Homeowners Insurance Basics

You didn't save, shop, and slog through red tape all this time just to move into a place that might get toothpicked by a hurricane, did you? Here's how you can maximize your insurance protection when you buy a place.

What It Is

A standard homeowners insurance policy is a "package" of four categories of insurance: coverage for the structure of the building; coverage for your belongings (everything inside the building); liability protection in case someone is injured in your home; and living expenses if you're forced temporarily out of your home. All four kinds of coverage can be tweaked and customized based on your needs. Most homeowners insurance claims are made because of fires or natural disasters, but the coverage also protects your property against theft (damn kids!) and protects you against potential lawsuits.

Who Needs It
Ain't you listening? Every homeowner needs a policy. Most banks require one when you get a mortgage anyway, but their minimums may only cover the structure -- not the stuff inside, liability, or living costs.

How It Works
After you buy, you should reevaluate your coverage regularly at a set time -- say, each year at Christmas, when you can photograph all your rooms and take a look at the new things you've added or gotten rid of in the last year. You can reduce extra coverage for valuables as they depreciate (like a custom home theater you poured thousands into back when you loved Nickelback) and increase certain types of protection as your home takes shape. Also, be aware that while the standard homeowners policy often covers perils ranging from fire to theft to "civil unrest" and vandalism, earthquake and flood coverage must be bought separately.

Floods (the natural disaster kind, not the washing-machine-backup kind) aren't covered by homeowners policies -- flood insurance is actually sold as a separate policy, which is funded by the federal government (check out fema.gov/nfip/ for the full scoop). Wondering why flood insurance comes from Uncle Sam? Flood damage costs are generally so high and so difficult to predict, private insurers can't afford to cover them. So while flood insurance is bought through private agents, it's in fact run through FEMA -- the policy costs are set and underwritten by the government.

You can also purchase an umbrella policy -- an extra million dollars in coverage costs only a few hundred dollars per year. This extra liability coverage protects your home and other assets if, for example, you're held responsible for a serious car accident and your car insurance liability coverage can't handle all the legal costs.

Questions to Ask

  • Can you add on flood or earthquake coverage?
  • Is the coverage limit enough to replace fancy things like furs, jewels, and computers?
  • Do you need a separate policy if you work out of your home?
  • How should you inventory your items to prove they existed if something happens?
  • How will you be reimbursed for claims -- the item's current value (an old stereo might only be worth $100 today), or what it costs to replace it with an equivalent new one?
  • Can you add a home warranty? (A home warranty covers things like mechanical systems and appliances that are covered by neither homeowners insurance nor the manufacturers' warranty.)

Average Cost
$677 per year (but costs vary widely since homes differ so much in terms of size, amenities, and condition).

How to Get Costs Down
Installing smoke alarms, dead bolts, security systems, fire extinguishers, and other safety devices will save you dollars. Also, homes that are fire resistant (brick homes, for example), new, or newly renovated can get discounts. Many companies give you a discount for each year you have a policy with them and don't make a claim. And if you have good credit, many insurance companies offer lower rates; to them, long-term stability indicates you're not as likely to make a claim as the average insuree. Finally, if you're worried about making a big home insurance payment every month, raising your deductible (the amount you'd have to pay out-of-pocket on a claim before your insurance would kick in) can help.

What to Remember (If You Only Remember One Thing)
Customize your insurance based on what your home would cost you to rebuild (take home improvements into account), what it would cost to replace the contents of your home (how much stuff did you collect or buy this year?), and how much you'd need in living expenses if an event forced you out of your home (if you have kids, your coverage will need to take them into account). Reassess your coverage every year. Oh yeah, we said that already, sorry.

Illustration by Joora Song

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