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HOME INSURANCE: Basic Information
1) What is home insurance?
Homeowners insurance provides financial protection against disasters. A standard policy insures the home itself and the things you keep in it.
Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets.
Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners' responsibility.
2) What is in a standard home insurance policy?
A standard homeowners insurance policy includes four essential types of coverage. They include:
a. The structure of your house: This part of your policy pays to repair or rebuild your home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in your policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear. When purchasing coverage for the structure of your home, it is important to buy enough to rebuild your home.
Most standard policies also cover structures that are detached from your home such as a garage, tool shed or gazebo. Generally, these structures are covered for about 10% of the amount of insurance you have on the structure of your home. If you need more coverage, talk to your insurance agent about purchasing more insurance.
b. Your personal belongings: Your furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disaster. Most companies provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home. So if you have $100,000 worth of insurance on the structure of your home, you would have between $50,000 to $70,000 worth of coverage for your belongings. The best way to determine if this is enough coverage is to conduct a home inventory.
This part of your policy includes off-premises coverage. This means that your belongings are covered anywhere in the world, unless you have decided against off-premises coverage. Some companies limit the amount to 10% of the amount of insurance you have for your possessions. You have up to $500 of coverage for unauthorized use of your credit cards.
Expensive items like jewelry, furs and silverware are covered, but there are usually dollar limits if they are stolen. Generally, you are covered for between $1,000 to $2,000 for all of your jewelry and furs. To insure these items to their full value, purchase a special personal property endorsement or floater and insure the item for it's appraised value. Coverage includes "accidental disappearance," meaning coverage if you simply lose that item. And there is no deductible.
Trees, plants and shrubs are also covered under standard homeowners insurance. Generally you are covered for 5% of the insurance on the house-up to about $500 per item. Perils covered are theft, fire, lightning, explosion, vandalism, riot and even falling aircraft. They are not covered for damage by wind or disease.
c. Liability protection: Liability covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by your pets. So, if your son, daughter or dog accidentally ruins your neighbor's expensive rug, you are covered. However, if they destroy your rug, you are not covered.
The liability portion of your policy pays for both the cost of defending you in court and any court awards-up to the limit of your policy. You are also covered not just in your home, but anywhere in the world.
Liability limits generally start at about $100,000. However, experts recommend that you purchase at least $300,000 worth of protection. Some people feel more comfortable with even more coverage. You can purchase an umbrella or excess liability policy which provides broader coverage, including claims against you for libel and slander, as well as higher liability limits..
Your policy also provides no-fault medical coverage. In the event a friend or neighbor is injured in your home, he or she can simply submit medical bills to your insurance company. This way, expenses are paid without a liability claim being filed against you.
d. Additional living expenses: This pays the additional costs of living away from home if you can't live there due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt. Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. You can increase this coverage, however, for an additional premium. Some companies sell a policy that provides an unlimited amount of loss-of-use coverage, but for a limited amount of time. If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.
3) Are there different types of policies?
Yes. A person who owns his or her home would have a different policy from someone who rents. Policies also differ on the amount of insurance coverage provided.
The different types of homeowner's policies are fairly standard throughout the country. However, individual states and companies may offer policies that are slightly different or go by other names such as "standard" or "deluxe".
Your level of coverage: Regardless of whether you are an owner or renter, you have the following three options:
i. Actual cash value: This type of policy pays to replace your home or possessions minus a deduction for depreciation.
ii. Replacement cost: The policy pays the cost of rebuilding/repairing your home or replacing your possessions without a deduction for depreciation.
iii. Guaranteed or extended replacement cost: This policy offers the highest level of protection. A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster-even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won't cover the cost of upgrading the house to comply with current building codes. You can, however, get an endorsement (or an addition to) your policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if you own an older home.
Some insurance companies offer an extended, rather than a guaranteed replacement cost policy. An extended policy pays a certain percentage over the limit to rebuild your home. Generally, it is 20 to 25 percent more than the limit of the policy.
4) Is flooding covered in home insurance?
Standard home policies do not cover flooding. You can purchase flood coverage directly through your homeowner's insurance agent.
Replacement cost coverage is available for the structure of your home, but only actual cash value coverage is available for your possessions. Replacement cost coverage pays to rebuild your home as it was before the damage. Actual cash value is replacement cost coverage minus depreciation so that the older your possessions are, the less you will get if they are damaged. There may also be limits on coverage for furniture and other belongings stored in your basement.
Flood insurance is available for renters as well as homeowners. You will need flood insurance if you live in a designated flood zone. But flooding can also occur in inland areas and away from major rivers. Consider buying a flood insurance policy if your house could be flooded by melting snow, an overflowing creek or pond or water running down a steep hill. Don't wait for a flood season warning on the evening news to buy a policy-there is a 30-day waiting period before the coverage takes effect.
The federal flood insurance program provides only limited coverage. If you need more coverage than the federal program provides, additional coverage known as "excess" flood insurance is available from specialized insurance companies. Depending on the amount of coverage purchased, an excess flood insurance policy will cover damage above the limits of the federal program on the same basis as the federal program-replacement cost for the structure and actual cash value for the contents. Excess flood insurance is available in all parts of the country-in high risk flood zones along the coast and close to major rivers as well as in areas of lower risk-wherever the federal program is available. It can be purchased from specialized companies such as Lexington Insurance Company, part of American International Insurance Company, and Lloyd's through independent insurance agents, or from regular homeowners insurance companies that have arrangements with a specialized insurer to provide coverage to their policyholders.
5) Can I own a home without home insurance?
You can legally own a home without home insurance. But, if you have bought your home and financed the purchase with a mortgage, your lender will most likely require you to get homeowners insurance coverage. That's because lenders need to protect their investment in your home in case your house burns down or is badly damaged by a storm, tornado or other disaster.
If you live in an area that is likely to flood, the bank will also require you to purchase flood insurance. Some financial institutions may also require earthquake coverage if you live in a region vulnerable to earthquakes. If you buy a co-op or condominium, your board will probably require you to buy homeowners insurance.
After your mortgage is paid off, no one will force you to buy homeowners insurance. But it is not advisable to cancel your policy and risk losing what you've invested in your home.
6) What is renters insurance?
Renters insurance provides financial protection against the loss or destruction of your possessions when you rent a house or apartment. Because in most cases, renters insurance covers only the value of your belongings, not the physical building, the premium is relatively inexpensive.
By purchasing renters insurance, your possessions are covered against losses from fire or smoke, lightning, vandalism, theft, explosion, windstorm and water damage (not including floods). Like homeowners insurance, renters insurance also covers your responsibility to other people injured at your home or elsewhere by you, a family member or your pet and pays legal defense costs if you are taken to court.
Renters insurance covers your additional living expenses if you are unable to live in your apartment because of a fire or other covered peril. Most policies will reimburse you the difference between your additional living expenses and your normal living expenses but still may set limits as to the amount they will pay.
There are two types of renters insurance policies you may purchase:
* Actual Cash Value - pays to replace your home or possessions minus a deduction for depreciation up to the limit of your policy
* Replacement Cost - pays the actual cost of replacing your home or possessions (no deduction for depreciation) up to the limit of your policy With either policy, you may want to consider purchasing a floater. A standard renters policy offers only limited coverage for items such as jewelry, silver, furs, etc. If you own property that exceeds these limits, it is recommended that you supplement your policy with a floater. A floater is a separate policy that provides additional insurance for your valuables and covers them for perils not included in your policy such as accidental loss.
7) How to take a home inventory and why?
Would you be able to remember all the possessions you've accumulated over the years if they were destroyed by a fire? Having an up-to-date home inventory will help you get your insurance claim settled faster, verify losses for your income tax return and help you purchase the correct amount of insurance.
Start by making a list of your possessions, describing each item and noting where you bought it and its make and model. Clip to your list any sales receipts, purchase contracts, and appraisals you have. For clothing, count the items you own by category -- pants, coats, shoes, for example -- making notes about those that are especially valuable. For major appliance and electronic equipment, record their serial numbers usually found on the back or bottom.
i. Don't be put off!
If you are just setting up a household, starting an inventory list can be relatively simple. If you've been living in the same house for many years, however, the task of creating a list can be daunting. Still, it's better to have an incomplete inventory than nothing at all. Start with recent purchases and then try to remember what you can about older possessions.
ii. Big ticket items
Valuable items like jewelry, art work and collectibles may have increased in value since you received them. Check with your agent to make sure that you have adequate insurance for these items. They may need to be insured separately.
iii. Take a picture
Besides the list, you can take pictures of rooms and important individual items. On the back of the photos, note what is shown and where you bought it or the make. Don't forget things that are in closets or drawers.
iv. Videotape it
Walk through your house or apartment videotaping and describing the contents. Or do the same thing using a tape recorder.
v. Use a personal computer
Use your PC to make your inventory list. Personal finance software packages often include a homeowners room-by-room inventory program.
vi. Storing the list, photos and tapes
Regardless of how you do it (written list, floppy disk, photos, videotape or audio tape), keep your inventory along with receipts in your safe deposit box or at a friend's or relative's home. That way you'll be sure to have something to give your insurance representative if your home is damaged. When you make a significant purchase, add the information to your inventory while the details are fresh in your mind.
8) What's the difference between cancellation and nonrenewal?
There is a big difference between an insurance company canceling a policy and choosing not to renew it. Insurance companies cannot cancel a policy that has been in force for more than 60 days except when:
* You fail to pay the premium
* You have committed fraud or made serious misrepresentations on your application.
Nonrenewal is a different matter. Either you or your insurance company can decide not to renew the policy when it expires.
Depending on the state you live in, your insurance company must give you a certain number of days' notice and explain the reason for not renewing before it drops your policy. If you think the reason is unfair or want a further explanation, call the insurance company's consumer affairs division. If you don't get a satisfactory explanation, call your state insurance department.
The company may have decided to drop that particular line of insurance or to write fewer policies where you live, so the nonrenewal decision may not be because of something you did. On the other hand, if you did do something that raised the insurance company's risk considerably, like committing fraud, the premium may rise or you may not have your policy renewed.
If your insurance company did not renew your policy, you will not necessarily be charged a higher premium at another insurance company.
HOME INSURANCE: How to Buy & Save Money
1) Do I need separate coverage for jewelry?
A standard homeowner's policy includes coverage for jewelry and other precious items such as watches and furs. These items are covered for losses caused by all the perils included in your policy such as fire, windstorm, theft and vandalism.
However, there are special limits of liability for certain items, meaning that the insurer will not pay more than the amount specified in the policy. One important limit is for the theft of jewelry. To keep coverage affordable because jewelry can be easily stolen, the standard policy has a relatively low limit of liability for theft: $1,500.
If you own valuable jewelry, there are two ways you can increase coverage: by raising the limit of liability or "scheduling" your individual pieces through the purchase of "floater" policies. Raising the limit of liability is the cheapest option; however, there may be a limit on the amount you can claim for the loss of any individual piece, say $2,000, when the overall limit is $5,000.
Scheduling each piece may cost more in premiums, but it offers broader protection because the floater covers losses of any type, including accidental losses-such as dropping your ring down the drain of the kitchen sink or leaving it in a hotel room-that your homeowners insurance policy will not cover. Before purchasing a floater, the items covered must be professionally appraised. The cost of this service varies by county or region according to the risk of theft.
2) How much homeowners insurance do I need?
You need enough insurance to cover the following:
a. The structure: You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don't include the cost of the land. And don't base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.
Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it's enough to cover the cost of rebuilding. (If your mortgage is paid off, don't cancel your homeowners policy. Homeowners insurance protects your investment in your home.)
For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local real estate agent, builders association or insurance agent.
Factors that will determine the cost of rebuilding your home:
* Local construction costs
* The square footage of the structure
* The type of exterior wall construction-frame, masonry (brick or stone) or veneer
* The style of the house (ranch, colonial)
* The number of bathrooms and other rooms
* The type of roof and materials used
* Other structures on the premises such as garages, sheds
* Fireplaces, exterior trim and other special features like arched windows
* Whether the house, or parts of it like the kitchen, was custom built
* Improvement to your home-adding a second bathroom, enlarging the kitchen or other additions that have added value to your home
Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance.
i. Replacement cost policies: Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation-the decrease in value due to age, wear and tear, and other factors.
If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis. ii. Guaranteed or extended replacement cost coverage After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.
An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.
iii. Building codes: Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowners insurance policies (even a guaranteed replacement cost policy) won't pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)
iv. Inflation guard: Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.
v. Older homes: If you own an older home, you may not be able to buy a replacement cost policy. Instead, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls and wooden floors, with similar materials, the policy will pay for repairs using the standard building materials and construction techniques in use today.
Insurance companies differ greatly in how they insure older homes. Some won't insure older homes for the replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for the replacement cost as long as the dwelling is in good condition.
If you can't insure your home for the replacement cost or choose not to do so-in some cases, the cost of replacing a large old home is so high that you might not want to replace it with a house of the same size-make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.
b. Your personal possessions: Most homeowners insurance policies provide coverage for your personal possessions for approximately 50 percent to 70 percent of the amount of insurance you have on the structure or "dwelling" of your home. The limits of the policy typically appear on the Declarations Page under Section I, Coverages, A. Dwelling.
To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire (for more information see How do I take a home inventory and why). If you think you need more coverage, contact your agent or insurance company representative and ask for higher limits for your personal possessions.
i. Replacement Cost or Actual Cash Value: You can either insure your belongings for their actual cash value, which pays to replace your home or possessions minus a deduction for depreciation up to the limit of your policy. Or you can opt for replacement cost, which pays the actual cost of replacing your home or possessions (no deduction for depreciation) up to the limit of your policy.
Suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to you.
Generally, the price of replacement cost coverage is about 10 percent more than that of actual cash value. If you need a flood insurance policy for your belongings, it is only available on an actual cash value basis.
ii. Insuring expensive items with floaters/endorsements: There may be limits on how much coverage you get for expensive items such as jewelry, silverware and furs. Generally, there is a limit on jewelry for $1,000 to $2,000. You should ask your agent or look it up in your policy. This information is in Section I, Personal Property, Special Limits of Liability. Insurance companies may also place a limit on what they will pay for computers.
If the limits are too low, consider buying a special personal property floater or an endorsement. These allow you to insure these items individually or as a collection. With floaters and endorsements, there is no deductible. You are charged a premium based on what the item (or collection) is, its dollar value and where you live.
You can determine the value by providing your agent with a recent receipt or getting the item or collection appraised.
c. Additional living expenses after a disaster: This is a very important feature of a standard homeowners insurance policy. This pays the additional costs of temporarily living away from your home if you can't live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.
Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. Some companies will even sell you a policy that provides you with an unlimited amount of loss of use coverage, for a limited amount of time.
If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.
You should talk to your agent or company to make sure you know exactly how much coverage you have and how long the coverage will be in effect. In most cases, you can increase this coverage for an additional premium.
d. Liability to others: This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay.
Generally, most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of coverage of liability protection.
3) How do I pick an insurance company?
There are many insurance companies, so choosing between them can be a challenge. Here are the main points to keep in mind when selecting an insurance company: a. Licensing: Not every company is licensed to operate in each state. As a general rule, you should buy from a company licensed in your state, because then can you rely on your state insurance department to help if there's a problem. To find out which companies are licensed in your state, contact the state insurance department.
b. Price: Many companies sell insurance policies and prices vary greatly from one to another, so it really pays to shop around. Get at least three price quotes from companies, agents and from the Internet. Your state insurance department may publish a guide that shows what insurers charge for different policies in various parts of your state.
c. Service: Your insurance company and its representatives should answer your questions and handle your claims fairly, efficiently and quickly. You can get a feel for whether this is the case by talking to other customers who have used a particular company or agent. You may also want to check a national claims database to see what complaint information it has on a company. Also, your state insurance department will be able to tell you if the insurance company you are considering doing business with had many consumer complaints about its service relative to the number of policies it sold.
d. Comfort: You should feel comfortable with your insurance purchase, whether you buy it from a local agent, directly from the company over the phone, or over the Internet. Make sure that the agent or company will be easy to reach if you have a question or need to file a claim.
4) How much will it cost?
There are many factors an insurance company uses to determine the price of your policy:
* The square footage of the house and any additional structures.
* Building costs in your area.
* Your home's construction, materials and features.
* Amount of crime in your neighborhood.
* The likelihood of damage from natural disasters, such as hurricanes and hail storms.
* The proximity of your home to a fire hydrant (or other source of water) and to a fire station, whether your community has a professional or volunteer fire service and other factors that can affect the time it takes to put out fires.
* The condition of the plumbing, heating and electrical system.
If you rent your home or own a condo or co-op, your insurer will not consider the size of the dwelling or building costs. However, the insurance company will take into account factors that make damage to your possessions more likely.
5) How can I save money?
The price you pay for your homeowners insurance can vary by hundreds of dollars, depending on the size of your house and the insurance company you buy your policy from. Here are some ways to save money.
a. Shop around:
Prices vary from company to company, so it pays to shop around. Get at least three price quotes. You can call companies directly or access information on the Internet. We provide comparisons of prices charged by major insurers.
b. Raise your deductible:
A deductible is the amount of money you have to pay toward a loss before your insurance company starts to pay a claim. The higher your deductible, the more money you save on your premium. Consider a deductible of at least $500. If you can afford to raise it to $1,000, you may save as much as 25 percent.
If you live in a disaster-prone area, your insurance policy may have a separate deductible for damage from major disasters. If you live near the coast in the East, you may have a separate windstorm deductible, if you live in a state vulnerable to hail storms, you may have a separate deductible for hail, and if you live in an earthquake-prone area, your earthquake policy may have a deductible.
c. Buy your home and car policies from the same insurer
Most companies that sell homeowners insurance also sell car and umbrella liability insurance. (An umbrella liability policy will give you extra liability coverage.) Some insurance companies will reduce your premium by 5 percent to 15 percent if you buy two or more insurance policies from them. But make certain this combined price is lower than buying the coverages from different companies.
d. Make your home more disaster-resistant:
Find out from your insurance agent or company representative what you can do to make your home more resistant to windstorms and other natural disasters. You may be able to save on your premiums by adding storm shutters and shatter-proof glass, reinforcing your roof or buying stronger roofing materials. Older homes can be retrofitted to make them better able to withstand earthquakes. In addition, consider modernizing your heating, plumbing and electrical systems to reduce the risk of fire and water damage.
e. Seek out other discounts:
Many companies offer discounts, but they don't all offer the same types of discounts or the same level of discount in all states. Ask your agent or company representative about discounts available to you. For example, if you're at least 55 years old and retired, you may qualify for a discount of up to 10 percent at some companies. If you've completely modernized your plumbing or electrical system recently, some companies may also provide a price break.
f. See if you can get group coverage:
Does your employer administer a group insurance program? Check to see if a homeowners policy is available and is a better deal than you can find elsewhere. In addition, professional, alumni and business groups may offer an insurance package at a reduced price. g. Stay with the same insurer:
If you've been insured with the same company for several years, you may receive a discount for being a long-term policyholder. Some insurers will reduce premiums by 5 percent if you stay with them for three-to-five years and by 10percent if you're a policyholder for six years or more. To ensure you're getting a good deal, periodically compare this price with the prices of policies from other insurers.
h. Look for private insurance if you are in a government plan:
If you live in a high-risk area-one that is especially vulnerable to coastal storms, fires or crime-and you've been buying your homeowners insurance through a government plan, find out from insurance agents, company representatives or your state department of insurance which insurance companies might be interested in your business. You may find there are steps you can take that will allow you to buy insurance at a lower price in the private market.
6) What information do I need to provide to my agent?
Your agent will ask you what kind of home you own or rent, roughly how much your possessions are worth, and what kind of liability coverage you will need. The agent will also want to know how many people live in your household, what pets you own, and the general condition of your house. You should also tell him if you own any particularly valuable items that might need special coverage called a floater.
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