Real Estate 101

Homeowner’s Insurance – A Primer

posted by Matt October 7, 2016 0 comments

If you’re thinking about buying a new home, you’re probably already aware that homeowner’s insurance is basically mandatory. Mortgage lenders aren’t going to loan you the money for your new home without it, so you know you have to get it. However, there are several details to keep in mind, and not all of them are obvious.

Why You Need Insurance

The most obvious reason you need homeowner’s insurance is the one I just stated – you can’t get a mortgage without it. Your lender is giving you a lot of money, and the home is the only collateral they have. They want to make sure it’s protected.

However, just because you have to have insurance doesn’t mean you should get the cheapest thing you can find. Fire, flood, earthquake, falling trees, hail storms, vandalism or burglary could all result in substantial loss. When you’re talking about as much money as you’re spending on your home, a loss could significantly set you back. Insurance might cost a lot every month (it probably does if it’s worth having), but if it means you don’t wind up living under a bridge and in debt for the rest of your natural life, it’s worth it.

What to Insure

The most obvious thing you’ll be insuring is the home itself. It’s also the most mandatory portion. The mortgage lender doesn’t much care if your gaming system is carried off by burglars, but they want to know their collateral is covered.

D.R. Horton Home

Image Courtesy D.R. Horton.

For your own peace of mind, you’ll also be insuring the property you keep in your home. Furniture, electronics, the kids’ toys, your power tools – these are all covered by your insurance policy. But – and this is important – you have to know they’re there. Sure, if the roof breaks open and all your stuff is ruined by rain, you can just look at it and go, ‘yep, that needs to be replaced,’ but if you lose your home to a fire or burglars make off with your electronics, you’ll have to prove that you actually owned the stuff you lost.

[Here’s a tip – your insurance provider probably has an app that will help you create an inventory. It’s a good idea to do that BEFORE you lose your stuff.]

Another handy thing that your insurance will cover is called loss of use coverage. When you can’t live in your home because a tornado dropped a sedan in the kitchen, the insurance will pay for the hotel or rent house. They’ll also throw you a few bucks if you have to eat out for a few weeks. Just don’t expect some kind of meal stipend – the insurance will only cover the difference between your normal grocery budget and the expense incurred when you have to eat out every meal for a week.

Finally, you have the part of homeowner’s insurance that just feels unpleasant – liability insurance. When the neighbor’s kid hops your fence and breaks his leg falling out of your tree, the neighbor could sue you. Fortunately, your homeowner’s insurance will help cover legal fees and protect your assets if you or your family are responsible for injury or damage to other people.

Insurance Mistakes and Pitfalls

  • You might think your coverage will pay to rebuild your home if it is damaged, but code upgrades can cause massive cost overruns. If you have an older home, you may have to replace plumbing, wiring, insulation or other elements that were not even damaged, just to get them up to code – and your insurance likely won’t cover it all. When a fire took the top floor of our home, we ended up having to pay out an extra $15K because our older home wasn’t code-compliant. That’s a lot of personal items we weren’t able to replace because we had to use the money to pay for repairs. Talk to your provider and find out if you need a cushion for code upgrades. That’s pretty common for older homes, but not as necessary for new construction.
  • Most policies exclude flood and earthquake insurance. Learn about the most common hazards in your area and make sure you’re covered. If you live in Denver, you probably don’t need sinkhole insurance, but if you’re in Florida, it might be wise to make sure you’re covered. If you’re not, you may want to consider supplemental insurance. There are often government programs to help out with supplemental insurance for high-risk areas. Trulia has a map you can check that will show you common hazards in your area (check it out HERE), but it’s a good idea to check with your realtor and insurance provider to see if you need supplemental insurance. If you do, help is out there, but you may have to hunt for it. For instance, FEMA runs the National Flood Insurance Program and California has the Earthquake Authority.
  • Business coverage obviously won’t be useful for everyone, but if you do run a business out of your home, your homeowner’s insurance won’t cover that. You need separate business insurance to cover things like tools, computers, prototypes and other things that are specific to your business. Your insurance provider may offer that coverage. It can’t hurt to ask.
  • Seriously valuable belongings like expensive jewelry or collectibles will almost certainly be capped for repayment value. If you have abnormally valuable belongings, you may need to insure those separately. Don’t wait for the rude awakening when your provider tells you that they will give you $2,000 for the $75,000 necklace you inherited from your rich grandmother.
  • Depreciation can take you by surprise if you’re not prepared for it. Say a hail storm ruins your roof – insurance should cover that, right? Sadly, if your roof is old, your insurance is going to adjust for the age of the roof. If your roof was 15 years old and you were about to replace it anyway, you may still be stuck with the bill. Insurance doesn’t pay to give you new things. It just replaces what you lost, and if you lost something old and broken-down, the insurance isn’t going to buy you a shiny new replacement.

Saving Money

Most insurance providers offer more than just homeowner’s insurance, and they would love to be your one-stop shop for car, motorcycle, boat and supplemental insurance. Talk to your provider and get quotes for bundled insurance. In many cases, you can save a considerable amount by getting all your insurance from the same company.

While it’s great to save money on insurance, the worst thing that can happen is to find out that your affordable insurance won’t pay their claims. Before you choose a provider, do a little internet research and find out what kind of reputation your potential pick might have. Bigger names tend to pay better, but it’s not uncommon to find a local agent who will make sure your claims get paid quickly. Our house fire was pretty horrible, but the insurance company we had took care of everything so well that they made a catastrophic situation merely a rough couple months. They cost more than some alternatives, but when we needed them, we were glad we didn’t go with the cheapest provider we could find.

Filing a Claim

This is one of those things you really hope you never have to do. It’s funny, you spend thousands of dollars over the life of your home, and you hope it was all for nothing. But when that worst-case scenario happens, when burglars make off with your home entertainment suite or your water heater gives out and fills your living room with tepid water, you’ll be glad it’s there.

  • The first step is to call your provider. If you have a local agent, call them. This is, unfortunately, just the first step. Your provider can walk you through a lot of the steps, but it helps to know what to expect.
  • Sure, I just said the first step is to call your provider, but if your loss was the result of a crime, your first step is really to call the police. Get names of all the officers and document everything you can – your provider is very likely to ask for that information.
  • You might be inclined to start cleaning up while you wait for the adjuster. Don’t do that. You can rescue your photo albums or move your belongings to safer ground, but don’t throw out anything before the adjuster arrives (and probably not even then).
  • Make sure your property is secure while you wait. If you have to leave, make sure the home is locked or that someone is keeping an eye on the place. It’s sad, but leaving your home empty when a fire has blown out the windows is like hanging a welcome sign for burglars. And that, unfortunately, is a completely separate claim – including a completely separate deductible.
  • Photograph everything. The more detailed a report you can file, the happier you will be. You need to be able to substantiate what was lost, what was damaged, and what needs to be taken to a dry cleaner to get the smoke out.
  • Your adjuster may recommend vendors to do the work you need. Keep in mind that you are not obligated to use the vendors they recommend. Standing in the rain outside a smoking home is a lousy time to comparison shop, but it might save you a lot of grief down the road.
  • The key to getting compensated for your loss is documentation. Record every expense, keep every receipt, and get the names of every person who will be handling your claim. From the computer repairman who bundles up your electronics to get them cleaned to the carpet cleaner pulling the water out of your rugs, everyone involved can be an important part of getting back what was lost.
  • One last point, and this may be the most important. If there are things with irreplaceable personal value – wedding photos, crafts your kids made, your grandmother’s antique locket – it’s not a bad idea to take care of those things yourself and keep them with you. The insurance may pay to have someone empty your home and store your belongings while repairs are completed, but those people are concerned with replacement value, and a lopsided clay ashtray has pretty low replacement value – except to you, because your son made it in second grade. It’s more trouble to tote that stuff off to the hotel, but it will be worth it when you keep it in one piece.

Homeowner’s insurance can be tricky, but it can also save your home. Take the time to understand what you need to do to protect your home and your family, and enjoy the peace of mind you get from knowing you’re covered.

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