Insurance 101 Part 2 – Home

In our last blog posting, we looked at a Forbes article citing studies that indicated Americans Don’t Understand Insurance.  While the article referred specifically to health insurance a little digging around suggests it likely holds true for home and auto insurance as well. In this segment, we look at home insurance.

As a responsible homeowner, you should review your homeowner’s coverage annually to make sure your insurance is sufficient to rebuild or repair your home after a disaster and if your coverage is sufficient to provide the protection you need.  At a minimum, your house should be insured for 80 percent of its value – not counting the value of the land –and the Insurance Information Institute recommends a minimum level of at least $300,000. So, what do you need to look for during the annual review of your homeowner’s policy? 

In reviewing your policy, pull out the declarations page – usually the first page in your policy, or a sheet that is sent each year with your renewal. The home owner’s insurance policy is usually divided into 2 parts with Part I your Property Protection and Part II your Liability Protection. Property Protection is often further broken down into sections.  The dwelling section typically covers your house, attached structures and the fixtures in the house – appliances, plumbing, heating, permanently installed air conditioning systems, and electrical wiring. If you have detached structures such as garages, storage sheds, and fixtures attached to the land including fences, driveways, sidewalks, patios, and retaining walls, these are shown under an Other Structures section.  A Personal Property section covers the contents of your home and other personal items owned by you or family members who live with you.  This section is one where you want to read a bit deeper into your policy to see what is actually covered.  Most policies don’t cover motorized vehicles unless unlicensed and used only at your home and there are likely to be coverage limits on items like firearms, artwork, electronic data, jewelry, and money. If you have high value items, business property or small boats, check your coverage carefully, you may need to buy an additional rider or endorsement to make sure you are covered. Finally, there may be a Loss of Use section that covers living expenses if you cannot live in your home while repairs are being made.  

Check each of these components to determine whether you are comfortable with the amounts and with the type of coverage you are being afforded.  Your policy may offer actual-cash-value coverage, full replacement cost or more rarely, guaranteed replacement cost.  You should understand that your actual cash value coverage will pay what your stuff was worth before it was lost or destroyed, less depreciation — not what it would cost to replace it.  If you have full replacement cost coverage, the insurer will replace or rebuild your property without any deduction for depreciation. Full replacement cost on your personal property will cost you 10 to 20 percent more than the actual-cash-value coverage. Guaranteed replacement policies are also available which take into account appreciation in value, but you need to be careful here as well since insurer’s typically limit the amount that they pay out to replace or rebuild your home to an amount usually no more than 20 percent above the amount for which your home is insured.  

The liability component of your policy is also an area to look at closely.  In today’s climate, it is possible to exceed the limits of liability on a homeowner’s policy.  High net worth individuals may want to seek extra coverage in the form of a personal umbrella policy or higher liability limits. There are others who may need to consider higher levels of liability coverage.  If you have a pool, machinery on your property or a dog you consider a guard dog you may be increasing your risk for a liability claim.

As always, it is easy to discuss these options with your insurance agent at Homer Smith Insurance. Also, there are some online tools that can help.  Dummies.com has an “Insuring Your Home and Everything in It” worksheet that explores the key areas to look at in order make sure you are adequately covered.    

In the next installment we will look at auto insurance.  

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