In some cases, a homeowner may be required to carry home insurance. If you have a mortgage, your lender will most likely request homeowners insurance, says the Insurance Information Institute (III) *. Typically, before financing or refinancing your mortgage, the mortgage company will ask you to prove that your home is adequately insured. This is because the lender wants to ensure that your investment in your home is protected in the event that any other risk is damaged or destroyed in a fire. A local agent can help you get home insurance that meets your needs.
If you don't have a homeowners policy, the Consumer Financial Protection Agency * notes that your lender is allowed to buy insurance and charge you the cost. However, keep in mind that the policy that the lender purchases may be more expensive and offer more limited coverage than what you can buy.
Home Insurance Protects More Than Your Home
While a standard homeowners policy helps protect your home, its coverage typically extends to more than the physical structure of your home. From your personal belongings to the shed in your backyard or even medical bills if a guest is injured on your property, a home insurance policy can include coverage for:
- Your home. If your home and attached structures, such as a deck or garage, are damaged by a covered hazard, homeowners coverage can help pay for repairs.
- Other structures. Other structures coverage on your policy can help pay for repairs or replacement for separate structures on your property, such as a fence or shed, if they are damaged or destroyed by a covered peril.
- Personal property. This coverage can help pay to replace certain belongings, including furniture and electronics stolen or damaged by a covered loss.
- You and your family *. If you or a family member is found legally liable for accidentally damaging someone else's property or injuring someone, liability coverage can help pay for repair costs, legal fees, and medical bills.
- Guests. If a visitor is accidentally injured in your home, your guest medical protection policy can help pay for the resulting medical bills.
- Additional living expenses *. If you can't stay in your home after a fire or other claim, your homeowners insurance coverage can help pay for temporary increases in living costs, like hotel bills.
Home Insurance Limits and Deductibles
It is important to note that all coverages have limits, the maximum amount your policy will pay after a covered loss. When selecting your coverage limits, be sure to consider issues such as the potential cost of rebuilding your home or replacing your belongings in the event they are damaged or destroyed by fire or a covered loss.
Also remember that many coverages have deductibles. Your deductible is the amount you will pay before your insurance benefits kick in to help compensate you for a covered claim.
Having a home insurance policy won't prevent damage to your home and belongings, but it can help provide financial security if the unexpected occurs. If you have a home insurance policy, you can be better prepared for either a storm or a crisis - knowing that your home insurance can help cover the costs of damage and move on.
How Much Home Insurance Do You Need to Have?
The amount of homeowners insurance needed should be enough to cover:
- The structure of the house.
- The content of this and personal belongings.
- The cost of additional expenses incurred in the event the home is damaged and they must reside elsewhere during repairs.
- To respond to civil liability with third parties.
1. Coverage of the house structure
You can say you have enough coverage if you can rebuild your home at current construction costs, not including the value of the land. Do not base the rebuilding price of the house on what you paid for it, as the cost of rebuilding a home could be more or less than this.
Some banks require homeowners with mortgages to obtain coverage for at least the value of the mortgage. If the amount of your coverage is based on the amount of your mortgage, still make sure that this protection will allow you to cover the costs of rebuilding it. If you have completely paid off your mortgage, do not eliminate homeowners insurance. This insurance will protect your home investment.
A quick way to be sure of the amount of insurance you need is to get the construction price in your area per square foot and multiply it by the total square footage of your home. To get an idea of the price of each square foot of construction in your area, you can contact a local real estate agent, a builders association, or simply your insurance agent.
There are several factors that will determine the cost of rebuilding your home:
- Construction costs for the area.
- The square footage of construction.
- The type of construction of the exterior walls of the house, such as wooden or concrete frames, brick or stone.
- The style of the house: if it is colonial, modern, etc.
- The number of rooms and bathrooms you have.
- The type of roof and materials used.
- That includes other structures such as garages adjacent or detached from the main residence, sheds, swimming pool, etc.
- If the home has a fireplace, basements, stone borders around the walls, and even decorative features like arched windows.
- If the house, or at least part of it, was built to measure and taste or is made according to a common plan for many houses.
- If the house has improvements, additional constructions such as bathrooms or additional rooms, the kitchen has been expanded, etc.
The standard homeowners policy provides coverage for disasters caused by fire, explosion, hail, lightning, and theft. However, it does not include damage caused by floods, earthquakes or those resulting from a lack of routine maintenance.
For coverage against flood damage you must obtain a separate policy that is issued by the Federal Insurance Agency that is part of FEMA and for policies for earthquake damage you can go to a private insurer or if you live in California to California Earthquake Authority.
Replacement of damaged structures
Most homeowners policies cover the cost of replacing affected structures. The type of policy called replacement cost of ownership ( replacement cost ), will pay for the repair or replacement of damaged property with materials of the same type and the same quality as existing, without reduction for depreciation of property affected, that is, without the replacement value being affected by age, use, condition or other factors.
Similarly, if you obtain flood coverage, it will be available on a replacement cost basis.
Guaranteed coverage and extended replacement cost coverage
In the event of a major disaster, such as a hurricane or tornado, the demand for construction materials and labor to make repairs often exceeds the supply and this can cause actual repair and replacement costs to be greater than policy limits that homeowners have on their homes, causing many homeowners not to receive enough money to cover full construction costs.
To protect against this risk, homeowners like you can purchase extended coverage that reimburses you beyond the policy limits. An extended replacement cost policy will pay from 20% above the policy limits if necessary, this will depend on the insurer.
You can also get a guaranteed replacement cost policy, which will pay for any cost of replacing the damaged property as it was before the disaster, fire, explosion, etc.
Building codes and the effect of inflation
Since building codes are updated periodically, they can change substantially in the amount of time you have lived in your home. If your home is heavily damaged by a coverage-eligible disaster and you rebuild or repair it, you may be forced to implement those new building codes.
Replacement cost homeowners policies (including guaranteed and extended coverage) generally do not pay for the extra cost of building with the new coding. Therefore, many insurers offer an extension or amendment to the policy that is known as ordinance or law endorsement, or endorsement of laws and ordinances and that pays for a specific amount of money for this type of cost (an endorsement is an attached document to the policy that changes your coverage).
Another important clause that you should consider adding to your homeowners policy is inflation protection. This clause allows the policy to automatically adjust the property value limit with respect to annual inflation, for the purposes of the policy payment limits, each time you renew it and to reflect the applicable construction costs in your area.
How to secure older homes
If you own an older home, you may not be able to purchase a standard replacement cost policy, instead you may need to purchase a modified one. This means that instead of replacing the typical elements of an old house such as friezes, walls, wooden floors, etc., with similar materials, the policy will pay to replace them with construction materials and techniques used today.
There is a big difference in how insurers protect older homeowners. Some companies do not provide replacement cost coverage to recreate the quality and style of the home that had special attachments such as moldings and reliefs on walls and floors, among others. There are insurers that cover older homes as long as they are in good condition.
If you are unable to obtain replacement cost for your home or choose not to use this type of coverage - in some cases the cost of replacing a large, old home is so high that you may not want to replace it with the same size - at least make sure that your policy coverage limits are high enough to provide you with adequate funds to build a home of reasonable quality and size.
2. The content of the home and your personal belongings
Most homeowners' policies provide coverage for your personal belongings between 50% and 70% of the amount of money you have purchased from maximum coverage for the structure of your home, which is known in English as coverage of dwelling of your house. Policy limits are generally itemized on the Policy Declarations page, under Section I, or Coverage A, of the structure.
To determine if this value provides you sufficient coverage, you must take an inventory of your belongings inside the home. That is, make a detailed list of all your possessions with information regarding the replacement amount in case of being stolen or destroyed in a disaster such as a fire. If after you've done your inventory you think you need more coverage than the standard, contact your insurance agent and ask them to quote you a higher price for your personal belongings.
Replacement coverage of cost or real value ( current cash value )
You can choose to insure your belongings for actual value ( actual cash value ) with cash, minus a deduction for depreciation of the article, up to the maximum limits of your policy. Or, you can opt for replacement coverage for the cost of your insured possessions. In this second case, they will pay you the amount it costs to replace your possessions with similar ones, WITHOUT deductions for depreciation, up to a maximum stipulated in your contract.
Suppose a fire in your living room destroys the television you bought 10 years ago. If you have replacement cost coverage, the insurance company will pay you the price it costs to replace your television with a new one. If you have real value coverage, they will give you a portion of the price of the new TV, because the one that was destroyed was 10 years old and the destroyed property had a lower real value than when it was new. One good thing about replacement cost policies is that some may include the cost of delivering the new replaced product to your door.
In general, the price of the policies with replacement coverage are usually a little more expensive than the real value ones, they are approximately 10% more expensive. Now if you need to take home flood coverage it is only available as real value coverage, never as replacement cost coverage.
How to secure expensive items with endorsements and riders
In your regular policy you will find limits of compensation to claim for certain expensive items such as jewelry, furs or tableware and cutlery. Generally, there is a limit of between one thousand and two thousand ($ 1000 - $ 2000) dollars for jewelry coverage. Ask your agent or find this description in the policy statement, under Section I, Personal Property, Special Limits of Coverage. For example, some insurers also have maximum coverage limits for certain items like computers.
If you find these maximum coverage limits are too low, consider purchasing a special rider or endorsement to the standard policy. This way you can secure additional items, either individually or in collections. Deductibles do not apply to these schedules. And the price of the annex to the policy will be in proportion to the value of the property (or collection) and its monetary value in the area where you live. You can also determine the value of items by showing the insurer receipts or invoices from recent acquisitions or by having them appraised by an expert appraiser.
3. Additional housing expenses after a disaster
This portion of homeowners insurance is a very important feature and is found in most standard policies. This coverage pays for the cost of additional expenses incurred in the event the home is damaged due to fire, hurricane, and other covered events and you must reside elsewhere during repairs. It includes paying hotel, restaurant bills, and other expenses incurred by you while your home is being rebuilt.
The amount of coverage varies from company to company, but many policies include this protection up to 20% of your insurance coverage limit. Some companies even offer a policy that provides coverage of expenses without maximum limits, but for a limited time.
If you rent a part of your house, a room, the garage, etc., the coverage of additional expenses will reimburse you the rent that your tenant would have paid you in the event that your home had not been damaged.
Ask your agent exactly how much your policy covers in your case and if you think it is too low, you can buy more coverage by buying an additional policy and paying a little more premium.
4. Civil liability towards third parties
This is the part of your policy that gives you protection against lawsuits for personal or property damages suffered by third parties related to your home or the members who reside there. It also covers damages caused by your pets, and pays both for the costs of defending you in court against the lawsuit, and for any expenses the court finds to be your responsibility.
As a general rule, most insurers include a limit of 100,000 dollars of coverage in cases of civil liability, but you can purchase amounts greater than this protection. It is increasingly important that you have higher limits on liability coverage, (between 300 and 500 thousand dollars).
Protection umbrella ( umbrella ) or excess coverage liability
You should seriously consider getting enough liability coverage to protect all of your possessions. If you own property, have investments, or have savings that are valued above your liability protection, you should consider getting more coverage through an umbrella or excess coverage policy.
Excess liability insurance policies provide additional coverage - they start to pay once regular policies have exhausted their limits, as in the case of your auto or home insurance liability coverage. These coverages are not part of your home coverage, they must be purchased separately. So in addition to providing more coverage, they can include more comprehensive protection than just your home. With these umbrella coverages, you receive protection against lawsuits for damages, invasion of privacy, defamation, and slander, things that are not generally covered in any homeowners or auto policies.
The cost of an umbrella insurance policy will depend on how much insurance you have and what level of risk you present. The more liability coverage you have, the cheaper they will be, because if you already have comprehensive liability coverage with your auto or home insurance, the less likely you will need additional coverage. Most insurance companies are going to require you to have a minimum of $ 300,000 of liability coverage, already through your home or vehicle insurance, if you have one.