All homeowners insurance policies provide basic financial protection against losses arising from a fire, windstorm or theft. However, homeowner insurance policies can vary greatly, and if homeowners aren’t careful, they may find their claims denied when disaster strikes. So it is important to review the different options and decide what is right for you, according to the Insurance Information Institute (I.I.I.). Become your own advocate and take time to read your policies and don't just shove them in a drawer. Because life changes, many of us get married, have children, divorce, and because different life stages can have an impact on our insurance coverage, it is good to revisit this topic yearly.The New Year is a great time to review your policy.
Every year take the time to ask this basic question: How much homeowners insurance do I need?
The answer is that you need enough insurance to cover the following:
- The structure of your home.
- Your personal possessions.
- The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
- Your liability to others.
According to United Policyholders, here are a few questions homeowners can ask insurance agents when shopping for a homeowner’s insurance policy:
• What is the coverage for water damage from sewer or pipe problems?
• What is the coverage for any damage to the foundation – is it completely covered, limited or excluded completely?
• Will items be paid at “replacement value” or “actual cash value”?
The structure- You need enough insurance to cover the cost of rebuilding your home at current construction costs. Do not include the cost of the land. Do not base your rebuilding costs on the price you paid for your home. The cost of rebuilding may be more than the price you paid or could sell it for today.
Some banks require you to buy homeowners insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it is enough to cover the cost of rebuilding. If your mortgage is paid off, do not cancel your homeowners policy—it is the best way to protects your investment in your home.)
For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local builders association or insurance agent.
Factors that will determine the cost of rebuilding your home:
- Local construction costs
- The square footage of the structure
- The type of exterior wall construction–frame, masonry (brick or stone) or veneer
- The style of the house (ranch, colonial)
- The number of bathrooms and other rooms
- The type of roof and materials used
- Other structures on the premises such as garages, sheds
- Fireplaces, exterior trim and other special features like arched windows
- Whether the house, or parts of it like the kitchen, was custom built
- Improvements to your home, such as adding a second bathroom, enlarging the kitchen or other additions that have added value to your home
Replacement cost policies- Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation—the decrease in value due to age, wear and tear, and other factors.
Guaranteed or extended replacement cost coverage- After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.
An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.
Older homes-If you own an older home, you may have to buy a modified replacement cost policy rather than a standard replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls and wooden floors, with similar materials, the policy will pay for repairs using the standard building materials and construction techniques in use today.
Insurance companies differ greatly in how they insure older homes. Some will not insure older homes for the replacement cost because of the expense of recreating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for the replacement cost as long as the dwelling is in good condition.
If you cannot insure your home for the replacement cost or choose not to do so—in some cases, the cost of replacing a large old home is so high that you might not want to replace it with a house of the same size—make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.
Replacement Cost or Actual Cash Value. You can either insure your belongings for their actual cash value, which pays to replace your home or possessions minus a deduction for depreciation up to the limit of your policy. Or you can opt for replacement cost, which pays the actual cost of replacing your home or possessions (no deduction for depreciation) up to the limit of your policy.
Generally, the price of replacement cost coverage is about 10 percent more than that of actual cash value. If you need a flood insurance policy for your belongings, it is only available on an actual cash value basis.
Flood Insurance- Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance. If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis.
Liability to others-This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay.
Generally, most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Increasingly, it is recommended that homeowners consider purchasing at least $300,000 to $500,000 worth of coverage of liability protection.
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