Homeowners Insurance in a Nutshell

August 26th, 2016

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Why is it important to have homeowners insurance?

Owning a home is one of the most valuable assets and investments you can have in a lifetime. Protecting your investment should be commonplace, though there are still those who feel that paying for insurance is a waste of money. Homeowners who have purchased their home with cash can decide against homeowners insurance but that is unwise. Otherwise, if you have a mortgage loan the lender will require you to have homeowners insurance.

What type of home insurance do you need?

Actual Cost

Actual cash value (ACV) refers to a policy that covers your home and possessions for market value at the time they are lost or stolen. Since your items are used, “market value” means that depreciation will be factored in when your insurance company pays you for your claim.

Insurance companies use a couple ways to calculate depreciation on the value of your home and personal items. They may use a pricing network or depreciation software. A more common approach is for the insurance company to do some simple math on the “lifespan” of your home and household items. First they figure out the depreciation percentage rate, dividing one by the life expectancy of the item.

Replacement Cost

For the majority of homeowners replacement cost insurance is preferable. When you have this type of coverage you will be compensated for how much it costs to replace the home and any lost, ruined, or stolen belongings. The home and items are not depreciated in this scenario. Instead you are given the amount of money that it costs to replace the them. Usually this type of insurance is a higher cost which might be worth it for the convenience factor and to be fully covered.

However, if you own antiques, heirlooms, collectables or a rare art collection, those items may only be covered up to a certain amount. The amount to cover all of those sorts of items may be capped at a certain dollar limit for everything. An alternative is to request “floaters” or riders to cover these type of valuables or irreplaceable items. Another option is to purchase a separate insurance policy to insure expensive possessions.

Guaranteed Replacement Cost

Guaranteed Replacement Cost is an even higher level of insurance coverage than regular Replacement Cost, where it replaces your home and items without a cap or cost limit. This homeowners insurance will pay full cost for everything based on a valuation of the home and possessions. Not every state offers this type of insurance and typically the insurer sets the replacement cost. This is the best option to have if you have a total loss, but obviously may be the most expensive.

What does homeowners insurance provide?

Each homeowners insurance policy is different and can have variations depending on the provider and your location. I am only providing a general idea of what is usually covered with a home insurance policy.

  • Structure: If you have loss or damage of your home due to a pre-defined peril in your policy, your provider will rebuild your home on that same property.
  • Personal items: If a disaster affects your furniture, electronics, clothing, etc. your insurer will replace these items depending on what insurance policy you have. There are usually limits on what is covered, how much is covered, where the items are located (in the home or off-site), and what caused the loss.
  • Liability is one of the most useful stipulations in your homeowners insurance policy. It will cover damages to your property or to someone else’s property affected by your property. It will protect you and your pets. It will cover accidents that happen to other people while on your property. Liability limits start at about $100,000, but many homeowners ask for additional coverage for a much broader range of incidents. Dave Ramsey suggests having no less than $500,000 of liability insurance.

Homeowners insurance comparison

Nerdwallet offers a helpful evaluation of the best homeowners insurance providers and policies for best customer satisfaction, best homeowners services, best in market share, and best for military families. Anytime you need to choose a vendor or even insurance companies, it is best practice to talk to several vendors, and ask a lot of questions as to cost, what is covered, how to make a claim, and billing.

Personally I do not recommend using a website that asks for your information and emails you quotes from different companies. These companies are paying that website for your lead information. They may or may not offer the best policy. Do some shopping around with reputable insurance providers before you settle on one. Below are important factors to consider when comparing insurance companies.

Industry ratings

A highly rated insurance company will have a minimum of A- on A.M. Best, Standard & Poor’s, or Moody’s insurance rating. If an insurance companies with a low rating may suffer from poor customer service and have less financial stability. Lookup the following ratings for each insurance provider you consider:

  • Customer service & satisfaction ratings
  • Price & policy value ratings
  • Financial strength ratings
  • Claims service ratings

Costs

The obvious is to compare premium costs. Also factor in the deductibles and discounts offered. If the premium is low, the deductible is high and there are no discounts; there might be a better option out there.

Claims and customer services

When disaster strikes, damage or loss occurs it is important to get a response from your insurance provider almost immediately. Insurance claims can take a long time to resolve. Therefore, claims service could be the most important rating to consider.

Insurance companies offer different customer service experiences. Some representatives are local, other are from a phone bank, and then there’s digital service. Everyone has a different preference, though I prefer to talk to a real live person on the phone. I also like having an app or access to my policy or account online.

Click here for information on homeowners insurance and how to shop for it, from ConsumerAffairs.

Keeping your home in the cloud

Keep an itemized record of household contents, their cash value, purchase date and description in the cloud in some sort of online storage or in your safety deposit box. Take photos or videos of all your valuables and items. The more details the better that will help prove ownership and replacement cost.

Consider Google Drive, Amazon Cloud or Dropbox to store a photo inventory of your valuable things in the cloud.

What homeowners insurance doesn’t cover

If you are in an area that is prone to natural disaster or what the insurance policy calls “acts of god” you might want to consider an additional insurance policy. Most homeowners insurance policies do not cover natural disasters. Check out this helpful chart from the Insurance Information Institute with another handy comparison of what is and is not covered.

Disasters that are usually covered by homeowners insurance:

  • Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riots
  • Damage by aircraft
  • Damage by vehicles
  • Smoke
  • Vandalism
  • Theft

Common incidents that may not be covered by your homeowners insurance:

  • Temporary/emergency living expenses. If at any point your home is unlivable because of damage or disaster, the insurer may cover expenses like temporary housing or hotel. Limitations may apply and may cost extra depending on the policy
  • Floods. Unfortunately, New Orleans found out the hard way that insurance doesn’t cover flood damages. If you are close to water sources or a beach, consider an additional policy through the National Flood Insurance Program by FEMA. In some areas, a lender may require additional insurance. Find out your property’s’ flood risk on the NFIP website where you can type in your address to assess your risk.
  • Trampolines. Your insurance premium could go up if you own a trampoline since they are considered a high-risk. If you, your kids, or other people are harmed on the trampoline, the accident will not be covered.
  • Breed restrictions. Unfortunately, there is discrimination against man or woman’s best friend and companies may consider you and your pet uninsurable based on its breed type. Here is a list of dog breeds that are not covered by most homeowners insurance policies. These dogs are considered high-risk by many insurance providers and are considered uninsurable. It can be very difficult for a homeowner to find an insurance provider who will allow their pet on the policy.
  • Pools. Another hazard that insurers may not cover in a policy. If you have or are getting a pool, consider raising your liability coverage to cover an accident or death.
  • Cash. Are you someone who keeps cash hidden in a safe or under the mattress? Chances are that if the cash is stolen or destroyed your insurance may only cover up to $200.

Scenarios you may not think about or even want, but may be included in your policy anyway:

  • Spoiled foods. This may not be more than your deductible if your only loss is food in a disaster. Though if it is more than your deductible, you should claim spoiled food as a loss.
  • Stampeding wild animals. Yes, this is for real. This does not include destruction from domestic animals or livestock. They must be ‘wild’ animals, who actively stampeded through your property or home. This is more likely if you live in a rural area.
  • Cemetery vandalism. Grave robbers may have been a thing of the past, though if you have paid for a funeral, you know that a tombstone can be quite costly. So, not to worry, your graves are covered.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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