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10 things you need to know about homeowners insurance

Once you make a commitment to purchase a home, begin shopping for your homeowners insurance. Your policy must be effective on your closing day. Depending on the mortgage lender, you will be asked to bring a paid homeowners policy receipt to the closing table, or pay during the closing process.

Here are 10 important things to consider when shopping for your policy:

1. Buy the right insurance. There are four aspects to consider when insuring your home, says Jeanne Salvatore, vice president for consumer affairs with the Insurance Information Institute, a nonprofit industry trade group. You are insuring the home's structure, your belongings, protection for your liability to others and coverage of living expenses should you be forced out. "If there's a disaster, you want to be able to rebuild your house and replace everything in it. And you need enough liability coverage to protect you in case you get sued," she explains. Living expenses would cover the cost of making the house livable or living elsewhere while your home is being repaired or rebuilt.

2. Get replacement value insurance. Face it, this is an insurance policy, not a garage sale. You don't really care how much your possessions would fetch on the open market -- the so-called "cash value" or "fair market value." You want to be able to replace everything you lost with similar, new items. And make sure that your policy spells out that both your home and its contents are covered by replacement-value insurance.

When it comes to replacing the home itself, look for extended or guaranteed-replacement-value coverage. Guaranteed replacement, which covers rebuilding no matter what the cost, is not offered much any more, says Don Griffin, assistant vice president of commercial lines for the Property Casualty Insurers Association of America (PCI). Many companies offer extended-replacement-value insurance, which will cover up to 100 percent of the value of the home, plus a certain percentage to cover rebuilding the home in today's market.

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3. Understand the claims process. Two policies can promise the same amount of coverage, but can be vastly different when it comes to making you whole after a loss. Have the agent explain exactly how claims are handled, especially when it comes to writing you a check. Do you receive your entire claim upfront, or just a fraction? Does the company pay you for all the things you've lost, or only those things that you replace?

Some policies will give you the cash value of your possessions right after a loss, but wait to cover the replacement value until after you've replaced your items -- and have the receipts to prove it. This could be a problem if you're wiped out and have no cash reserves.

Equally important is the timetable on replacement. If you go from living in a five-bedroom home to sleeping in a motel room with four kids and a dog, you might not want to go on a shopping spree right away. How long do you have to replace your things?

4. Take inventory. Filing a claim involves two steps -- proving you owned certain items and verifying their worth. This is a lot easier to do when you still have your things. Go through your home with a video camera (rent one if you don't already have one.) Walk through each room, do a quick sweep and get everything you own on tape. Don't forget the attic, basement, closets and off site storage locker, if you have one. Or take the low-tech method: Make a list and shoot a few rolls of film. Stash your video or photos in a safe-deposit box with a copy of your policy. If you keep your inventory at home, make a second copy to give to a friend or keep at the office.

5. Buy floaters. Many policies for homeowners and renters limit the amount you can collect on some big-ticket items -- usually things such as computer equipment, jewelry, furs and fine collectibles -- to a fraction of the replacement value. If this is the case, you need to pick up a special policy known as a "floater" or "endorsement" for each of those items. A floater will also reimburse you if you simply lose the article. In the case of something new, save the bill of sale with your inventory, and fax a copy to your insurance agent. If the item is older, have an appraisal done. Again, save one copy and send another to your agent. That way, you'll never have to worry about proving you owned an item, and there never will be a dispute over what it's really worth.

6. Keep pace with inflation. This is especially important with a homeowners policy. It may have cost you $100,000 to build your home 10 years ago, but it might cost $120,000 to replace it today. "Many companies have an inflation guard, which covers the increasing cost of rebuilding," Salvatore says. When your policy comes up for renewal, talk to your agent to verify that your coverage amounts are still realistic. And when you make an improvement, add it to the total.

7. If you own a condo or co-op, protect your property. Make sure that the condo board or association has a policy that covers the common areas, and get a copy. Also look at the association bylaws to find out what portions of the home you must cover. "It's usually from the drywall in," Griffin says.

Since condo owners need their contents policy to cover things such as cabinets and fixtures, they need a bit more insurance than the typical renter. Sometimes you get a price break if you go with the same company that wrote the policy for the condo association.

"Plus they are familiar with what they cover, so they know what to sell you," Griffin says.

You also may want to consider assessment coverage. If the condo association's policy is not large enough to cover a loss, or if there is a hefty deductible, the association will split the additional costs among the members in the form of an assessment. With assessment coverage, your insurance company pays the tab.

8. Consider insurance for your area's common natural disasters. Granted, this is not for everyone. But if you live in an area prone to floods, earthquakes, tornados or hurricanes, it pays to know that most property policies do not cover these disasters. Depending on where you live, mortgage lenders may require you to carry hurricane, earthquake, windstorm or flood insurance before you close on the property.

9. Think about buying an umbrella policy. Liability insurance, which picks up the tab if someone gets hurt on your property or through the actions of your family members, tops out at $300,000 on most homeowners policies, according to Griffin. "But nobody sues for $300,000," he says. "That usually starts at $1 million." His recommendation: If you have assets, pick up an umbrella policy that would add extra liability coverage to your home and auto policy. "Umbrellas are cheap -- usually starting at about $200 to $350 a year."

10. After a life-changing event, call your agent. Getting married or divorced? Are the kids moving out -- or back in? The amount of insurance you need -- and the items you want to cover -- change over the years. Be sure you keep your policies and inventories up to date.

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: March 15, 2004
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