Home insurance: Boring but important

Posted by on April 7th, 2016


Every person who has a home mortgage or has any plans to get one will be required by their lender to purchase homeowners insurance.

Even people who own their homes outright should probably have at least some coverage.

For a new homeowner, home insurance can seem a tedious portion of an otherwise exciting home buying adventure.

Admittedly, home insurance is pretty straightforward, and hopefully, it goes unused.

However, it is important to understand insurance basics to better evaluate your buying options. If the need to make a claim ever arises, it can help homeowners understand coverage limitations, their rights as a policyholder and future courses of action.

A new homeowner should evaluate choices diligently before selecting a policy, and it behooves experienced homeowners to re-evaluate coverage at least once a year.

Every home insurance policy is a little different – but all share three basic features – premiums, deductibles and limits of coverage.

Comes at a premium

The premium is the amount the insured pays for coverage on the home or item.

Premiums for all types of insurance are based on the level of risk assumed by the insurance company. The process for making that calculation is called underwriting

Underwriters use actuarial tables compiled from vast stores of data to determine a premium reflecting the likelihood of an applicant making a future claim. Today, much of the underwriting process is automated.

The deductible is the amount of money the insured agrees pays out of pocket before the insurance kicks in.

One way to decrease premiums is to offer to pay a higher deductible if and when the insured item incurs damage or loss.

In general, when the deductible amount rises, the premium will decrease. The reverse – higher premium, lower deductible – is also true.

Know your limits

The limit of coverage is the maximum amount the insurance company will pay on a claim – set for each primary component of a homeowner policy – structure, personal property, and liability.

The structure component of the home policy refers to the building itself, and for mortgaged properties, must at least cover replacement cost, the amount needed to completely rebuild or repair the structure.

Now it’s personal

Most insurance policies only cover replacement cost for the structure, and only cover actual cash value (ACV) of personal property. That means insurers factor in depreciation to determine the overall amount of the loss. Most insurers also offer replacement cost coverage for personal property as an option.

While an ACV policy is a way for homeowners to save money up front on insurance premiums, when losses occur, it results in more out-of-pocket expense.

Liable to care

The liability portion refers to coverage of things that are the personal fault of the homeowner – specifically causing bodily injury or property damage to others.

Liability insurance generally pays for court costs, attorney fees, and settlements.

Additional limits:

Three additional outlined coverages on your home policy carry separate limits, automatically determined as a percentage of the dwelling coverage.

“Other structure” covers things like pools, sheds and fences. “Loss of use,” covers living expenses like hotel fees in the event a home is uninhabitable during repair or replacement. “Medical expenses” reimburses the medical expenses of guests injured on the property, regardless of fault.

At your peril

Every homeowner policy spells out the “perils” under which a home or property will be covered. Coverage can be provided from “all perils” or “named perils.” Examples of perils include hurricane, fire, windstorms, or water damage.

Say a homeowner is concerned about hail, windstorms and fire, but isn’t too concerned about hurricanes or floods.

As such, they may opt for a less expensive “named peril” policy, which delineates exactly what sort of event is covered, and excludes what isn’t.

All peril, also known as “broad coverage,” may sound like it covers everything. It really doesn’t.  However the insurer is obligated to specifically list what is excluded.

Be sure to know the exclusions. If the broad policy doesn’t include things you might see as a future peril, a “named peril” policy allows you to fill in those specific holes.

Well, isn’t that special

Insurance companies will insure practically anything – providing “specialty insurance” based on their perceived risk they will ever have to pay a claim.

It is true that some insurers have collected premiums on exorbitant policies to cover certain celebrity body parts in the event of damage or loss – including model Heidi Klum’s legs, rocker Keith Richards’ middle finger and actress Jennifer Lopez’ derriere.

If that weren’t special enough, more than $10 million in alien abduction insurance has been written across the nation.

Homeowners can get specialty insurance for their homes and the property within as well.

Finding out insurance doesn’t cover replacement of a one-of-a-kind item can add insult to injury, so many homeowners select specialty policies to cover things like antique vehicles, recreational vehicles, watercraft, and ATVs.

Specialty coverage is also available for seasonal and vacation homes, vacant homes, landlord or rental properties, older and low-value homes.

Ensure you are insured

The fact is, insurance is a gambler’s game. Always has been, and always will be.

Insurance companies, like Las Vegas bookmakers, know all the facts about the likelihood they will have to pay off. They are betting you will not need to make a claim, and you are betting you will.

The only difference between sports books and insurance companies is, you are hoping they win.

Insurance can be a difficult topic to understand. Knowing the basics helps determine the best coverage, and eventually may help choose an insurance agent working in the homeowner’s best interest.