Prior to purchasing homeowner’s insurance, you need to honestly answer a few questions to make sure you but the correct type and amount of coverage. Although you should always seek the advice of a professional insurance agent when selecting coverages, you will ultimately need to give thought to the below questions as you go through the process.
1. DOES MY HOME HAVE A HISTORY OF INSURANCE CLAIMS OR DAMAGE?
If you are purchasing the home from a previous owner, you should request documentation reflecting whether the home has had any previous damage – such as floods, fires, sinkholes, or other incidents – and if so, whether this damage has been fully repaired. You should also request specific information as to whether the seller ever submitted any prior insurance claims regarding the property.
The more information you can gather, the better position you will be in to determine the necessary insurance coverage. Obviously, insuring a newer home with no previous claims or damage will be cheaper than insuring an older home, but older homes are definitely insurable as well.
2. HOW MUCH INSURANCE COVERAGE DO I NEED?
The best way to determine the replacement cost of your home is to have a home builder look at your home and provide an estimate of the cost to rebuild the home. Once you’ve determined your home’s replacement cost, you can then decide what level of protection you want to buy. In general, there are three levels of protection to consider:
– Actual Cash Value: This coverage provides payment for the depreciated value of your home and belongings. In general, the formula is Replacement Value minus Depreciation equals Actual Cash Value of your property.
– Replacement Cost: This coverage provides payment for what it would actually cost to replace your damaged property with a like kind and value. This coverage does not deduct for depreciation, and assumes that you would repair or replace your home up to its original condition.
– Guaranteed/Extended Replacement Cost: This coverage provides the most comprehensive protection available and will cover the cost to repair or rebuild your home, even if it’s higher than your policy limit. Some insurers will offer this level; however, it is usually limited to a maximum coverage of 20-25% over your policy limits.
Also, it does not make any sense to just purchase insurance coverage limits in an amount equal to your mortgage. By limiting your coverage to only the mortgage amount, you are only protecting the bank, and not protecting any equity you may have in the property.
3. WHAT ARE MY PERSONAL BELONGINGS WORTH?
There is a portion of your insurance policy that provides coverage for the personal possessions in your home. Although this coverage amount is usually calculated as a percentage of your Coverage A – Structural Coverage, you may consider adding additional coverage. If you have any items of exceptional financial worth, such a family heirloom, artwork, or high value jewelry, you should seek additional coverage amounts or insure these pieces separately. Some insurance companies charge extra for this additional coverage, but it can definitely be worth it after a loss.
As with the coverages for your home, there are two types of coverage for your personal property – Replacement Cost and Actual Cost Value. Please see our post regarding actual cash value and replacement cost for more information.
4. HOW MUCH OF A DEDUCTIBLE AM I COMFORTABLE WITH?
A deductible is the amount you’ll pay out of pocket before coverage kicks in. As with vehicle insurance, the higher the deductible, the lower your monthly insurance premiums will be. Therefore, you should carefully calculate how much of a loss you would be willing to absorb prior your insurance company paying the remainder of the claim. If you opt for a lower deductible, this means your insurer must cover more, and they’ll pass those costs on to you with higher premiums.
5. IS MY HOME IN A HIGH-RISK ZONE?
Certain geographic areas are deemed “High-Risk” due to the fact that these areas are more prone to natural disasters like hurricanes, floods, tornados, sinkholes, or other events. Your property could also be deemed High-Risk if the home is too far from the fire station or not up to current building codes. If your home is deemed High-Risk, you may need to add an addendum or rider to your policy to specifically cover these risks. As you can imagine, the insurance company will charge you higher premiums for providing coverage to High-Risk properties.
Although your insurance agent is sure to have other and more detailed questions to go over with you prior to binding coverage, the above questions will get you started in the right direction. As always, should you have any questions related to what may be covered under your insurance policy, please do not hesitate to contact us.