Are you a first time homebuyer or just thinking about buying a home? Don’t forget about the insurance! Owning a home can be likened to owning a car. When something goes wrong we pick up the phone and call the insurance company to handle it. Homeowners insurance policies provide protection against financial loss brought about by accidents, theft, or natural disasters. More importantly, nearly all lenders, banks, and mortgage companies require borrowers to have a policy in place that covers the full value of the property if something bad occurs. When considering the best policy, it is critically important to make sure you get the right coverage and enough of it.
In this article we will discuss the 4 basic categories of homeowner’s insurance coverage.
Standard policies generally cover four areas:
- House Structure
- Individual Possessions
- Personal Liability Protection
- Alternative Accommodation Expenses (ALE)
Here is a detailed explanation of each area:
1. House Structure
Your insurance provider will cover the expenses incurred while restoring your house to the state it was in prior to the unplanned damage occurring. Incidents can include lightning, wind, hail, hurricane, fire, earthquake, or accident (such as a car crash or tree falling). Most policies provide coverage for detached property such as your gazebo, tool shed, or garage at the rate of 10 percent of the total value of the house.
It is worth noting though that standard homeowners insurance policies won’t cover damage as a result of an earthquake, flood, or regular wear and tear. For this type of coverage, you may need extra added protection which will be an added expense. However, for some homeowners (such as those in California where earthquakes are more frequent) the added expenses can be worth the peace of mind.
When buying insurance coverage, go for a policy that provides adequate protection for your home but not so much that it breaks the bank. Be sure to talk to a licensed homeowners insurance broker for the best advice.
2. Individual Possessions
Your personal belongings such as clothes, furniture, TVs, electronics, appliances, and musical instruments and equipment can be covered against theft, hurricane, fire and any other insured catastrophes. Homeowners insurance covers up to 70 percent of the total insured value of the house’s structure.
To determine whether standard insurance covers your home adequately, start by conducting a home inventory. Be sure to take photos, video, and document all items that need to be covered under your policy. This way, if something happens you can easily send this information to your insurance provider. It is also a good idea to store this information with a cloud based service (such as Google Drive or Dropbox) so that it cannot be destroyed in the event of an accident.
Items stored outside your house might be covered by some policies.
Expensive belongings such as collectibles, fur, jewelry, silverware and art are covered, but a dollar limit might be put in place if they are stolen. The best way of insuring valuable items is by purchasing additional personal property insurance.
Under standard policies, vegetation such as plants might be covered for around $500 per piece. Nevertheless, the policy doesn’t cover destruction by disease or poor maintenance.
3. Personal Liability Protection
Standard homeowners insurance policies provide liability protection against lawsuits that may arise if someone is injured or suffers property damage due to an incident that occurs on, around, or in your home. It also covers damage instigated by your pets. You are covered if your children (or dog) wrecks a neighbor’s valuable items, such as a rug. If an animal ruins your rug, however, don’t expect to be compensated.
The liability provision of your policy covers the fees accrued for court defense and any awards. The limit is stipulated in the policy documents.
To get more coverage against risky elements, it is good to purchase extra liability policies which cover broader areas.
4. Additional Living Expenses (ALE)
An accident may force you to seek alternative accommodation if it left your home in an uninhabitable state. If the cause of the incident was covered by your homeowners insurance, you qualify to be compensated by the ALE.
The ALE covers the cost of seeking accommodation in hotels and the cost of meals as you wait for your home to be repaired or rebuilt. Other living expenses are covered by the ALE depending on the policy. Some limitations are likely to be put in place.
Even if your ALE is used up, your insurer will cater for the full cost of restoring your home depending on the limits of your policy.
If you are a landlord and are renting some portion of your property to tenants, the ALE will reimburse the amount that you would have received from the tenants.
What is not covered by homeowners insurance?
Some things are not covered under typical homeowner’s insurance policies. These are things like “acts of God”, damage from acts of war, or certain natural disasters. Many standard homeowners insurance policies do not include coverage for damage that arises when a home lies within a flood plane, hurricane, or earthquakes prone area. To get covered for these types of things, you will likely need an extra policy or “riders”. Fortunately, these extra policies are fairly easy to find and many of them cover things like damage from a backup of sewer pipes or financial damage caused by identity theft.
Overall, making sure you have adequate homeowners coverage and protection is key to having peace of mind when an unexpected event happens. It is never a good thing to become buried in high interest debt to cover the costs of these occurrences. Having regular or annual maintenance checks on your property can also prevent unexpected disasters.
Remember what Ben Franklin once said (in regards to the protecting of towns from fire):
Benjamin Franklin, 1735
“An ounce of prevention is worth a pound of cure.”