Insurance Basics: Homeowners Insurance
Paul Tarins, RICP®,WMCP®,CSRIC™
Your home is one of the largest, if not the largest, assets you own. And if you own a home and have a mortgage, homeowner's insurance is almost always required. Lenders require homeowner's insurance to protect their investment in your home in case damage occurs. Even if you have a mortgage, homeowner's insurance is something every homeowner should have to protect their assets and livelihood. Should the unthinkable happen, your homeowners insurance is designed to help you recover, repair, and rebuild.
When was the last time you reviewed your policy? It's important to understand the ins and outs of your coverage to make sure that you have the right amount and that you have coverage amounts you're comfortable with. In this article, we'll break down a policy and what each coverage means.1
Overview of Homeowners Insurance
Homeowners insurance covers quite a bit more than just the physical structure. While the physical structure of the home may include attached structures, fixtures, and built-in appliances, many don't realize that your insurance also provides personal liability coverage for injuries or damage that occur from covered accidents. Many homeowners choose to add additional coverage, which may include unattached structures, personal property, medical payments, additional living expenses, sewer backup, and umbrella liability.1
Understanding Your Policy Coverages
Your homeowners policy will depend on the type of dwelling you have. Most single-family homeowner policies involve the following types of coverage:
- Dwelling: Pays for damage to the house and attached structures.
- Other Structures: Pays for damage to structures not attached to the house (fences, sheds). Coverage is typically a percentage of the total dwelling value.
- Personal Property: Pays the value of damaged or lost possessions (furniture, electronics, clothing). Coverage is typically a percentage of the total dwelling value.
- Loss of Use: Pays some additional living expenses during home repair. Coverage is typically a percentage of the total dwelling value.
- Personal Liability: Covers financial losses from property damage and personal injuries to others if found legally responsible. You can choose the amount of personal liability coverage you'd like to add.
- Medical Payments: Pays medical bills for people hurt on the homeowner's property or by the homeowner's pets. You can choose the amount of medical payment coverage you'd like to add.
- Water Backup of Sewer: Pays for losses to the house from sewer or drain backup. Coverage is typically a percentage of the total dwelling value.
- Personal Umbrella Liability: Pays for losses from bodily injury, property damage and personal injury to others beyond the policy limits. Coverage is typically a percentage of the total dwelling value.
- Flood Insurance: Separate policy that pays for flood-related damages to the house and contents.
- Earthquake Insurance: An add-on or separate policy that pays for damages to the house and other covered items caused by an earthquake.1
A Caveat: What Isn't Covered
In the section above, you may have noticed that flood and earthquake insurance are not commonly included in your homeowners policy. Damage resulting from earthquakes or floods is not covered by your standard insurance and requires separate policies. Even if you're not in an area prone to floods or earthquakes, it may make sense for you to add these policies, just in case.1
How Much Coverage Do You Need?
When it comes to insuring your dwelling, you should have enough insurance to fully rebuild, should your home be destroyed or become unlivable. You can insure your home based on replacement costs (the cost to rebuild) or actual cash value (ACV). ACV is based on the current market value. It may make sense to review these options with an agent to determine which one is the best choice. Should you need to use your insurance, you'll need to pay your deductible first before the insurance pays any claims. Depending on the type of damage involved, an insurance or claims adjustor may need to inspect the property as well.1
It's also important to note that when you set your deductible, consider which is easier to pay. The lower the deductible amount, the higher the policy cost will be.1
It's important to read your homeowner's policy carefully to ensure your home and family are protected. Make sure you know the specific types of damage your homeowners policy will cover. Some policies, for example, might exclude damage from windstorms and hail if you live in a hurricane-prone area. Check the details to determine what, if any, exclusions may apply.1
Review and Update Your Policy
When was the last time you reviewed your homeowners policy? Insurance policies should be reviewed annually to determine if your coverage still makes sense. Home values can change, and if you've made major purchases or upgraded appliances, your home coverage needs to reflect that. It's also important to inventory your personal belongings annually to ensure that you have the proper content coverage. Something as simple as purchasing a new TV or as complex as inheriting family heirlooms changes the replacement cost of your valuables, and many homeowners neglect this important step.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.