each year to make sure you are adequately and properly covered.
How Much and What is Covered by Your Policy?
A standard policy has a single page noted as “Coverage Limits” with the maximum amount an insurer will pay out on each category of risk you have in being a property owner. Here are the more important ones:
Dwelling/Structure – This covers the main building structure, walls, roof, doors, windows, kitchen, etc. My house of 1,250 square feet is valued at $560,000 but I only have $205/per square footage worth of coverage, or $256,250 maximum loss payout. That is because the rest of the value in my property relates to land (about $264,000), which typically doesn’t need insurance. Rule of thumb: If you have a big fancy house, you need more coverage.
It’s important to talk to your insurance professional each year and make sure that the current coverage maximum dollar limit for your dwelling is enough to pay to rebuild your house in case it is destroyed. Other dwelling coverages to discuss are “Extended Replacement” and “Building Ordinance” coverage — so as to make sure you are fully protected.
Personal Property – Your insurance also covers your personal items (i.e., clothing, computers, couches, flatware, etc.). Make sure you have enough coverage as personal property costs more than you think. Special expensive items like jewelry, and artwork should be discussed with your agent for the proper separate insurance.
Liability and Lawsuit Protection – Homeowners insurance also typically covers you if you get sued. Some examples would be if your child hits a baseball that hurts another child, or a slip and fall accident occurs on your property. Typical liability coverage is $300,000 and you need to discuss your net worth with your insurance agent to see if that is sufficient. If your net worth is high, it is smart to consider an “Umbrella” policy to increase liability coverage to $1 million+. Talk to your insurance agent to determine the premium cost increase.
Want a lower premium? Raise your deductible! When a loss occurs, you are required to pay for the first few hundred or thousand dollars of a claim out of pocket. This is called your deductible amount and you can select the amount. The reason to have a higher deductible is to get a lower premium.
Realize. however, that you will pay more out of pocket when a loss occurs. It’s wise to discuss this with your insurance professional.
What Isn’t Covered and What to Consider Adding
You also need to understand that a typical homeowners policy does NOT cover many perils like earthquakes, floods, business activities and other specialty occurrences. Other policies may cover these and your insurance professional can help.
HO-6 Policy for Condos: For townhouse and condominium owners, it’s wise to have an HO-6 policy in place. HO-6 refers to the form used for a condominium/townhouse insurance policy. An HO-6 policy typically covers the interior of the unit, personal property and personal liability from the “studs in.” Many people are under the impression that the condo association’s master policy protects interior unit coverage, but most times it does not.
Policy Binder – Your insurance company will mail you a policy binder that has all the coverage items, maximum limits, terms and conditions outlining your coverage with the insurance company. While this document is lengthy, it is your money at risk if you have a loss and are not covered.
To lower your risk and potential financial disruptions in life, make sure you have the right type and amount of insurance in place. Any loss will most likely be devastating, but by properly preparing yourself with sufficient insurance the loss should be a lot less painful!
Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Investment – Rental Properties, Foreclosures, Short Sales” and “Buying a House, Condo or Townhome – Guide to Smart Purchasing” and loves kicking the tires of a good piece of dirt! See more at ProfessorBaron.com.