“Home, Sweet Homeowners” Insurance, 101
Your stuff is all packed. You have called the movers. You have enlisted help from your friends and family to load and/or unload the truck (probably by bribing them with pizza and beer).
You are all set to start your new life as a homeowner, right?
There is just one more little thing to think about: your homeowners insurance. And you do want to think about this; trust me. You have great stuff. You have a great house. You do not want to lose the use of any of it, should something unforeseen happen. Right?
So what are you buying when you plunk down the premium for that policy?
In a word, you are buying protection: the amount the company will pay and what types of losses it will protect you against (such as fire, smoke, lightning, windstorms, and theft). You can buy a policy that covers only your house, but most homeowners buy a combination of several types of coverage:
Dwelling is the coverage that pays when your house is damaged or destroyed. It also pays for unattached structures and buildings, such as fences, detached garages, and storage sheds.
Personal property covers items in your house (such as furniture, clothing, and appliances) if they are damaged, destroyed, or stolen.
Liability is what you will use if you are sued and found legally responsible for someone else’s injury or property damage (in accidents other than those involving vehicles). It also pays the legal fees for your defense. Homeowner policies vary in the amount of liability coverage available, so shop around; some will cover you for up to $1 million.
Medical payments take care of the medical bills of people (non-family members) who get hurt on your property. If your neighbor’s child falls down your steps during a party, your homeowners medical coverage takes care of the doctor bills. It will also pay for some injuries away from your home—such as if your dog bites someone. The basic homeowners policy pays $1,000 in medical bills, but you can augment this amount up to $10,000.
When you are purchasing homeowners insurance, be sure to add Guaranteed Replacement Cost on dwelling and personal property. Read your policy to determine exactly what is covered, what is not, and how it is limited. Make sure you know your policy details and understand them—do not wait until trouble happens to review your policy and know your rights!
Whenever you decide to shop around for your homeowners coverage, always request replacement cost, never do apples-to-apples comparison. This could cause your policy to have gaps in coverage.
Replacement Cost on Dwelling coverage pays a certain amount above the policy limit to replace a damaged home, generally 120% to 125%. It is similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction.
Unless you have replacement-cost coverage on your personal property and possessions, your furniture is insured only for its actual cash value, which is its replacement cost at the time of loss, minus depreciation of its value and any deductible applicable to your policy. So, that sofa and love seat you bought three years ago for $1,200 might have a depreciated value of $700 now. Your insurance company will only pay you the $700 (less your deductible, of course) for new furniture, even if those items cost you $1,400 today to replace.
If you have replacement-cost coverage on your personal property and possessions, you would receive the $1,400, or whatever it costs to replace the furniture with that of equal value (less your deductible, of course).
Replacement-cost coverage protects you from both depreciation and inflation. It usually is available at a nominal charge in addition to your homeowners or renters insurance and is well worth the investment.