by Kathleen Seligman
7/10/2006 Ah, owning your own home – it’s part of the American Dream. But along with the pride and privacy that comes with being the King or Queen of your castle, can come a long list of costs and potential problems. Termites could make a paradise out of your foundation. An unattended stove could cause an all-consuming fire. A storm could bring days of rain that turn your downstairs into an indoor swimming pool. After returning from vacation, you could discover that not only have your valuables been stolen, but also that everything left behind was destroyed.
None of these disasters are very likely, but they can happen, and as Murphy’s Law dictates, they may just occur when you’re least prepared to deal with them. Not only heartbreaking, each of these events is also very expensive. But wouldn’t it be great if you didn’t have to pay for them – if your home could be restored to its former glory at little or no cost to you? Then homeowner’s insurance may be the answer you’ve been looking for.
What Is Homeowner’s Insurance?
Homeowner’s insurance protects you from many expensive catastrophes that can happen to your home or personal belongings. So how does homeowner’s insurance work? After a disaster happens, you receive a specified amount of money, minus your deductible, to repair or replace your property. When taking out homeowner’s insurance, make sure you get enough coverage to actually rebuild your home and replace your belongings. Many people look only at how much their home is worth and so underestimate how much it would take to rebuild from scratch. It’s generally also a good idea to take photographs and/or a videotape of your possessions in order to minimize the difficulty of replacement.
Standard homeowner’s insurance is a combination of liability and casualty coverage. Liability insurance covers you if anyone is injured on your property. Liability insurance would come in handy for example if your neighbor came over, tripped down your stairs, and then tried to sue you for his or her medical bills. Casualty insurance, meanwhile, gives you money if your property is damaged or destroyed as the result of an insured event.
There are several different types of homeowner’s insurance, so make sure you do your homework to see which kind of homeowner’s insurance you need. Each homeowner’s insurance option covers different sources of damage and includes different levels of payment. When looking to obtain homeowner’s insurance, you’ll need to research different insurance companies and collect several quotes. Since homeowner’s insurance rates can vary depending upon how much coverage you want, your claim history, and certain risk factors – such as if you live in a wooded area where trees close to your home represent a fire danger – you will want to do as much research as you can. Fortunately, there are many websites floating in cyberspace just waiting to show you rate quotes from a wide variety of homeowner’s insurance lenders.
While there are many different individual homeowners’ insurance policies available, each of these falls into two basic categories: custom value and replacement value. Custom or basic market value insurance is based on your home’s appraised value. If your home is worth $100,000 and it is destroyed, you will receive that amount which you could hypothetically use to buy a new house.
Instead of having a homeowner’s insurance policy that includes a set amount of money, you can choose the “replacement cost” option. Replacement cost homeowner’s insurance plans ensure that you will be able to replace your home or belongings regardless of changing market prices. While this type of homeowner’s insurance may come with a higher deductible and/or premium, it does guard you against high replacement costs.
With regular homeowner’s insurance policies, your personal possessions are insured for a percentage of your home’s value. Actual percentages vary according to individual plans, but they generally range from 50-75% of your home’s insured amount. If you find that this is not enough, you can choose to pay for additional homeowner’s insurance to cover more of your belongings’ worth. Here is another reason why it’s a good idea to maintain a catalogue of your property. By keeping records of your possessions and their values, you’ll always know how much insurance you would need if you had to replace them.
If the cost of homeowner’s insurance seems too high at first, there are some changes you can make that will reduce your insurance premiums:
Installing a home security system or cutting back trees that are close to your house can reduce your risk level and with it the cost of homeowner’s insurance. You can also save money by raising your deductible. The larger your deductible, the lower your monthly homeowner’s insurance premiums will be. For example, according to ehow.com, just increasing your homeowner’s insurance deductible from $100 to $1,000 can save you up to 20% on your monthly payments.
Homeowner’s insurance is also a must if you plan on taking out a loan that taps into your equity, as most lenders will not even look twice at your application if you don’t have homeowner’s insurance.
What Does Homeowner’s Insurance Cover?
Various homeowners’ insurance policies protect you from most disasters both natural and manmade including damage incurred during a tornado, fire, or high winds. Homeowner’s insurance also pays you if your home is burglarized or is the victim of vandalism. Contrary to its name, homeowner’s insurance also insures more than just your home and the belongings within it. Regular homeowner’s insurance protects your home and any other buildings on your property, such as a garage or shed, as well as any possessions inside them.
What Doesn’t Homeowner’s Insurance Cover?
While standard homeowner’s insurance can protect you against many possible threats, there are a few situations that require specialized policies. Common exceptions to general homeowner’s insurance policies include floods, earthquakes, war, and nuclear accident. You can, however, purchase additional policies to cover most of these possibilities. If you aren’t sure whether or not you need additional homeowner’s insurance, you might want to investigate the area you live in. If your city has a history of flooding or of earthquakes, it’s probably wise to at least consider protecting yourself and your home from these events.
As with any form of insurance, make sure you understand exactly what your individual policy does and does not cover. Knowing whether your policy places a limit on the amount of money you can use to replace certain items, such as jewelry, or if specific events like earthquakes are excluded from your plan, can make the difference between being safe and being financially devastated should disaster strike. You should also be comfortable with your deductible and monthly premiums. No one wants to lose their home or their possessions, but a good homeowner’s insurance policy could at least make the rebuilding process bearable.
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