The first time most people come into contact with the concept of homeowners insurance is as a child, playing The Game of Life. This Milton Bradley board game walks you through the journey of a traditional life: getting a job, getting married, buying a house, having kids, and retiring. When choosing a home by random draw, very few players opt into purchasing home insurance. What’s the worst that can happen? they think. Next thing they know, they land on a space requiring them to cough up thousands of dollars in play money due to an earthquake that strikes their fictional home. It goes without saying that the real deal is a lot more serious.
There are 4 parts to keep in mind while purchasing home insurance: the structure of the home, your personal possessions, any additional living expenses if your home is unlivable, and liability. Each of these features are extremely important to protecting your assets just in case anything goes wrong.
You want to keep your costs as low as possible, but you also want a good amount of protection on each of these 4 aspects of the home. Look at yourself as the Goldilocks of homeowners insurance, wanting not too much, not too little, but just enough.
Structure of the Home
The coverage on this protection should be equal to the value of the home based on its worth when you purchase this home insurance policy. There are 3 different options, depending on how much insurance you need based on personal factors:
Actual Cash Value (ACV): This provides the smallest amount of coverage needed. It covers the value of the home, minus depreciation. For example, if you bought new floor tiles for $6,000 in 2005 and an earthquake destroys them, your insurance company will not reimburse you the full $6,000 because the value of these floors have depreciated in value since their installment in 2005. Under this policy, your insurance company most likely won’t give you enough money to rebuild the home completely. Your premiums would be lower with this type of coverage, but you will pay more out of pocket for the damages, repairs, and rebuilding.
Replacement Cost (RCV): This policy pays the full cost for your home to be replaced. This coverage is often recommended for most people by most insurance companies, as it makes the most sense logically for a majority of Americans based on their location.
Guaranteed or Extended Replacement Cost: This type of coverage has the most expensive premiums, but it might be worth the splurge in certain geographical locations. This covers the rebuilding of the home even if the costs exceed the limits of your insurance policy. This is a great policy for people in locations with a higher risk for natural disaster – like Florida and California – because a following a disaster, the high demand for materials will cause the prices of building goods to increase. Following the $47.4 billion in damage following Hurricane Katrina in Louisiana, the prices of local building materials appreciated by up to 50%; this is one of the many instances in this country in which this type of insurance would have saved homeowners a great amount of money. If you live in a state with a high amount of property damage costs per square mile, you might want to consider the extended replacement option.
For this policy, you want your coverage to be equal to the total value of all the personal possessions you own. Homeowners insurance protects everything in the house and even many of the things you own outside the house. Cars are not included in this, as they should be covered by auto insurance instead. If your items are destroyed, stolen or vandalized, homeowners insurance on your possessions will cover the cost to repair or replace these items.
Make an inventory of everything you own, thinking of what you spent on them and how much it might cost to replace them. Most likely, the cost of these items will be approximately 75% of your house’s value, but if they cost significantly more or less, you should talk to an insurance agent to negotiate your costs for this policy.
Certain items are covered only up to certain amounts of money. If you have expensive items, you’ll need to purchase extra insurance. For instance, if you own a lot of expensive jewelry, Farmers has a Jewelry Floater, which covers the full value of all your jewelry.
Additional Living Expenses
This covers the costs of having to live outside of your home if it becomes unlivable or destroyed. With this type of coverage, your insurance company will pay for you to rent a place, as well as covering food costs if this rental doesn’t have a kitchen and the extra amount in gas you’d pay to drive to this temporary home. Most insurers set this coverage at 20% of your total coverage; unlike the others, you often don’t get a choice how much you’ll pay for this policy.
This type of coverage solves any expenses that come as a result of accidental injury of another person or damage of their property (excluding incidents that occur while driving a car). For instance, if your child breaks a neighbor’s belonging or your dog bites someone, your homeowners liability policy should cover it.
When deciding how much liability insurance to purchase, it’s best to look at all your assets. Your liability insurance should equal the amount of your assets; this will protect them in any lawsuits you may face. You should always opt for high limits on this premium, as liability insurance is often the cheapest part of your homeowners insurance and can make a big difference down the line.
In order to get the best homeowners insurance rates, check your quotes online. To protect your home and belongings against fire or natural disaster, an investment in homeowners insurance could save you money and stress in the future.