Your home is your castle, so the saying goes. And you’re going to want to protect it. Homeowners insurance can give you just the protection you need. It provides coverage if your home is damaged or destroyed. It also covers your family’s possessions and provides you with compensation for liability claims, medical expenses, and other expenditures that result from property damage and bodily injury suffered by others.
You may need homeowners insurance because your mortgage lender requires it. But even if you own your home outright, you still need homeowners insurance to protect that which you can’t afford to lose. It’s really that simple. After all, you’ve spent years building up a solid financial foundation for you and your family. Without homeowners insurance, all of that hard work can go down the drain in a matter of minutes when, for example, a tornado devastates your house, a burglar robs and vandalizes your home, your dog bites and severely injures your neighbor, or your mail carrier slips on your front steps and breaks his leg.
Property Coverage
The main purpose of homeowners insurance is to protect your home and other structures, like a shed or detached garage. Your policy will cover not only the cost of the damage (the exact amount depends on your policy) but also your living expenses (up to a limit) while you wait for your home to be repaired.
In addition to protecting your home, the typical homeowners policy covers your personal property, both on and off premises. Your personal property consists of the contents inside your home (e.g., furniture, appliances, clothing, jewelry) as well as outdoor items (e.g., sporting equipment, lawn tools). It’s important to note that homeowners policies set specific dollar limits for certain types of personal property (e.g., jewelry, coins).
Although policies vary, a typical homeowners policy provides coverage for damage to property caused by:
- Fire and lightning
- Windstorm and hail
- Explosions
- Theft or vandalism
- Vehicles
- Smoke
- Falling objects
- Weight of ice, snow, and sleet
- Freezing of plumbing, heating, or air conditioning system
- Riots
But be aware that homeowners insurance does not cover a wide variety of perils (e.g., flood, earthquake damage). You may need to purchase an endorsement or separate insurance policy to ensure adequate coverage in these instances.
When reimbursing you for a loss, insurance companies use one of two methods to determine the value of property:
Replacement cost: This pays you the cost of replacing damaged property, with no deduction for depreciation, but with a maximum dollar amount.
Actual cash value: This pays you an amount equal to the replacement value of damaged property minus a depreciation allowance.
Keep in mind that before an insurance company reimburses you for a loss, you’ll need to satisfy a deductible.
Liability Coverage
In addition to insuring your property, the typical homeowners policy includes liability protection that provides coverage for damages caused by your negligence. Medical payments to third parties and your legal costs for any lawsuits brought against you are also included. Most homeowners policies provide a standard amount of liability coverage (usually $100,000) per accident.
Purchasing Homeowners Insurance
Homeowners insurance policies are written individually, typically at the time you purchase a home or when you take out a mortgage on a home. For the most part, you’ll want to purchase enough property coverage to cover the replacement cost of your home and its contents. The amount of liability coverage you’ll need to purchase will depend on the assets you would like to protect (e.g., home, car, investments).
The cost of homeowners insurance depends on the amount of your coverage, any endorsements you add to the policy, and policy deductibles. But since premiums for similar policies vary from company to company, it pays to shop around and compare rates.
Coinsurance
The coinsurance clause of your homeowners policy requires you to carry coverage of at least 80 percent of your home’s total value if you want to receive full replacement cost for any losses–partial or full–you suffer. If you don’t insure your home for at least 80 percent of its value, you face a coinsurance penalty and coverage for only a percentage of the loss you suffer. Insurance companies insert this clause to discourage policyholders from purchasing coverage of considerably less than the full value of their homes. Without it, policyholders might gamble that they will only suffer small losses and thus purchase insurance with low coverage limits; the insurance companies then would lose money by paying out full replacement cost.
There is a formula for calculating the amount you will recover for a loss if you carry insurance for less than 80 percent of your home’s overall replacement cost:
Your Coverage Limit/Value of Your Property x 80% x Amount of Loss = Insurance Co. Payment
For example, Hal owns a home valued at $10 million. He decides to carry homeowners insurance for $5 million on his home. A fire occurs in his $1 million kitchen and completely destroys it. According to the formula, he would receive $400,000 from his insurance company. The calculations are as follows:
$5 million coverage limit/$10 million x 80% x $1 million loss = 5/10 x .80 x $1 million = $400,000
Hal owns a home valued at $10 million and decides to carry homeowners insurance for $8 million on his home. A fire occurs in his $1 million kitchen and completely destroys it. According to the formula, he would receive $640,000 from his insurance company. The calculations are as follows:
$8 million coverage limit/$10 million x 80% x $1 million loss = .64 x $1 million = $640,000
If your home’s value increases due to inflation or improvements you make, you need to purchase additional coverage in order to maintain the 80 percent overall coverage limit for full compensation for losses. You can do so without repeatedly purchasing additional coverage by purchasing one of two endorsements: an Inflation Guard Endorsement or a Replacement Cost Endorsement.
At Henssler Financial we believe you should Live Ready, which includes understanding how your home is insured. If you have questions, the insurance experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures
Forefield disclosure: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
