Homeowner’s Insurance

It’s a simple fact; if you’re buying a home to live in, you need homeowner’s insurance. 
However, how much coverage do you need? What does it include? What does it not include? How does it apply to condominiums? These questions, along with several other topics, will be covered in today’s posting.
To get started on this topic, we will first need to list out several overarching principles that will guide us in our decisions on this.
Guiding Principles
  • Homeowner’s insurance should only be purchased to protect yourself against “financial catastrophes.” It should not be used for to recover from a small loss. 
    • An example of a catastrophic loss would be if a storm caused a tree to fall on your house.
    • An example of a small loss would be if someone broke in to your house and stole only your TV you purchased for $1000.
  • Take the highest deductible that you can afford.
    • For the uninitiated, a “deductible” is the amount you have to pay out of pocket to your insurance company before your insurance policy will pay you out for the coverage you have.
    • By taking the highest deductible you can afford, it ensures that you will only tap in to your insurance policy for catastrophes.
    • Typically, the options available for deductibles quantities are $250, $500, $1000, $2500, and $5000. Choosing a higher deductible can save you huge money on your monthly insurance premium payments, as shown below.
      • If you increase your deductible from $250 to…
        • $500 – save up to 12%
        • $1000 – save up to 24%
        • $2500 – save up to 30%
        • $5000 – save up to 37%
    • The highest deductible that each person can afford varies (as you probably guessed). However, for my situation, I would go with a $2500 deductible, since I keep a good amount of funds available in my emergency fund savings account.
  • Buy broad coverage insurance that covers all types of “perils,” or possible bad things that could happen to damage your home.

What does homeowner’s insurance consist of?

Provided that you purchased broad insurance (called HO-3 in technical circles) as mentioned above, your homeowner’s insurance policy will consist of three types of coverages – dwelling, personal property, and liability.
  • Dwelling Coverage
    • Dwelling coverage insures the cost of rebuilding the structure of your home, in the event that it were to be destroyed.
    • In your insurance policy, you will want to make sure that you have a “guaranteed replacement cost” provision. This provision ensures that your insurance will pay to rebuild your house’s structure, even if it costs more than the Dollar value amount of the coverage you obtained.
    • Condominium Dwelling Coverage
      • Dwelling coverage for condominium’s works a little differently than with single-family homes.
        • The condominium’s Home Owner’s Association (called HOA) will have a master policy that covers rebuilding the structure of the building in which your condo unit is located. If you are buying a condo, you will want to make sure that the dwelling coverage on the building in which your building is located is sufficient to rebuild the structure. For example, in reading through the HOA master policy for the condo I am moving in to this fall, I found out that the coverage for the 10 unit building in which my unit is located is only $750K. This seems a little bit low to me, meaning that I will want to look in to that issue going forward.
        • However, the HOA master policy will not cover the replacement of the interior of your unit. For this purpose, the dwelling coverage portion of a homeowner’s insurance policy for condos will cover the following interior structures of your unit:
          • Walls
          • Wall coverings
          • Carpeting
          • Built-in cabinets
          • Shower modules
          • Sinks
    • Personal Property Coverage
      • Personal property coverage insures the “stuff,” or contents that you keep inside your home.
      • As mentioned with dwelling coverage, you want to make sure that the personal property coverage contains a “replacement cost guarantee” to ensure that all of your items are replaced by your insurance (even if the price is higher than you thought), in the event of a loss.
      • Personal property coverage is generally based on a percentage (usually 50-75%) of the dwelling coverage Dollar value. This is usually more than enough.
    • Liability Coverage
      • Liability coverage insures you in the event that someone is injured on your property (or by your pets) and sues you for damages.
      • The general rule of thumb with this coverage is to obtain the larger Dollar value of either 1) 2X the amount of your dwelling coverage, or 2) $300,000.

    Determining how much coverage you need

    • Take a written and pictorial inventory of your property

    A good place to start with in determining how much coverage you will need from your homeowner’s insurance policy is to take an inventory of all of the contents of your current apartment or home. Beside each item on the list, you will want to record the replacement value of the item (make sure to list what the item would cost to replace at today’s prices, not the price that you paid for it). Making this inventory will also help you if it ever comes time to file a claim to receive your insurance.

    To get you started, the link below is a good resource from State Farm that shows the items contained in a typical house, along with their approximate replacement value. In addition, the Insurance Information Institute offers a great FREE pdf brochure available for download that will guide you through this inventory taking process.

    Depending on the type of structure your home is, you will want to add replacement cost to 1) rebuild the actual house structure and 2) replace any permanent attachments, appliances (water heater, air handlers, wiring, etc), or improvements you have.

    State Farm – Personal Property Inventory
    Insurance Information Institute – Home Inventory

    After you have done this, you will also want to take pictures and/or a video of EVERYTHING in your house. This will provide even more evidence that all of the items are real, in the event of a disaster occurring.

    Key point: Remember to store the inventory AWAY from your house, so that you do not lose it along with your other items in a disaster. For the written inventory, a good way to store the Excel file with the listing of all of your items is using Google Docs. It is a free online platform that allows you to securely store and share documents.

    What is covered by your homeowner’s insurance policy?

    If you have a broad coverage insurance policy, the following “perils” are typically covered:

    • Losses caused by fires, lightning, tornadoes, weight of snow, wind storms, hail, explosions, smoke, vandalism, theft.
    • Losses caused by a pipe bursting and spilling water all over your house
    • Losses caused by a tree falling on your house during a storm (only if the tree was alive before falling).

    For more information, the brochure (available for free pdf download) at the link below goes through numerous scenarios that are and are not covered by home insurance.

    Insurance Information Institute – Am I Covered?

    What is not covered by your homeowner’s insurance policy?

    • Damage caused by floods or earthquakes
    • Damage caused by water seepage from the ground
    • Food spoilage
    • Expensive jewelry, furs, or firearms
    • Damage caused by birds, rodents, insects, or pets.
    • Damage caused by business activities

    Obtaining flood and earthquake insurance

    Since flood and earthquake insurance is not included in the regular homeowner’s insurance policy, you will have to purchase it separately.

    For earthquake insurance, it can be purchased directly from the insurance provide of your homeowner’s policy. Simply ask your agent to get coverage added on for that element.

    On the other hand, flood/mudslide insurance must be purchased from the National Flood Insurance Program (government program). To find out more about flood insurance, please click on the link below to go to the program’s website.

    National Flood Insurance Program Website

    On the website, there is a very handy feature where you can type in your address and get an instant analysis of your risk potential for a flood occurring, along with estimates on what flood insurance would cost per year.

    Give it a try for yourself! Even though the result for my condominium came up to be moderate-to-low risk, I believe that I will still purchase flood insurance to protect myself against catastrophic loss (and because it is very cheap).

    Ways to save money on homeowner’s insurance

    The link below is a great resource from Net Quote that lists some way that you can save money on home insurance.

    Net Quote – Ways to Save on Homeowner’s Insurance

    Several of the methods to save money that stuck out the most to me are listed below:

    • Asking for a multi-policy discount, in the event that you also have auto, life, or business insurance from the same insurance provider to which you are applying for home insurance.
    • Install home security (burglar alarm) and home safety (fire extinguisher) devices.
    • Stop smoking (reduces risk of fire burning down house).

    Keep on learning!


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