Homeowners Insurance Basics: What Kind of Policy Do You Need?

Like car insurance, a homeowners insurance policy is a necessity for every owner. Not only will it protect you in the event of theft, fire, or other disaster, but it offers protection if someone is injured on your property. Unfortunately, many people discover too late that they’re underinsured. Use my basic guide to determine how much insurance to buy and which policy elements to look for. Once you know what you need, use a company like NetQuote to request several home insurance quotes and then compare the offers.

Policy Types
If you have a single family home, then you will most likely need an HO-3 policy, which covers the structure, contents, and liability. If you have a condo, then you’ll need an HO-6 policy. It covers the contents, structures in the section you own, and possibly some liability. The building’s insurance, purchased through the homeowner’s association takes precedence for most structural claims. Your HOA bylaws can guide you in buying condo insurance.

Additional Policy Elements
When shopping for a policy, make sure the following elements are included, or at least discussed, before you make a decision about which policy is best.

Replacement Coverage
Replacement coverage covers the actual replacement cost in a total loss. Any other form of coverage may not be enough if local building costs have risen since you bought the home. If you can afford it, buy 100% replacement coverage. 90% coverage is a minimum. Contact a local custom contractor to get an estimate of the replacement cost for your home. Some insurers cap replacement coverage at 100-120% of the current value, but look for one without a cap in case building costs rise faster than values.

Inflation Guard
An inflation guard increases your policy annually based on the local inflation rate so that your coverage stays current with the value.

Ordinance-and-Law Coverage
If your home is more than ten years old, it’s probably not fully compliant with current building codes. Ordinance-and-law coverage will cover the cost of bringing the home into compliance.

Some liability coverage is included in the basic policy, but you can choose to add more. Liability covers you if there is accident on your property.

Displacement insurance covers the costs you incur if you have to live elsewhere while your home is rebuilt after a fire, floor, or disaster. Usually the minimum coverage is sufficient.

Home Business Rider
If you operate a business out of your home, you need a home business rider to cover your business equipment. If you see clients in your home, you should also get a separate business liability policy.

Valuables Riders
In most cases, computers, electronics, instruments, artwork, and jewelry aren’t covered by your basic policy. Have artwork or jewelry appraised and buy a rider for that amount. You can rely on receipts for coverage of computers, electronics, and instruments (assuming you don’t have a Stradivarius violin.)

Even if you don’t live in a flood plain, you may want to buy flood insurance. Although most homeowners policies will cover water damage due to wind-driven rain, they may not cover the damage if that rain causes a landslide or ground flooding. If you live in a flood-prone region, you can buy flood insurance from FEMA.

If you live in California, you need earthquake insurance. You’ll have to buy it from the California Earthquake Authority, but you can usually do so through your homeowners insurance company.

Wise Homeowners Insurance Use
Shop Carefully
Before you buy insurance, investigate several companies with your state insurance commission and shop around for competing offers. The cheapest may not be the best – it could indicate stingy coverage or slow response times.

Double-Check the Fine Print
Before agreeing to the policy, ensure that the above elements are included. You should also verify that it covers the replacement cost of the contents, rather than the depreciated value.

Keep Good Records
Save receipts for big-ticket items, a home inventory, and photos or a home inventory video in a safe-deposit box. Update it annually.

Avoid Making Claims
Avoid making small claims, especially if they’re lower than your deductible. Your insurance could be cancelled if you make more than two claims in three years.

Don’t Buy a Big Dog
Due to bites, some insurance companies will cancel policies or refuse to cover owners of certain dog breeds. Before you buy this kind of dog, make sure your policy will still cover you.

Your homeowners insurance policy is designed to help you recover from theft or the loss of your home. If you use it wisely, you won’t have to worry that your policy will be cancelled. If you keep careful records and shop carefully to find a good insurance company, you’ll also have an easier time making a claim when the time comes. Although it’s tempting to skimp, buy the best policy you can. You don’t want to discover you don’t have enough coverage if your home is wiped out in a fire.

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