Personal property insurance: Are you covered?

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Having insurance to protect the structure of your home is important, but it’s equally important to have coverage for your personal belongings, like clothing, electronics and furniture. In the event of a fire or a break in, you don’t want to pay out of pocket to repair or replace stolen or damaged items.

Most homeowners insurance policies include personal property coverage, which is sometimes referred to as contents insurance. In this article, we’ll explain what personal property insurance covers, how much coverage you need and how much you can expect to pay.

What exactly does personal property insurance do?

Personal property insurance helps you pay to repair or replace your belongings if they get damaged or destroyed in a covered peril. After you meet your deductible, the insurance company will reimburse you for losses that are covered under your policy.

Insurance companies offer personal property insurance in different levels of coverage, which is the maximum amount they’ll reimburse you for a covered loss. When you purchase a policy, you can choose your level of coverage based on the total value of your items. Higher levels of coverage usually mean you’ll pay a higher premium.

Most personal property policies provide coverage for your belongings at 50-70 percent of your dwelling insurance. However, you could need less or more coverage depending on the value of your belongings.

What’s covered?

Your personal property policy covers all of your personal belongings, wherever you keep them. That includes in your house, yard, shed, car, garage and even in hotels when you travel. However, your items are only protected by covered losses. You can’t file a claim if your lawnmower breaks down or you want to upgrade your refrigerator.

While the basic amount of coverage is sufficient for some people, others might need to boost their coverage for added protection. Before purchasing a personal property insurance policy, figure out how much coverage you need based on the total value of your belongings and where you live. Raising your coverage limit will increase your rate, but it’s only a fraction of what it would cost if you had to pay out-of-pocket to replace your items.

Under the umbrella of personal property coverage are two policy options—open peril and named peril. It’s important to understand the differences between these policies and figure out which one makes sense for you.

Open peril policy

An open peril policy covers your personal belongings from any type of damage that is not explicitly written as an exclusion in your policy. Some of the situations that an open peril policy would cover include:

  • Accidentally breaking an appliance
  • An animal entering your home
  • Boiler explosions
  • Breaking your laptop
  • Damaging your stove after a kitchen fire
  • Losing valuable items
  • Plants getting destroyed after a storm
  • Replacing damaged patio furniture after a storm
  • Staining furniture
  • Tree falling on a play structure

However, open peril policies don’t cover every situation you might encounter. Most personal property insurance policies do not cover damages resulting from:

  • Any damage caused by earthquakes and floods
  • Cracking foundation
  • Faulty construction
  • Insect, vermin, rodent and pet damage
  • Mechanical breakdowns
  • Mold
  • Natural wear and tear
  • Rust and corrosion

Because you can submit a claim for almost anything, open peril policies can give you the most peace of mind. However, they are also more expensive than named peril policies.

Named peril policy

A named peril policy is the opposite of an open peril policy. If you have a named peril policy, the insurance company will only cover certain losses that are specifically stated in your insurance policy. Named perils usually include coverage for damage caused by things like:

  • Frozen pipes
  • Lightning causing a fire
  • Riots
  • Roof damage after a hail storm
  • Theft
  • Vandalism
  • Water damage
  • Wildfire

Similar to an open peril policy, there are certain losses that aren’t covered under named peril policy. These are typically the same as open peril policies, excluding damage from causes such as mold, earthquakes, wear and tear and rust.

For either policy, you’ll need to determine how much coverage you need. That will depend on the value of your items, where you live, how much risk you’re willing to take and the amount you can afford to pay if you had to replace your items.

For instance, if you live in an area that is prone to wildfires, you’ll be covered under a named peril policy. However, you’ll benefit from raising your coverage level because fire damage could potentially destroy your entire home and belongings.

Things to consider

When you file a claim for a covered loss, your insurance company will pay you after you’ve met your deductible. However, how much money you get is dependent on how your insurance policy reimburses you. This is where Actual Cash Value (ACV) versus Replacement Cash Value (RCV) comes into play.

If you have an ACV policy, you’ll get reimbursed for any losses with depreciation factored in. For example, if you bought a laptop for $1,000 five years ago, it’s now worth $500. If that laptop were damaged in a covered loss, the insurance company would give you $500 to replace it. ACV is used by default in most personal property policies.

On the other hand, an RCV policy doesn’t factor in depreciation. The insurance company will pay you to replace your damaged or destroyed items for the full value that you bought them for. If that $1,000 laptop gets destroyed, an RCV policy will pay you $1,000 to get a new one. Because RCV policies give you a better deal, they can be added for a higher premium.

How much should I expect to pay for PPI?

Most insurance providers include personal property coverage in every homeowners insurance policy. As of 2015, the average cost of homeowners insurance was $1,173 per year. However, certain factors might increase the price of your personal property coverage.

For instance, the default coverage level might be too low for your personal belongings, especially if you own valuables. If you have jewelry, art, furs, collectibles or pricey electronics, it’s a good idea to get an enhanced policy, which will raise your annual premium.

Additionally, your personal property insurance rate will vary based on whether you have an ACV or RCV policy. Remember that ACV policies are usually the default option and are cheaper. You can choose to change your policy to RCV, but you’ll pay more.

While your homeowners insurance might be expensive, there are ways you can save money on your premium. Here are some things you can do to lower the price of your personal property coverage:

  • Upgrade your home: If you own an older home, you can expect to pay more for your homeowners insurance. Old homes tend to be more likely to have claims. To save money, you can upgrade your appliances, replace the roof or install safety equipment like a security system.
    Improve your credit score: People with low credit scores tend to have higher homeowners insurance premiums. If you raise your credit score, your insurance provider might lower your annual rate.
  • Avoid filing claims: The more claims you’ve filed, the more your insurance rate will go up. Avoid filing claims whenever possible. Repair or replace inexpensive items yourself, even if it costs you a little money. Only file a claim when major losses occur that would cost more than a few hundred dollars to fix.

Bottom line

Having personal property insurance is important, and so is having the right type of policy for your needs. Make sure your policy can sufficiently cover your and your family’s personal belongings in the event of a loss. Decide how much you can afford to pay out-of-pocket to determine your coverage level and which kind of policy you choose.

Personal property coverage is an investment, but it could save you thousands of dollars or more in the long run.