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Do You Have Adequate Homeowner’s Insurance? 10 Things You Should Know
Congrats - you bought a house! Before your realtor hands over the keys, make sure you understand the ins and outs of your homeowner’s insurance policy.
Not sure what kind of policy you need? Confused about the difference between replacement coverage and coverage of the market value of your home? You’re not alone.
According to a 2016 survey from Marshall & Swift/Boeckh, up to 60% of American homeowners have underinsured their property by about 17%.
“For a $200,000 home, that would equate to a shortfall of $34,000 in much-needed coverage,” explains Caitlin Bronson at Insurance Business America.
Don’t let this happen to you. We’re breaking down the essentials of any homeowner’s insurance policy worth its salt below:
1. One Size Doesn’t Fit All
Unlike your average car insurance policy, homeowner’s insurance policies vary wildly depending on the form of insurance you purchase.
Whether you draw up a policy using the Basic Form, which protects against fire, theft, and vandalism, or the Broad Form, which provides extra assurances against electrical and water damage, work closely with your insurance agent to articulate your needs and protect your assets.
Both mobile homes and older homes fall into different insurance categories, so keep this in mind as you draw up all the paperwork.
Need a breakdown of the basic insurance categories? Check out this helpful guide from esurance.com.
2. Common Coverage
Most homeowner’s policies, like the Basic or Broad forms, will cover common mishaps - but it all depends on what kinds of risks are named in your coverage.
“A named peril policy is less expensive and covers only what is listed,” explains Janet Thomson at Curbed. “So if the policy doesn’t explicitly state that it covers tornados, you won’t be covered if your home is damaged by a tornado.”
Similarly, an all-risk policy covers all risks except those named in the document. Often this includes catastrophic and unpredictable natural disasters like floods and earthquakes, which require additional policies.
Another area that’s often underinsured? Personal liability for accidents that occur on your property, says Sonja Penner at WEA Member Benefits.
“Your teenager beans someone with a baseball while at the park causing eye damage,” Penner writes. “Your runaway grocery cart causes someone to fall and break a hip. Accidents yes, but the reality is that you could be held financially responsible in any one of these situations, and each could easily exceed $100,000.”
Ask your broker about how much liability coverage is in your policy.
3. Location Is Everything
As you were looking for a property, you considered the strength of your local school district and the length of your commute. But you probably weren’t thinking about how location could affect your insurance policy.
Live in an area that occasionally experiences flash flooding? Settling down on the plains, where tornadoes are more common?
You’ll probably have to re-think your policy. This is especially true for those who live on the coast, says Loretta Worters, Insurance Information Institute’s vice president of communications.
“Because of the increased risk of catastrophic weather events resulting in claims, it will generally cost more to insure,” Worters told Realtor.com.
Something to keep in mind if you’re eyeing a coastal vacation property!
4. Find a CLUE
Unlike other commonly-insured items - your car, for example - your home’s insurance claims are collected in a database called the Comprehensive Loss Underwriting Exchange, or CLUE.
“[Insurers] look at the claims history to see if the person applying for insurance hasn’t disclosed a certain condition or indicator of how the property is being maintained, or if there are several instances of the same type of loss,” explains Robert Passmore, a personal policy expert for the Property Casualty Insurers Association of America at Bankrate.com.
As a homeowner, you can use CLUE to learn more about your property’s insurance history and inform your decisions about coverage, too.
Find out about leaky pipes or the potential pitfalls of your location, so you can better estimate your insurance needs.
5. Shop Around
As you would with any major purchase, it’s important to consider your options when it comes to homeowner’s insurance policies, too.
“Shop for value, not necessarily rock-bottom price,” advises personal finance expert Abby Hayes at U.S. News & World Report. “Since you'll mainly deal with insurance companies during times of disaster, make sure the company you choose has great customer service reviews.”
Once you narrow down your choice, make sure you pick the right insurance agent for you, too, suggests Allison Kade at LearnVest.
“Before committing to a policy, take the time to research an agent whom you trust—preferably one with good reviews online or via a personal recommendation,” Kade writes.
A positive adjuster who’s easy to work with will make all the difference if you ever have to file a claim.
6. Work with Your Mortgage Broker
As you were shopping for your new home, you most likely estimated your monthly mortgage payments to include a homeowner’s policy.
“Setting up an escrow account with your lender could result in you being offered a lower interest rate on your loan, which can bring substantial savings over the long haul,” Joe Chatham, founder of Chatham Mortgage Partners, explained to Bankrate.com.
Because you’re setting aside a predetermined amount each month in an escrow account, banks feel more confident in your ability to pay back your loan - so they’ll cut you a break on interest.
7. Maintenance Matters
Is your new home outfitted with new fire alarms? Has a previous owner recently replaced the roof or plumbing?
Any of these upgrades could help you save money on your policy, says Kade.
“According to insuranceagents.com, you can reduce your premium by about 5% if you install something as a simple as a deadbolt, and up 15-20% for a burglar alarm system,” reports Kade at LearnVest.
That’s because preventative measures - while simple - reduce the chance for risk in the eyes of your insurer.
8. Disaster Relief
Unlike common mishaps like fire or theft, you won’t find coverage for natural disasters like flooding and earthquakes in your average policy.
According to Worters, you should especially consider purchasing flood insurance - even if you don’t live near the coast or a flood plain.
“Ninety percent of all natural disasters in the U.S. involve flooding,” Worters explained to Realtor.com. “However, 25% to 30% of all paid losses for flooding are in areas not officially designated as special flood hazard zones.”
Don’t get caught off guard by a major storm or other unforeseen natural disaster - especially since flood insurance only costs about $700 per year.
9. Replacement Value
No matter what price you closed on, you’ll want to insure your property for more than it’s worth, advises Meghan Melendez, a personal accounts manager for Abram Interstate Insurance Services.
“To this day, I can’t tell you how many agents don’t run replacement cost estimates and when I mention they need to be doing that, for their own protection, it’s an alarm for them,” Melendez explained to Insurance Business America. “An agent that is running off a referral or using the value or sale price of the property rather than actual rebuilding costs could be insuring the property incorrectly.”
Make sure your insurance agent understands the ins and outs of replacement value, so you’re properly covered.
10. A Note About Deductibles
While it may seem counterintuitive, a homeowners insurance policy with a high deductible could save you a bundle in the long term.
Since a deductible represents how much money you’re willing to pay out-of-pocket should something bad happen, you can choose your deductible amount based on your savings and income.
“What you want is coverage for the risks that you can’t pay for yourself,” Jack M. Guttentag, who runs MortgageProfessor.com, told Forbes.
For some families, that number could be relatively high - and a high deductible means big savings on your policy.
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