Always ask the right questions about your home insurance
Always ask the right questions about your home insurance
10 second overview: This is a 3-part series navigating the complexities of home insurance. In part 1 of this series, we looked at the essential questions every homeowner should ask about their home insurance policy. Then, in part 2 we explored the potential risks and liabilities homeowners face and which ones are generally covered by home insurance. In part 3m SmartCitti's insurance expert Mark Chappell sheds light on the levels of homeowner's insurance coverage to keep in mind when selecting, renewing, or upgrading your policy.
Having the right kind of homeowners insurance can be a lifesaver. In the US, home insurance is designated from HO-1 through HO-5 which provide varying levels of cover from basic to premium. However, it's important to understand that the coverage you get within these 5 levels (HO-1 TO HO-5) generally come in 3 basic kinds namely, Guaranteed (or extended) Replacement Cost/Value, Replacement Cost, and Actual Cash Value. According to Mark, our insurance expert, you can further customize or enhance your policy's coverage by adding optional endorsements as needed.
Key question: “What is minimal coverage and what does it actually cover?”
Minimal coverage refers to what a homeowner can expect to get at minimum irrespective of their chosen level of home insurance. At minimum, all home insurance policies include some kind of coverage for valuables lost to theft, replacement cost for the home and items damaged within the home, and coverage for liabilities ranging from minor repair costs to potentially expensive medical and legal bills.
Key question: “What valuables are covered by homeowner's insurance?”
Valuables covered by home insurance include furs, firearms, watches, silverware, jewelry, collectible coins, and gold, and in most cases, the minimum coverage could give you less than $1000. For jewelry, a standard policy provides $1,000 for theft but some companies will provide limits up to $5,000.
Key question: “Will my insurance cover the full worth of my valuables?”
According to SmartCitti’s expert, it's important for homeowners to understand what their valuables are worth and to sign up for policy packages which can provide commensurate coverage. It would be unwise to have a policy which provides a limit of $1,000 when the valuables you own and store in your home are worth 10 times that policy limit.
Key question: “How does my policy determine how much settlement I get for lost or damaged items?”
Replacement cost refers to the cost of replacing any items lost or damaged in a home, including the cost of rebuilding or buying a new home in the event of total property damage. Most policies determine the settlement amount on an actual cash-value basis which takes depreciation into consideration.
As Mark Chappell explains it, this could be a problem down the line because a property purchased at $400,000 could be worth less than $200,000 today due to depreciation and the homeowner in this situation would be stuck with a settlement amount far less than what they paid out when they built or purchased their property going by the actual cash-value formula.
The good news is that replacement cost endorsements can be added to a policy so that replacement claims are paid without factoring in depreciation.
Key questions: “What is the liability limit for my policy?”
As explained in part 2 of this series, liabilities vary and depending on the kind of insurance policy purchased, a homeowner could be stuck having to pay significant liabilities out-of-pocket. While all home insurance policies have basic coverage for liabilities, it helps to increase the liability limit on your policy as basic liability coverage for home insurance will not cover things like medical and legal bills which can be very expensive.
Insurance expert Mark Chappell stresses that, "Liability for the medical or legal expenses of third parties can be astronomical, and to protect your financial future as a homeowner, it is worthwhile to invest in increasing your liability policy limits."
This level offers the most extensive coverage, and should the worst happen, homeowners would be fully covered. For most insurance providers, this is the recommended option for because it covers the entire cost of rebuilding a home if necessary.
Key question: “Should I choose Guaranteed insurance that covers the cost of my property, the value of my mortgage or the current value of my home?”
As SmartCitti’s insurance expert Mark explains, it is crucial for homeowners to understand that if the need arises, they will need to rebuild their home at current market prices, rather than the original cost of building or purchasing the property. So, choosing Guaranteed Insurance that's pegged to the original cost of the property could put the homeowner at risk of paying a significant portion of the replacement cost out-of-pocket.
He also adds that, "While it might be tempting to think you only need insurance that covers the value of your mortgage, that usually works out to around 85% - 90% of the current value of your home, which could also leave you with non-trivial out-of-pocket expenses."
Key question: “Is replacement cost insurance right for me?”
Replacement cost insurance pays out the original value of your home and possessions based on what they cost back when they were purchased. This means that if you bought your home for say, $400,000, and your goods such as all your furniture and electrical items cost you $100,000 to purchase, then you’d be covered for $500,000 in total.
However, keep in mind that if you need to rebuild your home and the price of building labor and materials have gone up by $100,000 since you purchased the property, then you wouldn’t be covered for that extra cost.
Key question: “Is actual cash-value home insurance right for me?”
This level of coverage would pay out the total value of your home and items as they are today, considering the effect of depreciation. Put simply, if your television cost $1,000 to buy but is now worth $200 because it has devalued over time, this type of insurance policy would pay out $200 to replace your television, rather than the $1,000 it originally cost you to purchase.
The same logic would also apply to the cost of rebuilding your home. If you paid $400,000 for your home five years ago but the property market has since dipped and it’s currently valued at $250,000, then that’s the amount your insurance provider would pay out to you.
This kind of coverage could leave you financially worse of in the long run because you'd be unable to rebuild your home as it was without paying out-of-pocket and choosing to rely on the insurance payout alone could mean reducing your standard of living.
So, as Mark Chappell stresses, homeowners need to choose their policies wisely!
If you missed it, read PART 1 and PART 2 of this series now.