Homeowners insurance is similar to auto insurance in that people often shop for price and don’t consider what kind of coverage they are buying. This is a very dangerous way to buy this type of insurance because it’s filled with gaps and pitfalls that you have to be wary of.

If you’re like many people, your home is the biggest financial investment you’ll make. However, insuring the physical structure of the house is only a portion of what homeowners insurance can cover for you. And it’s a great deal, you can usually get a lot of coverage for a small price, so don’t hesitate to increase your coverage where needed.

Basic Coverage

There are a number of different coverages that homeowners insurance offers.

Coverage A – Coverage for the structure of your home – This pays to repair or rebuild your home if it is damaged or destroyed by fire, hurricane, wind, hail, lightning, or other disaster listed in your policy.

It’s very important that you cover at least 80% of the replacement cost of your home (to rebuild new). If your coverage is less than 80%, you will get a depreciated claim settlement. To be safe, you should insure 100% of the replacement cost of the home, though it’s not always easy to decide on that number. Insurance companies often have a formula which is used to estimate this cost (based on size, materials, etc.). If you choose to use this formula, make sure the company has all the correct information on the house for the most accurate estimate.

Also, some insurance companies offer a Home Replacement Guarantee. This is a great option! This guarantee will cover you should you discover at claim time that your full replacement cost is higher than you estimated. Since this risk is likely due to the difficulty in getting an accurate estimate, the Home Replacement Guarantee can be a big help. So be wary of insurance companies that don’t offer this coverage.

Coverage B – Coverage for the structure of detached buildings – This refers to detached garages, sheds, in-ground pools, etc. The usual coverage is 10% of the coverage on the home, which is automatic with the policy. This automatic coverage is often sufficient, but if you have a structure that you know is worth more than the 10%, you can purchase additional coverage.

Coverage C – Coverage for your personal property – This pays to replace the contents of your home if items are stolen, damaged, or destroyed by a covered risk. Most policies cover up to 70% of the amount of the coverage on your home. It’s important to buy the replacement cost option, which will cover replacing your belonging new instead of the depreciated cost of the items. If you need more than the automatic coverage, it can be purchased.

If you have specialty items (jewelry, electronics, antiques) or collectibles (stamps, coins, figurines), you may need a separate “rider” for those items. Consult with your homeowners insurance agent to confirm that your coverage is adequate.

The problem with this coverage comes at claim time. Even if you insure everything properly and have enough coverage, if your home is completely destroyed, will you be able to remember everything you had inside and also be able to prove you had it? Insurance companies aren’t going to payout for items you can’t remember you had, and often they will require proof. The solution to this problem is incredibly easy but we don’t think many people take to time to do it. Just take pictures or videotape the contents of your home. It doesn’t take long and it’s easy to update when you get new things. Don’t forget to open all the closets, cabinets, and drawers, and go through all the nooks and crannies of the house and garage. Of course, the key here is to keep the proof off site. Insurance companies will take videos or pictures as proof of your ownership and you won’t have to go through the incredibly stressful task of having to remember everything you owned when it’s gone.

Coverage D – Coverage for additional living expenses – If you are displaced from your home due to damage covered by A, B, and C, this coverage will help with the additional living expenses you may incur (hotels, dining out, etc.). You will get coverage based on a percentage of the coverage on your home, depending on the insurance company.

Coverage E – Coverage for liability protection – Covers you against lawsuits for bodily injury or property damage that you, family members, or your pets cause to other people, even if it’s not on your property. Liability limits generally start at $100,000. We generally recommend that your have at least $500,000 for better protection, but make sure to match your other liability limits on your auto insurance.

Coverage F – Coverage for medical payments – This covers the medical payments for someone injured on your property. It’s not as important as the other coverages, and if someone is seriously injured, you should be covered by your coverage E.

Dangers of Homeowners Insurance

Homeowners insurance policies are filled with exclusions and gaps. We’re not going to get into every one possible, but just know they exist and if you review your policy and are uncomfortable with what you see, talk with your insurance agent and see if you’re covered properly. A good agent will be able to tell you where your policy needs to be strengthened.

One exclusion we will mention because it’s important is for business use. If you have a home office and/or use any portion of your home or detached structures for business use, you will not be covered under your normal homeowners policy for property damage or liability! That’s incredibly important because some people may not realize that when they store some business equipment in the garage or keep inventory for a personal sales job, it may not be covered if lost or damaged. Make sure you talk to your agent about the risks you are taking on with a home business and what coverage you will need to protect yourself.

Another insurance option that compliments the auto and homeowners policies is called an umbrella policy, and this type of coverage can help you avoid the exclusions and gaps you otherwise may be open to. We’ll cover umbrella policies next week.