Now that you are planning to buy a house, you’ll also be buying homeowner’s insurance at the same time. Your lender will require proof at or before closing that you’ve provided insurance protection for the structures on the property, and you will want to protect your personal belongings as well. Homeowner’s insurance, however, is not a one-dimensional product, so here’s a primer on the subject.
Perhaps you’re paying $438,000 (the Talbot County 2016 average sales price) for your new house, but that’s not the amount of homeowner’s insurance you need. If a disaster destroys your house, the land value remains. So, you need enough coverage to replace the structure(s) on your land. The insurance agent will estimate the construction value of your dwelling based on a formula that considers its age, type, location, and size. This amount is the maximum reimbursement you could receive for the replacement of your house, regardless of how much insurance you buy. Obviously then, there is no benefit to gain from over-insuring your home.
There is, however, an additional insurance policy that serves as inexpensive protection against under-insuring your home and is also a guard against inflation. Ask for guaranteed replacement cost coverage on the structure. If the insurance agent’s estimate of the cost to replace your home turns out low, the insurance company makes up the difference. This extra protection should add an extra level of comfort for both you and the lender.
This basic structure-replacement coverage will satisfy most lenders, but you have a good deal of personal property, as well. The insurance agent will help you estimate the value of your possessions – the contents – in order to establish a premium. You could buy actual cash value coverage for your clothing, electronic gear, furniture, and everything else you own – this would pay the depreciated value of your goods. Or, for a higher premium, you could buy replacement cost coverage for these things. Chances are you would want to buy new clothes, not used, if your wardrobe got destroyed in a fire. Ditto with electronics gear and many other objects in your home.
When you’re packing up in readiness for the move, it’s a great time to develop an inventory of everything you own. Make a list (and take photos, too) of appliances, furniture and major objects by manufacturer, date of purchase, and price. Remember to list things you may not think of in terms of value: clothing, books, pots and pans, trinkets, knickknacks, and so forth. Get current appraisals of antiques, art, and other items of value. The inventory and pictures will help you and your insurance agent update your contents coverage and support your claim if you suffer a loss. Keep a copy of the inventory in a safe place and update it annually or whenever you make a significant purchase.
Types of Coverage
Most homeowner’s insurance policies will cover damage caused by such perils as fire, windstorms, hail, lightning, theft or vandalism. It will pay to repair or rebuild your home if it is damaged or destroyed by the items listed in your policy. It will not pay for damage caused by flooding (which is an issue for insurance companies in Talbot County), or routine wear and tear.
Homeowners insurance also provides liability coverage against accidents in the home or on the property.
For more money you can get an “all risk” homeowner’s policy which does pretty much what its nameimplies. “All risks” means that any risk that the contract does not specifically omit is automatically covered. For example, if an all-risks homeowner’s policy does not expressly exclude flood coverage, then the house will be covered in the event of flood damage. All-risks insurance is obviously the most comprehensive type of coverage available. It is therefore priced proportionately higher than other types of policies, and the cost of this type of insurance should be measured against the probability of a claim.
Condos and Co-ops
Condominium and co-op buyers need to get a different type of insurance than the policy for a regular house – one that includes coverage for contents, for additions and alterations, and for loss assessment. A master policy held by the association protects the building, but only the stripped-down structure. It does not cover your personal belongings, or things like your fixtures or kitchen cabinets, or any improvements you may have made. Also, the unit owners will be assessed the difference between insurance reimbursement and replacement costs if the master policy is inadequate after a loss.
What Isn’t Covered
Even an “all-risk’’ policy has certain limitations, and if you’re not sure what they are when you read your policy, then get your insurance agent to make them very clear to you. Common exclusions are damage from floods, termites, war, neglect, earthquakes, or intentional loss. There may be others on your policy. Your insurance agent, real estate agent, lender, and the local building inspector will be able to help you to decide whether you need a flood, earthquake, or other special policy.
There are often policy limits – commonly about $1,000 to $2,500 – for theft of certain classes of belongings – silver and gold, money, firearms, and furs are examples. You should ask your insurance agent what types of policy riders are required for these, and also what your personal responsibilities for safeguarding them are.
The premium for a homeowner’s insurance policy that is properly tailored to your property, possessions, location, and financial picture is money well spent … an extra security blanket for your home.
If you have questions about homeowner’s insurance, especially when you’re moving to a new location where you may not know an insurance agent, you should ask your real estate agent for a referral, or see a list of Talbot County Insurance Agents in our directory.