When you consider that your home is one of the biggest
investments you'll ever make, not having enough homeowner's insurance
can be catastrophic. Picture these scenarios:
There's a fire in your house, and your insurance
doesn't completely cover everything that needs to be replaced:
furniture, clothing, jewelry, paintings and stereo equipment.
An acquaintance trips over your dog and breaks her
arm. A few weeks later you get a letter from her lawyer informing you
that $50,000 will keep the case from going to trial.
During a storm a tree in your yard falls through the
porch roof, and your property damage coverage is only half what it
will cost to repair it. You have to come up with several thousand
dollars in cash.
Your house is broken into and $5,000 worth of jewelry
and silver is stolen. Your policy only pays $1,500 for all of the
jewelry and $2,000 for all of the silver. The rest is your loss.
Homeowner's insurance has a terrific name because it
focuses on you -- the homeowner -- not just the structure in which
you live. Aside from protecting your home and your possessions, it
provides you with liability coverage. However, many people (and their
homes) are woefully underinsured, usually because your lender only
requires that you have enough to cover the outstanding mortgage balance.
As a general rule, buy homeowner's insurance that
covers as broad a range of catastrophes as possible and most types of
losses. Homeowner's insurance policies have three key types of
protections: property damage, loss of personal property, and
liability claims by others. Here is a look at each.
1) Property damage
This is the most commonly known form of homeowner's
insurance. Property coverage protects your home in case of a fire or
some other catastrophe, such as a tree crashing through your roof.
There's a little-known catch to property damage
coverage, however. Lenders require that the insurance cover at least
80% of the cost to replace your home if it's destroyed. If the
insurance doesn't cover that much, you'll get a cash settlement and
it's up to you to decide if you're going to rebuild.
Determining replacement-cost coverage can be
complicated, because several factors are taken into account:
the geographic area in which you live (not the
the age of your home,
the square footage of your home, and
the quality of the house's construction.
To make matters more confusing, replacement cost has
nothing to do with market value (which includes the structure, plus
the land it sits on). In certain areas of the country, replacement
costs can run as much as 40% higher than the market value of your
house. All your insurance company cares about is the cost of
rebuilding your house -- not what the land is worth.
Buy a policy that has guaranteed replacement costs,
because then your insurance company must pay for the entire
reconstruction regardless of actual costs, not just up to the
estimated replacement cost. To lock in this guarantee, you'll need to
have purchased homeowner's insurance equal to 100% of your home's
current replacement cost, as defined by the insurer.
2) Personal property loss
We tend to accumulate more and more "things"
every year. So many of your assets may be in the form of personal
property instead of financial assets. Your home is more than the
structure itself; it also includes everything that is in it.
Homeowner's insurance can protect your personal property both at and
away from home, including furniture, silver, jewelry, boats and collectibles.
But be careful; there is usually a maximum payout. If
you look at your policy, it may say that it will pay up to $2,000 for
lost or stolen jewelry. But what happens if you have four pieces of
jewelry, each worth $2,000? If that jewelry is stolen or destroyed in
a house fire, all you'll get is $2,000. You've just lost $6,000.
Most policies have "internal limits" such as
these for various items. They pay a maximum amount for all items in
that category, no matter how many items or what the total. Valuable
objects in your home should be appraised and listed individually on
your policy as "riders." There usually is only a small
additional charge, and the expense is well worth it because you will
be fully reimbursed for each of these items.
If you rarely wear your jewelry or rarely use other
valuable items, you can save on the insurance premium by putting them
in a safety deposit box and purchasing vault insurance. (Although you
will pay a small extra premium each time you remove them.)
It's a good idea to buy replacement-cost coverage on
the contents of your house, such as your furniture and electronics.
That stereo system or computer you purchased for $2,000 a few years
ago may be worth only about $250 today. If something happens, and you
don't have replacement-cost coverage, you would get only $250 because
that's what these items are worth now. A replacement-cost rider for
contents is not a major additional cost and it's another one of those
seemingly small insurance provisions that can pay off if you ever
have a loss.
The good news about personal property coverage is that
your homeowner's policy will cover that property even if you're not
at home. For example, if you bring your antique silver platter
(listed in your policy) to your cousin's wedding reception, and it
"disappears," it's still covered even though it was not
stolen from your house. Your personal property coverage also will pay
for the first $50 in charges on any stolen credit cards. (After $50,
the credit card company typically covers the losses, assuming that
you've notified the company in a timely fashion.)
3) Liability coverage
The third type of coverage provided under your
homeowner's policy is liability coverage for you and your family. In
today's litigious society, lawsuits aren't uncommon even among
friends and acquaintances.
The amount of liability coverage you choose should not
be tied to the value of your home. Whether you live in a $50,000
house or a $1 million mansion, if there is an accident on your
property or you caused one elsewhere, you might be sued. You should
have at least $300,000 of liability insurance coverage under your
homeowner's policy. You also should consider "umbrella
liability" insurance to cover damages that exceed your
Separate coverage for home offices
Many people are using parts of their homes for
business purposes, with setups ranging from a simple one-person,
one-room office to a suite staffed with employees where customers and
suppliers come and go.
If you have a home-based business, any damage or
liability arising from those business pursuits will probably not be
covered by your regular homeowner's policy. Even an accident that
occurs during a business dinner at your home is not covered. You can
buy a separate policy, or if you're running a single-person operation
in your home, you should look into purchasing additional homeowner's
coverage called "incidental office occupancy."
Keep good records
Use your camcorder or camera to create a visual
room-by-room record of what's there, including any architecturally
significant parts such as ceiling molding or parquet floors. Take out
any valuables that you own, such as china, silver, jewelry or
antiques, and get close-up photos of them.
When you buy a new item of value, make a copy of the
receipt and keep it in a file at your office or in your safe-deposit
box -- along with the videotape of your house and contents. It
doesn't do much good to have all these records if you keep them at
home and a fire destroys them! When it comes to homeowner's
insurance, the more documentation you have the better.
Renters should get renter's insurance
Even if you don't own a home, you still need renter's
insurance. The same rules still apply -- you need to protect all your
clothes, furnishings, and personal belongings from a fire or a
break-in. Pay special attention to your renter's liability coverage
-- you should have the same coverage as someone who owns a home.
There is so much at stake with homeowner's insurance,
and it's easy to lose everything you own in a blink of an eye if
you're not adequately covered.