If you own your home you probably carry homeowner’s insurance on it. If you have a mortgage, your lender will require you to maintain insurance on the property. You probably pay your premiums and don’t think too much more about it, but there are some things you need to know about your policy.
The purpose of homeowner’s insurance is to protect you (and your lender) against certain losses and damage to your home. When you first buy your home, your lender will require you to purchase a policy as a condition of the mortgage before you close. If you have an escrow account your future premiums will be paid by the lender from the funds in that account. If you pay cash for your home or you no longer carry a mortgage balance then it will be up to you to determine what kind of coverage you wish to have.
The coverage you carry will depend on whether you choose replacement cost or a dollar amount of coverage. Replacement cost will give you the actual cost to replace your home if it is destroyed, otherwise you will receive whatever the dollar amount of coverage you have chosen. If you choose to insure your home for $100,000 and it is destroyed by fire, you will probably only receive up to $100,000 even if it costs $200,000 to replace it. A lender will require you to keep the property insured for at least the amount of the mortgage.
A standard homeowner’s policy not only insures the structure but may also cover the personal property inside it and additional structures like garages, sheds, decks, etc. They may also cover loss of use coverage which provides living expenses if your home is being repaired and personal liability coverage in case someone is injured on your property or by your pet.
There are limits as to how much loss will be covered in most policies, for example things like jewelry, furs and art may require a rider for additional coverage over and above what your standard policy covers. You should ask your insurance agent if you think you require additional coverage on those items. The amount of personal liability insurance will also vary depending on the type of coverage you select. If you want to reduce your exposure for accidents others may have on your property you will want to increase your personal liability coverage as well.
Standard homeowner’s insurance policies do not protect you and your property against all losses or damage. Most policies will not cover flood or earthquake damage so you would need supplemental insurance if the property is at risk for either of these things. If you are doing significant remodeling to your home, you may want additional coverage for accidents that may occur during the construction. Sump pump failure and sewer backup damage usually also require supplemental coverage and both of these things can cause significant property damage.
There are many different options for insurance coverage and you should discuss your specific needs with your insurance agent to make sure you have adequate coverage. Since most homes do appreciate in value over time you should also check periodically to make sure you have enough coverage to cover the current value of your home. If you bought your home 30 years ago for $50,000 and it’s worth $150,000 today you want to make sure you have enough coverage for the current replacement cost.
Just like everything else you buy; you should shop around for your homeowner’s coverage. Having good credit or “bundling” your insurance policies together like homeowner’s and auto insurance may reduce your premiums. You may qualify for other discounts if you have smoke detectors, a security system and a fire extinguisher among other things, so check with your carrier to see what options they offer. Your insurance agent will review your needs and suggest a policy that is appropriate for your circumstances. Make sure your home and property are sufficiently insured so your most valuable assets are protected and you will be prepared for any unexpected loss that may occur.