Homeowners insurance is the most forgotten about type of insurance. Often times, it is paid for through your escrow account, you make your monthly mortgage payment and then forget about it. This can be detrimental to your family’s financial security and can leave you paying too much for not enough coverage.
Throughout this article we’ll guide you through what homeowners insurance is, what does it cover, how much coverage you should have, and what is the best way to ensure you are getting the most coverage for the best possible price.
What Is Homeowners Insurance?
A homeowners insurance policy is essentially financial protection for you and your home. It is not required by law, however many lenders will require homeowners insurance in order for you to be able to secure a mortgage loan.
What Does It Cover?
Homeowners insurance is often thought of as simply financial protection for your home. However, homeowners insurance can be much more than that.
Yes, homeowners insurance first and foremost does protect your home if something were to happen but it can also protect your personal belongings, the cost of living expenses if you could no longer use your home and even legal expenses if you were to be sued as the result of an accident. Let’s review each of these coverages.
Dwelling Coverage
This is coverage specifically for your home. Now just because you have a specific number next to this section in your policy, doesn’t mean you will receive a check for this amount if your home burns down. Your insurance company is only responsible for indemnity. This means that they only need to get your home back to the state it was previously in, not any better. It’s important to assess how much coverage you will need for your dwelling to ensure you are not overinsuring or underinsuring yourself.
Other Structures Coverage
This portion of your policy protects any detached structures from your home such as fences, poles, detached garages, sheds or even your pool. Many agents don’t ask the right questions to ensure you have an adequate amount of this coverage.
Loss Of Use Coverage
Loss of Use provides reimbursement for any costs that are associated with you being unable to use your home if it ever needed to be repaired or rebuilt. This can include hotel expenses, rental expenses, eating out because you can’t use your kitchen and even extra gas that you may now have to use. This coverage is only provided for the shortest time possible until your home is livable again.
Personal Liability Coverage
Your homeowners policy also includes liability protection if you were responsible for injuring a person or damaging their property. It can provide coverage for medical expenses, lost wages, legal fees or any costs associated with the damage you caused.
Medical Payments Coverage
This is like a “let’s stay friends” coverage. Say for example, you had a friend over and while at your home they tripped over the step that you have been needing to fix for months. They end up spraining their ankle, needing to see a doctor and getting a brace. This is not free for your friend so they can choose to sue you to cover these medical expenses, or you can make a claim for your medical payments coverage. This will provide a no questions asked payment to a guest who sustains a minor injury in your home. This way, they don’t have to sue you, and you both can still stay friends.
Additional Coverage
There are so many additional coverage options that may be necessary in your unique situation. In the next section we’ll review the one’s that may be important to your family.
How Much Homeowners Insurance Coverage Should I Have?
Like life insurance or auto insurance this is going to depend on your family’s unique situation. Here are some things to think about:
Should I get replacement cost or actual cash value?
If it is offered, always get replacement cost! Actual cash value only provides coverage for the depreciated value of your home unlike replacement cost which will pay to replace your home or items. This is not just a concern for your home but also your belongings. Many insurance agent’s will put actual cash value in your policy for your belongings because it is significantly cheaper. Don’t be misled, actual cash value can leave your family without thousands of dollars in necessary coverage.
Dwelling Coverage
You should have just enough dwelling coverage to ensure your home is able to be rebuilt if it were completely destroyed. However, this does not mean that if you bought your home for $350,000 you need to have $350,000 of coverage. In fact, using this logic you would probably have too much coverage because your insurance company is not replacing the land or location of your home. Luckily, at Metcalf Financial we are experts at estimating how much coverage you will need.
Other Structures Coverage
It is good to ensure that you have enough other structures coverage to replace your fence, shed or any other detached structures from your home. An insurance expert can help you assess their value!
Loss of Use Coverage
Usually this coverage is provided as a flat percentage of the dwelling coverage amount. We usually recommend not having any lower than 20-30% of your home coverage amount.
Personal Liability Coverage
Like auto insurance, many people overlook this coverage because it increases the price of their policy. This should not be the case. It is important to examine your assets and ensure that if you were to be sued for any damage or injury that you caused, you would not leave your family without the necessary coverage to protect your current financial situation. We usually don’t recommend having any lower than $300,000 of personal liability coverage.
Medical Payments Coverage
Although this coverage is somewhat less important than the others on this list, it can still be really helpful if anything ever happens to a guest on your property. You can usually choose to have between $1,000 and $20,000 of coverage, but we don’t recommend having less than about $5,000.
Equipment Breakdown Coverage
This is an additional coverage that many agents don’t tell you about. It usually only costs about $25 per year but it can provide for the repair or replacement of your home appliances, electronics, AC unit, water heater or even a well pump. Generally this coverage only has a $500 which can really help you save some money if you no longer have a home warranty.
Water Back-Up Coverage
Flooding damage is generally excluded from all homeowners insurance policies, no matter the source of the damage. With this additional option your policy can provide anywhere from $5,000 to $25,000 of coverage to pay for any water damage if your sewer, drain or sump-pump were to back up and usually costs less than $50 per year.
Ordinance or Law Coverage
This is a crucial additional coverage that many policies do not have. As stated previously, your homeowners insurance is only required to repair or rebuild your home to where it was prior to the damage sustained. This means that any new building codes or laws that were put in place after your home was built would not be covered. The builders are still required to abide by these laws or codes but it must be paid for out of your pocket. Let’s say for example, a huge hail storm blows in and damages your roof. You call your insurance company, make a claim and they start working on replacing it for you. What you didn’t know is that last year, your city created a new law requiring all new roofs to be constructed with an ice and water shield. This makes the average roof cost $2,000 more to build! Your insurance company is not going to be responsible for the ice and water shield because you don’t have ordinance or law coverage and you will need to pay for this out of your own pocket if you want your roof to be replaced.
How To Get The Most Homeowners Insurance Coverage For the Best Possible Price
The best way to get the most coverage for the best price is by working with an independent insurance brokerage where they can compare multiple options for your needs from a variety of different companies. At Metcalf Financial we work with over 80+ different insurance companies to ensure you are always getting the best price possible. We will guide you from A-Z to creating the homeowners insurance policy with the right coverage to protect your home and family.
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