Homeowners insurance, also known as "Home insurance", is a necessity, rather considered as luxury. Not only because it protects your home and belongings from damage and theft. Almost all mortgage lenders require borrowers to have insurance coverage for the full or fair market value of a property (typically the purchase price) and will not make a finance or loan for residential real estate transaction without proof.
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• Homeowners insurance policies typically cover destruction and damage to the interior and exterior of a residence, the loss or theft of personal property, and personal liability for injury to others.
• The three basic levels of coverage are actual cash value, replacement cost, and extended replacement cost/value.
• Policy rates are largely determined by the insurer's risk that you'll file a claim; those who assess this risk based on past claim history associated with the home, the neighborhood, and the home's condition.
• When shopping for a policy, obtain quotes from at least five companies, and be sure to check with any insurers with whom you are already familiar; current clients frequently receive better rates.
What a Homeowner's Insurance Policy Covers
Despite being infinitely customizable, a homeowner's insurance policy has a number of standard components that specify which costs the insurer will cover.
Damage for the Interior or Exterior of Your House
In the event of damage caused by fire, hurricanes, lightning, vandalism, or other covered disasters, your insurer will pay to repair or rebuild your home. If you want coverage for destruction or mutilation caused by floods, earthquakes, or poor home maintenance, you may need to purchase separate riders. Additionally, detached garages, sheds, and other structures on the property may need to be insured separately using the same guidelines as the primary residence.
The majority of your home's contents, furniture, including clothing, and appliances, are covered if they are destroyed in an insured disaster. Even "off-premises" coverage is available, allowing you to file a claim for lost jewellery no matter where in the world it was lost. Moreover, there may be a cap on the amount your insurer will reimburse you. According to the Insurance Information Institute, the majority of insurance companies will cover between 50 and 70 percent of your home's structure insurance. For instance, if your home is insured for $200,000, your personal property would be covered for up to $140,000.
If you own numerous expensive items (fine art or antiques, fine jewellery, designer clothes), you may need to pay extra to include them on an itemized schedule, purchase a rider or even purchase a separate policy.
Personal Liability for Damage or Injuries
Liability insurance protects you against lawsuits when filed by third parties. This clause encompasses even your pets! Therefore, if your dog bites your neighbor Chris, regardless of where the incident occurred, your insurer will cover her medical expenses. Alternatively, if your child breaks her Ming vase, you can submit a claim to compensate her. And if Chris falls on the broken vase pieces and successfully sues you for pain and suffering or lost wages, you will be covered, just as if someone were injured on your property. Those with renter's insurance typically do not have coverage for off-premises liability.
According to the Insurance Information Institute, while policies can offer as little as $100,000 of coverage, experts suggest having at least $300,000 of coverage. For a few hundred dollars more in premiums, an umbrella insurance policy can provide you with an additional $1 million or more.
Hotel or Residential Rental till Your Home Is Being Rebuilt or Repaired
If you are forced out of your home for a period of time, it will undoubtedly be the best coverage you've ever purchased. This portion of your insurance policy, known as additional living expenses, will indeed reimburse you for the rent, hotel room, restaurant meals, as well as other incidental costs you incur while your home is being repaired. Before reserving a suite at the Ritz-Carlton and ordering caviar from room service, however, you should be aware that policies impose daily and total limits. Obviously, you can increase these daily limits if you are willing to pay a higher premium.
Different Types of Homeowners Coverage
Not all insurance policies are created equal. The least expensive homeowners insurance policy will likely provide the least coverage, and vice versa.
In the United States, the industry has standardized several forms of homeowners insurance; they are designated HO-1 through HO-8 and offer varying levels of protection depending on the homeowner's needs and the type of residence being covered.
Essentially, there are three levels of coverage.
Actual cash value
The actual cash value includes the cost of the home and the value of your belongings, less depreciation (i.e., how much the items are present value, not how much you paid for them) and when the market goes very good the appreciation of the property increases.
Replacement cost
Replacement value policy covers the actual cash value of your home and belongings without depreciation, allowing you to rebuild or repair your home to its original value.
Guaranteed (or extended) replacement value or cost
This inflation-buffer policy is the most comprehensive because it pays for the total cost of repairing or rebuilding your home, even if it exceeds your policy limit. Certain insurers offer extended replacement, which provides more coverage than you purchased, but there is a cap; typically, it is 20 to 25 percent higher than the limit.
Some advisors believe that all homeowners should purchase guaranteed replacement value policies because you need enough insurance to rebuild your home at current prices, not just to cover its market value (which probably will have risen since you purchased or built). Adam Johnson, home insurance product manager for policy comparison website Quote Wizard.com, says that consumers frequently make the mistake of insuring only enough to cover the mortgage, which typically equals 90 percent of a home's value. Due to market fluctuations, it is always a good idea to purchase insurance for more than your home's value. Guaranteed replacement value policies absorb the increased replacement costs and provide homeowners with a cushion in the event that construction costs rise.
What Isn't Covered by Homeowners Insurance?
Natural disasters or other "acts of God" and acts of war are typically not covered by homeowner's insurance policies.
What if the living area prone to flooding or hurricanes? Or a region with an earthquake history? You will need an additional policy for earthquake and flood insurance. You can also add sewer and drain backup coverage, as well as identity recovery coverage, which reimburses you for expenses related to identity theft.
How Are Rates for Homeowners Insurance Determined?
What then is the driving force behind these interest rates? According to Noah J. Bank, vice president and insurance advisor at HUB International, the perceived "risk" is the likelihood that a homeowner will file a claim. And to determine risk, home insurance companies consider the homeowner's prior home insurance claims, as well as claims related to the property and the homeowner's credit score. "Claim frequency and type of severity plays a noteworthy role in determining rates, particularly when multiple claims are related to the same issue, such as water damage, wind storms, etc.," says Bank.
In addition to paying claims, insurers are in business to make money. Insuring a home that has had multiple claims in the previous three to seven years, even if the claims were filed by a previous owner, can increase your homeowner's insurance premium. Bank notes that if you have filed too many claims in recent years, you may not be eligible for home insurance.
The neighborhood, crime rate, and availability of building materials will also play a role in determining rates. Of course, coverage options such as deductibles or added riders for art, wine, jewellery, etc., as well as the desired coverage amount, also affect the annual premium cost."Pricing and eligibility for homeowner's insurance can vary based on an insurer's appetite for certain building construction condition or age of the home, roof type, heating type (if an oil tank is on-site or underground), proximity to the coast, swimming pool, trampoline, and security systems, among other factors," says Bank.
What other factors affect your rates? Bill Van Jura, an insurance planning consultant in Poughkeepsie, New York, explains, "The condition of your home could also reduce a home insurer's interest in providing coverage." "A poorly maintained home increases the likelihood that an insurer will pay a claim for damage." Even the presence of a single puppy can increase your home insurance premiums. Depending on the breed, certain dogs can cause extensive harm.
Tips to Reduce Insurance Costs
Although it never pays to skimp on coverage, there are ways to reduce insurance premiums.
Maintain a security system
A burglar alarm monitored by a central station or directly connected to the local police station will reduce the homeowner's annual premiums by at least 5 percent. Typically, in order to obtain the discount, the homeowner must provide the insurance company with a bill or a contract as proof of central monitoring.
Smoke detectors are another essential. While they are standard in most modern homes, installing them in older homes can reduce annual premiums by 10% or more. Additionally, CO detectors, deadbolt locks, sprinkler systems, and in some cases even weatherproofing can be beneficial.
Raise your deductible
As with health and auto insurance, the higher the homeowner's deductible, the lower their annual premiums. The disadvantage of selecting a high deductible, however, is that claims/problems that typically cost less than a few hundred dollars to repair, such as broken windows or sheetrock damage from a leaking pipe, will likely to be borne by the homeowner. And these can accumulate.
Look for multiple policy discounts
Many insurance providers offer discounts of 10% or more to clients who maintain multiple insurance policies with the same company (such as auto or health insurance). Consider obtaining quotes for additional types of insurance from the same provider as your homeowners insurance. You may save money on two premiums.
Prepare in advance for renovations
If you intend to construct a home addition or adjacent structure, consider the materials that will be utilized. Wooden structures are typically more expensive to insure due to their high flammability. In contrast, cement or steel-framed structures will be less expensive because they are less likely to be destroyed by fire or severe weather.
The insurance costs associated with the construction of a swimming pool are an additional factor that most homeowners neglect to consider. In fact, pools and other potentially dangerous devices (such as trampolines) can increase annual insurance premiums by 10% or more.
Repay your mortgage
Obviously, this is easier said than done, but the premiums of homeowners who own their homes outright will likely decrease. Why? The insurance company believes that if you own a property in its entirety, you will take better care of it.
Perform routine policy evaluations and comparisons
Regardless of the initial price quoted, you should do some comparison shopping, including a search for group coverage options available through credit or trade unions, employers, or association memberships. And after purchasing a policy, investors should compare the costs of other insurance policies at least once per year. In addition, they should review their current policy and make note of any changes that may have occurred that could result in a reduction in their premiums.
For instance, you may have disassembled the trampoline, paid off your mortgage, or installed an advanced sprinkler system. If this is the case, simply informing the insurance company of the change(s) and providing proof in the form of photographs and/or receipts could result in a substantial reduction in insurance premiums. Van Jura states that some businesses are eligible for tax credits for complete plumbing, electrical, heating, and roofing upgrades. Usually, loyalty pays off. With some insurers, the longer you remain a customer, the lower your premium or deductible may become.
In order to determine if you have sufficient coverage to replace your belongings, you should conduct periodic evaluations of your most valuable items.
Look for neighbourhood changes that could result in lower rates. For instance, the installation of a fire hydrant within 100 feet of the residence or the construction of a fire substation in close proximity to the property may result in a reduction in premiums.
How to Evaluate Home Insurance Providers
Here is a checklist of search and shopping tips for locating an insurance provider.
1. Evaluate state-level prices and insurers
When it comes to insurance, you should ensure that the provider you choose is legitimate and creditworthy. Visit the website of your state's Department of Insurance to learn the rating of each home insurance company licensed to do business in your state, as well as any consumer complaints filed against the company. The website should also include the average cost of homeowner's insurance in various counties and cities.
2. Do a company health check
The top credit agencies (such as A.M. Best, Moody's, J.D. Power, and Standard & Poor's) and the websites of the National Association of Insurance Commissioners and Weiss Research offer ratings for home insurance companies. These websites monitor consumer complaints against companies, as well as general customer feedback, the processing of claims, and other information. In some instances, these websites also rate the financial health of a home insurance company to determine whether the company can pay insurance claims.
3. Evaluate the claims response
Following a significant loss, the burden of paying out-of-pocket for home repairs and waiting for reimbursement from your insurer might place your family in a difficult financial position. Actually number of insurers are outsourcing core functions, such as claims processing.
Find out whether licensed adjusters or third-party call centers will handle your claims calls before purchasing a policy. Mark Galante, president of field operations PURE Group of Insurance Companies, says, "Your agent should be capable of providing feedback on his or her experience with a carrier, as well as its market reputation." "Seek out a carrier with a proven track record of fair, timely settlements, and be sure to understand your insurer's position on holdback provisions, which is when an insurance company withholds a portion of its payment until a homeowner can demonstrate that repairs have begun."
4. Current Policyholder Contentment
Every business will claim to have superior claims service. Ask your agent or a company representative about the insurer's retention rate, or the percentage of policyholders who renew annually. Numerous businesses report retention rates between 80 and 90 percent. You can also find customer satisfaction data in annual reports, online reviews, and traditional testimonials from reputable individuals.
5. Get Multiple Quotes
Obtaining multiple quotes is important when shopping for any type of insurance; moreover, it is especially important for homeowner's insurance because coverage needs can vary so widely. Comparing several businesses will yield the best results overall.
How many bids should you obtain? About five will give you a good idea of what people are offering and give you negotiating leverage. Inquire of insurers with whom you already have a relationship for a quote before soliciting estimates from other providers. As previously stated, a carrier with whom you are already doing business (for your auto, boat, etc.) may offer better rates because you are already a customer.
Some businesses offer discounts to senior citizens and people who work from home. The rationale is that both of these groups tend to be present more frequently, making the home less susceptible to burglary.
6. Look beyond price
The annual premium often influences the decision to purchase a home insurance policy, but price alone should not be the deciding factor. According to Bank, no two insurers use identical policy forms and endorsements, and policy language can vary greatly. Even when you believe you are comparing apples to apples, there is typically more to consider; therefore, you should compare coverages and limits.
7. Communicate with a Real Person
Stauffer believes that the best way to obtain insurance quotes is to go directly to the insurance companies or to speak with an independent agent who works with multiple companies, as opposed to a traditional "captive" insurance agent or financial planner who works for only one home insurance company. Keep in mind, however, that "a broker authorized to sell for multiple companies frequently attaches their own fees to policies and policy renewals." This could incur additional costs of hundreds per year, he notes.
The bank encourages consumers to inquire about their options in great detail. You should compare or evaluate various deductible scenarios to determine whether it makes sense to go for a higher deductible and self-insurance.
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