Insurance can often be viewed as a difficult thing to understand. In reality, the concept is pretty simple, but what makes things confusing for people are the different coverage’s and how they are determined. This misunderstanding can often result in consumers asking what to look for in homeowners’ insurance.
Fear not, however, if you’re reading this article you’re in good hands. I’m going to explain what homeowners’ insurance is, why it’s needed and what some basic coverage’s are. I will also cover added coverage’s that you can attach for added cost, along with things that you may not have known are generally not covered.
Lastly, and probably most importantly, I’m going to show you what to look for in an insurance agent when determining your homeowners’ insurance. This will help you see if they are more worried about covering you appropriately, or just wanting to process the transaction quick and get you out the door.
What is homeowners’ insurance?
Homeowners insurance is an insurance policy/contract between you and the insurance company. This contract states that if certain events happen resulting in damage to your home, the insurance company will pay for the damage in exchange for a small monthly premium payment.
In this policy/contract are also stated the events that will be covered. There are certain events that an insurance company will not cover, or will only cover if requested in exchange for a higher payment.
How are coverage amounts determined?
The short answer…is that the customer can choose how much the home be covered for. If your home is worth $300,000, a customer may say well I only want to cover it for $275,000 if it gets burnt down. Keep in mind however that the insurance company will not over insure the property if it deems unnecessary.
The correct and longer answer is, your insurance agent will (or at least should) ask you a series of questions on the materials used to build your home such as the exterior material, the flooring, how many bedrooms and bathrooms, etc. Based off of public information and your responses to the home construction materials, the insurance company will determine the “replacement cost value” of the home.
Keep in mind that “replacement cost value” is different from the actual market value of the home, and does not include the value of the land that the home sits on.
From an insurance company standpoint, if your home burns down, they are only worried about how much it will cost to build the exact same home you originally had, and how much that would cost in today’s dollars.
Market value is another discussion but is the value used to determine how much you paid for the house. It is a valuation based off of supply and demand and how much the consumer is willing to pay for the house. This is often much different than what the replacement cos is, and usually
Is homeowners’ insurance required by law?
As you may know, auto insurance is a required insurance policy by law. Why? because it affects other people, not just ourselves. For example, if I get into a car accident and it was my fault, but I have no car insurance, why should the one that got hit have to pay for my mistake? That’s where auto insurance kicks in and pays it for you.
Unlike auto insurance, homeowners’ insurance is not a required type of insurance, although something that is VERY smart to have in place. Why? Because your home is your biggest asset, meaning it is probably the most expensive piece of tangible property that you own.
Having said that, some mortgage companies will require the borrower to have a homeowners’ policy in place to protect the mortgage company. Similar to the auto insurance example above, why should the mortgage company who lent you $300,000 to buy your house have to pay for your mistake not supervising your children playing with the matches in the garage? Make sense?
Now if you own your home free and clear, or in other words, you don’t have a loan on the home, than the decision is yours. No one else would be liable for any damages except yourself. The question is, is that a risk you are willing to take?
The homeowners’ insurance policy basic coverage’s
The first and primary coverage on a homeowners’ policy is the “dwelling coverage” which is referring to the actual structure of the home itself. This type of coverage is generally determined with the replacement cost valuation. Remember that the replacement cost is referring to “if your house burnt down today, how much would it cost to rebuild the exact same home with the same materials today?”
The second basic coverage is referred to as “unscheduled structures” or often called “other structures” coverage. This covers structures that are not directly attached to the house, such as a basic shed, a detached garage, or other structures on the land.
Next we have “personal property” coverage. This is simply all your belongings in the home, and most policies even cover your belongings anywhere in the world! (bet ya didn’t know that one). Be advised that this does not cover vehicles, as those should be covered on your auto insurance policy.
Lastly we have a few other basic coverage’s. Namely: 1) Loss of use – covers reasonable living expenses for you to survive if your home is inhabitable. 2) Personal Liability – this covers your legal liability for events that happen on your property that you may be liable for, such as not salting the driveway and your neighbor slips and breaks their leg than decides to sue you (heaven forbid that ever happens).
Optional coverage’s that can be added
There are plenty of additional coverage’s that you can add onto a homeowners’ policy. Quite frankly you can almost add anything in some form or another. These coverage’s generally are a little different from one insurance company to another, whereas the basic coverage’s listed above are pretty industry wide.
Optional coverage’s include things such as: Identify fraud expense coverage, business property kept at home, sewer backup coverage, exact value coverage for valuable jewelry like an engagement ring, coverage for the pool or hot tub, etc.
You name it, there is a coverage that I’m sure will insure it in some way or another.
Coverage’s that are not included: Little did you know…
There are a few types of coverage’s that are not covered in most generic insurance policies. The reason these coverage’s are not included in the general policy coverage’s is because they are normally higher risks and as a result end up costing much more to have on the policy.
An example of this is earthquake insurance. Due to the cost to repair a community that just experienced an earthquake being VERY expensive, insurance companies will only cover this if it is added as an endorsement on the regular policy. Depending on your geographical location, this coverage can sometimes cost more than twice the cost of the actual policy! But definitely something that may be worth having.
Other things that most people don’t know that aren’t covered are damage to the home caused from “outside water.” In other words, if it rains and your basement floods, it’s not covered unless you’ve added flood insurance! Any water damage that comes from outside is only added if requested (and in some cases it’s required in “flood zones” which are determined by the governments that have jurisdiction of that area).
What to look for from your insurance agent
From my experience in the insurance industry, sadly many insurance agents get in the mode of processing new insurance policies on a transactional basis. In other words, they are trying to complete the policy and get it done and signed as soon as possible, rather than making sure you are covered correctly.
You know a good insurance agent when that agent does their due diligence. A good insurance agent will determine your appropriate coverage amount through asking you the materials used to build your home. They do a thorough questionnaire on your belongings and other structures on the premises.
Based off of your answers to these questions they come up with a correct amount of insurance, rather than just going off of the mortgage loan amount, or the market value of the property (the both of which have nothing to do with the amount of coverage you should have on your home).
How do you know a good agent when you see one? They aren’t in a rush to hurry and bind your policy. Rather, they customize the policy to your current needs and wants.
Coverage, Service, Price… In that order!
The way I see it, when I recommend coverage’s to clients I have my priorities ordered in the following order: 1) Coverage 2) Service 3) Price…IN THAT ORDER! I’m more concerned with ensuring my clients have the correct coverage so that when the unexpected happens (not if, but when), finances are the last thing on their mind! Good service creates long term reputation and attracts great clients, and price being the last priority although not an unimportant priority.
I understand and know what it’s like to be a newlywed with little money and a mountain of bills. I get it. Having said that, after doing a correct valuation of the coverage, than we see where we can give and take to make the price work for your budget by changing limits and endorsements.
All else aside, it’s more than just a policy. No one ever wants insurance until they need it, and once they need it the wished they would have done a better job at customizing it.
Have questions or comments? List them below, I’m happy to help out!