For most clients, one of their largest assets is their house or residence. With that being said, it is good to review your homeowner’s policy from time to time. For most of you that have been with us, you have seen our “Success Triangle” and one of the items at the foundation of that Triangle is insurance. This is because if the proper insurance is not in place, it jeopardizes the rest of your financial health. In this article, we will discuss how much coverage you should have, what most polices cover and what they don’t.
What is a homeowner’s policy?
Homeowner’s insurance protects your home, its contents, and, indirectly, your other assets in the event of fires, theft, accidents or other disasters. A standard homeowner’s policy (known as an HO-3 policy) will protect you from things like fires and fallen trees. Floods or earthquakes are specifically not covered by a standard policy and require additional coverage.
Dwelling coverage (known as Coverage A in most homeowner’s policies) financially protects your home's structure in the event it is damaged or destroyed by a covered risk like fire, hail, windstorms, theft, vandalism, and much more. This coverage extends to fireplaces, rooms, carpeting, floors, the roof, and everything in between.
You probably think of your dwelling as solely the part of the property in which you dwell. Please note that a standard home insurance policy defines your dwelling as the house itself, plus any structures that are attached. This may include everything from your front and back porches, to your deck and attached garage.
So, in addition to calculating the coverage you'll need for your dwelling, take an inventory of any unattached structures on your property. Even though these aren't included in your dwelling protection, unattached structures such as a guest house, tool shed, swimming pool, or gazebo are protected up to the limits you choose for Other Structures Protection on your homeowner’s insurance policy. For example, if a tree topples onto your unattached garage, the other structures protection on your policy would help to cover the repair or replacement costs.
How much insurance do I need?
Your home-insurance policy should cover enough to entirely rebuild and furnish your home were it wiped off the map. Ask a home builder to walk through your home and give you an estimate of what it would take to rebuild. That figure should be the basis for how much replacement coverage you’ll need. Be sure to point out any unique and/or expensive details that would add to the replacement cost.
Once you’ve determined the replacement cost of your home, you’ll need to know what kind of coverage you want. There are a few key terms here:
- Guaranteed Replacement Cost Coverage - This means that the insurer will pay for the rebuilding of your home no matter the cost. (These policies are hard to find these days)
- Extended Replacement Coverage - Many insurers offer coverage that caps the payout at around 125% of your home’s insured value.
- Inflation Guarantee - This feature makes sure that your home’s insured value stays current with the marketplace.
What’s covered?
A standard policy will also protect your possessions from said disasters as well as theft. But a standard policy is not a blank check: there’s a limit to how much you’ll be compensated. If you have specific items of value, such as jewelry or artwork, you can pay a little extra each year to insure them for their full replacement value. All policies limit payouts for certain categories of personal property losses. Some example of typical limits include:
- $1,000 to $1,500 for jewelry, watches, furs, and precious and semiprecious stones.
- $200 for money, bank notes, bullion, gold other than goldware, silver other than silverware, platinum, and coins.
- $1,000 to $1,500 for watercraft, including their trailers, furnishings, equipment, and outboard motors.
- $2,500 for silverware, silver-plated ware, goldware, gold-plated ware, and pewterware.
- $2,500 for property used for business purposes.
Companies sometimes impose similar coverage limits on works of art, antiques, musical instruments, and cameras. To insure items worth more than these special limits, consider buying additional coverage either by paying to increase the category limit or buying a personal-articles floater for them.
Homeowner’s insurance policies typically cover your belongings for 50 or 75 percent of the amount for which you insure your dwelling. If your dwelling coverage compensates you for losses up to $400,000, and your personal property coverage is for 50 percent, you will be covered for personal property losses up to $200,000.
Usually, What’s Not Covered?
Most homeowner’s insurance policies don't cover damage that results from a basic maintenance issue that you're responsible for as the homeowner. For example, if your water heater cracks, your dwelling coverage probably won't help to replace it — but it might, however, help cover any damage to your floors and surrounding areas. Also note that many homeowners’ policies don’t offer protection for mold or sewage backup.
Personal property is protected against only named perils. Earthquakes, war, floods, and other perils excluded from coverage on your dwelling are also excluded from personal property coverage. Accidental losses are not covered for personal property. For example, if you accidentally spill paint on your brand-new leather sofa, or drop your fancy flat-screen TV while trying to mount it on the wall, the loss is not covered. Nor are you covered if you drop your wedding ring in a lake or a power surge knocks out your computer. You can insure your personal property against accidental losses by buying a special provision to an HO-3 policy or buying an HO-5 policy.
Also keep in mind that there are two different kinds of coverage when it comes to personal articles. There’s “actual cash value” and there’s “replacement cost.” You want coverage for replacement cost. Actual Cash Value Insurance is what you’d get if you sold your valuable today — a lower amount than what you initially paid. Replacement Cost Insurance pays you the amount of money you’d need to buy a brand-new item to replace your old one.
We recommend that clients take a thorough home inventory of your personal possessions (like furniture, clothing, electronics, appliances, fancy rugs, and more) so that your personal property coverage on your homeowner’s policy can sufficiently cover all of your beloved belongings in case life ever takes a turn for the worse.
Another important note is that you should not use insurance to cover every conceivable expense, just the big ones. If reinstalling a gutter will cost you $200, pay the $200 — don’t start filing claims for it. Insurers hate it when you file too many claims, and may raise your monthly premium or even cancel coverage because they’ll view you as too risky. A rule of thumb is that if you can fix anything for less than $1,000; don’t file a claim with your insurer.
In summary, some action items that you should take from this article to discuss with your insurance agent include:
- Ask a home builder to walk through your home and give you an estimate of what it would take to rebuild. That figure should be the basis for how much replacement coverage you’ll need.
- If you have unattached structures on your property, consider getting coverage for them.
- Take a thorough home inventory of your personal possessions.
- Consider buying additional coverage if you have precious or expensive personal property.
In my next article, I will discuss some other important items that were not touched on in this article including Liability Coverage, Additional Coverage for Other Losses, Medical Payments Coverage, and finally Umbrella Policies.
