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Home and Personal Property Insurance
Simple Answers to Your QuestionsFew people can afford to replace the loss of their home. If your house burns down or is destroyed by a violent storm, or if your possessions are stolen, homeowner's insurance will pay to repair or replace what was lost. Therefore, homeowner’s insurance can offer valuable protection.
A common misconception is that homeowner's insurance is simply a way to pay for repairing or rebuilding a damaged home. While this certainly is an important reason to buy insurance, the homeowner's policy covers much more than that. Also known as "fire insurance", a typical homeowner's insurance package covers the home and its contents from loss by fire, theft, and other specified perils such as lightening, wind damage, explosions, vehicle impact, vandalism, and so on. It also includes public liability protection against injury to other people while they are on your property. Most homeowner policies do not include earthquake or flood protection, which must be purchased separately.
The proper home insurance coverage consists of getting the right type of policy, having the proper levels of protection within that policy, including special provisions for jewelry, computers, etc., and supplementing this coverage with special protection against natural disasters that aren't included in your basic policy. They key is obtaining proper homeowner’s insurance which protects you.
How much coverage do you need?
To determine how much coverage you need, find out the cost to rebuild the building only. You can insure the building, not the land. If your house burns to the ground, the land will still be there.
Your insurance agent can help you estimate the cost to rebuild your home. Also, if you have a mortgage, the lender will have done a mortgage assessment. You can ask your lender for a breakdown of the assessment. It will tell you how much of your home’s value is for the building only.
If you live in a condominium townhouse or apartment, the exterior or common parts of the building are usually insured by the condominium corporation. You are required to insure the interior and its contents. Check with your condominium manager to be sure what coverage they provide and what you must provide.
The next step is to choose between regular coverage and replacement coverage. Replacement coverage (sometimes called guaranteed replacement) costs a bit more but it covers you to rebuild the house at current prices. Regular coverage pays only the depreciated value of the building. This will not cover the full cost to replace or repair the house. When you consider the cost of coverage and the cost to rebuild a house, it is usually wiser to go with a replacement policy.
Homeowner’s insurance and your mortgage lender
Mortgage lenders have a special interest in homeowner's insurance. It pays the loan if the building is destroyed. For this reason, mortgage contracts include a clause (usually called a loss payable clause) that gives lenders first claim to insurance money, in the event of a covered loss, to cover the outstanding loan. If the mortgage amount is greater than the insurable value of the house, the lender can insist that you take out insurance on the value of the mortgage. In other words, you’ll pay for more insurance than is needed to replace the house.
What happens when the mortgage is greater than the value of the house?
Jim and Judy bought a house for $160,000. The lot is appraised at $50,000 and the building at $110,000. Therefore, the insurable value of the building is $110,000. After their $35,000 down payment, they needed a mortgage of $125,000. As the mortgage is $15,000 more than the insurable value of the building, Judy and Jim must pay for $15,000 worth of extra insurance, or obtain a guaranteed replacement policy on the home (usually the best alternative).
How can you avoid paying for more insurance than you need? Before you make an offer to buy a house, make sure you can keep the mortgage at or below the insurable value of the building.
Two Example Calculations
Estimated selling price of house & land
$120,000 $120,000
Subtract your down payment
$ 40,000 $ 40,000
Amount of needed mortgage
$ 60,000 $ 60,000
Insurable value of building
$ 70,000 $ 50,000
Subtract mortgage
$ 60,000 $ 60,000
Difference between insurable value & mortgage
+$10,000 -$10,000
You want to get a positive number. A positive number means the house's insurable value is greater than the mortgage. A negative number means that the house's insurable value is less than the mortgage and you will need more insurance than is needed to replace the house. A guaranteed replacement policy will satisfy lenders who want to make sure their exposure is covered. Note that a guaranteed replacement policy is not always available on older homes or manufactured homes, so it's important that you determine your needs as well and make sure they are reflected in your coverage.
Contents
In addition to building coverage, a "homeowner's insurance package" will cover the contents (furniture, clothing, equipment, and other personal property). Generally, a basic package covers what you would need to start over again if everything burned or blew up. If you want to protect things like stamp, coin, or jewellery collections, you’ll need additional coverage by itemizing those items.
To get enough coverage (but not more than you need), list your possessions in an inventory log or video, by description and value (keep sales receipts if you have them). Keep this information in an off-site safety deposit box to prevent loss in case of fire.
Liability insurance
Finally, your homeowner’s insurance package will include liability insurance. This protects you from the ruin of a visitor's fateful fall on the front steps. By the laws of most lands, you are responsible for the safety of other people while they are on your property. If anyone is injured, even though you took no deliberate action to cause the injury, you could be sued. Ask your agent to recommend the appropriate amount of liability coverage. In a world of lawsuits, there is little risk of having too much liability insurance when compared to the risk of having too little.
Structures not attached to the home
Structures not attached to your home, such as tool sheds, gazebos, or unattached garages, are covered. The amount of coverage that normally applies is 10% of the replacement coverage amount you chose for your home. A swimming pool is also considered an unattached structure. As is the case with your personal property, you should assess your needs to determine if you want to pay extra amounts to increase these levels of protection.
Additional living expenses and rental costs
If your home is destroyed or damaged and not in livable condition, then the expense over and above normal living expenses to rent a home similar to your own would be covered until your home is repaired, you are permanently relocated, or the limit of this coverage is reached. The amount usually offered is equal to 20% of the dwelling coverage amount.
Keep your coverage up to date
If you increase or decrease the value of your property, (such as by an addition or demolition of some of the building or its attachments), remember to update your insurance policy. Avoid the risk of too little coverage or the cost of too much.
Basic policies
There are six basic kinds of home insurance policies and they're pretty much the same regardless of where you live. They tend to be defined by the perils they cover:
HO-1. Basic homeowner. Covers your dwelling and personal property against losses from 11 types of perils: fire or lightning, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, theft, damage by glass or safety glazing material that is part of a building, and volcanic eruption.
HO-2. Basic homeowner plus. Covers dwelling and personal property again 11 perils plus six more: falling objects, weight of ice/snow/sleet, three categories of water-related damage from home utilities or appliances, and electrical surge damage.
HO-3. Extended or special homeowner. Covers 17 stated perils plus any other peril not specified in the policy, except for flood, earthquake, war and nuclear accident.
HO-4. Renters coverage. Covers personal property only from 17 listed perils.
HO-6. Condominium owner coverage. Covers personal property only from 17 listed perils.
HO-8. Basic older home. Covers dwelling and personal property from 11 perils. Differs from HO-1 in that it covers repairs or actual cash values, not rebuilding costs. This is for homes where some historic or architectural aspects make the home's replacement cost significantly higher than its market value.
There are variations on these policies. For example, landlords can get coverage that insures only their dwelling and not its personal property (which is what the tenant's renter's policy would cover). You can get special policies to cover mobile homes (a.k.a. manufactured housing). Most homes are covered by HO-2 and HO-3 policies.
Coverage levels
As noted earlier, there are signigicant differences between regular and replacement coverages. In most cases, you want to insure your dwelling and its contents for their replacement values, which will likely differ from the dwelling's market value, tax assessment, and your personal property's depreciated cash value. A policy with automatic inflation adjustments, so the replacement cost keeps pace with the general level of price increases, is very important. Homes insured under HO-8 policies are only covered for repair costs or actual cash values, since replacing them would be so costly. Owners of such homes could get replacement coverage, but the premiums are much higher.
Standard coverage normally insures your possessions at 50% of the value of your dwelling. Many people boost this coverage to 70% or 75% with additional protection. But there are still individual limits on certain types of personal property. Standard policies may fall short of covering the replacement costs of even moderate amounts of home electronics hardware or expensive possessions. For relatively small premiums, you can purchase "floaters" that will add protection to certain types of personal property.
Homeowners policies regularly provide other types of coverage, including off-premises theft protection and unauthorized use of your credit cards. Make sure you understand which provisions are included in the standard coverage you elect to purchase and which may require supplemental premiums.
Thank you for your interest! Please email us at quotes@duanesammons.com now. Also, you can call 360-647-0090 or toll free at 800-676-0090 for further assistance or questions.