Homeowner’s insurance is an essential purchase. Mortgage holders require their borrowers to keep this coverage in force while the mortgage has a balance. However, the coverage is just as important for those who own their homes free and clear. Few individuals have sufficient funds to rebuild a destroyed home. For this reason, it is important for homeowners to have the right coverage, not just any coverage. Failure to consider a few factors can leave them with a too-small claim check or even no claim check at all. Probably the most important of these are the amount of insurance on the home and the perils that could possibly damage it.
Insurance industry consulting firm MSB has estimated that as many as two-thirds of American homes are underinsured, by an average 21 percent. This means that a home that would cost $100,000 to rebuild is probably insured for only $79,000. It is important for the insurance limit to reflect building costs in the area, not the prices that homes are selling for. It should also take into account the cost of rebuilding to comply with local codes, the expense of not buying materials in bulk, and any custom features the home has. For a nominal fee, MSB offers an online tool to help homeowners calculate their insurance needs at www.accucoverage.com.
Homeowner’s insurance typically covers damage caused by fire, lightning, vehicles, windstorms, and several other perils, but it does not cover everything. For example, it does not cover damage caused by flooding. Too many people fail to consider this; more than 40 percent of New Orleans homes damaged by Hurricane Katrina lacked flood insurance, and the insured rate was higher there than in other affected areas. Homeowners who live near ponds, creeks, lakes or oceans should give serious consideration to buying flood insurance from the National Flood Insurance Program, and even those who do not live near water should think about it. Officials with the NFIP estimate that one in four flood claims occurs in low- to moderate-risk areas.
Other perils that the policy may not cover include earthquakes, mudslides, mold infestations, and gradual rotting of building components. Homeowners in areas with frequent seismic activity should consider separate coverage for earthquakes and other types of earth movement.
The amount of insurance and the scope of the coverage have a major impact on the policy’s cost, but another influential factor is the deductible — the amount the homeowner pays out of pocket before the company pays. Higher deductibles result in lower premiums because the company is spared the expense of handling small losses that fall below the deductible. Each homeowner must decide the deductible amount that she can comfortably afford. Since homeowners often pay insurance premiums for many years without suffering a loss, the savings from the higher deductible discount may well offset the higher out-of-pocket expense if a loss occurs.
There are several other considerations homeowners have when they buy insurance. Do you have expensive pieces of jewelry, collectibles, musical instruments or artwork? Do you run a business out of your home? Do you or your children own laptop computers? Are you a landlord? Do you own snowmobiles or boats? Operate a home day care center? You may need special coverage for all of these. To identify your coverage needs and determine the cost of insuring them, speak with a qualified insurance agent who insures many homes. She can present options and provide information about the financial strength of companies and their claims handling practices.
Homeowner’s insurance is not just another expense. It is a vital part of a homeowner’s financial plan. Take the time to make certain you have the right coverage at a reasonable cost.