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If you own a home, you need to have homeowner’s insurance. But how much, what type of coverage and whether you need extra coverage depends on your home, your possessions, your assets, and your location. Here’s what you need to know about homeowners insurance before you sign on for that policy.
How much homeowners insurance coverage do you need?
You will need enough to cover the structure of your home should you need to rebuild, to replace your personal possessions, to pay for living expenses if you need to live elsewhere while your home is repaired, and to pay for any damages brought against you by someone injured on your property.
Levels of insurance policies
In the U.S. there are eight levels of homeowners insurance policies, labeled HO-1 through HO-8. HO-3 tends to work best for most people. This policy protects against all perils your home could face except those explicitly called out in the policy—usually floods, earthquakes, wars and nuclear accidents. HO-6 is the policy for you if you own a co-op or condo. It covers everything from the walls in, but not the structure itself since your building already has its own policy.
Disbursement options
You’ll need to consider how you want to be paid by your homeowners insurance policy should you ever need to file a claim. Typically, you have two options: to receive the actual cash value of the items you need to replace or to receive the replacement cost of those items. While signing up for the actual cash value option results in a less expensive policy, you could end up paying more in the end if you do need to file a claim, depending on your possessions.
Here’s the difference: Say a fire destroys the five-year-old couch you paid $1,000 for and you need to replace it. With an actual cash value policy, the depreciation of the couch will be factored into the amount you will receive from the insurance company. This means you’ll only receive a percentage of what you originally paid for the couch. However, with a replacement cost policy the insurance company pays to replace your couch with one of similar style and cost. So, you’ll need to consider which payout would work best for you and balance that with the cost of your homeowners insurance plan.
Personal possessions
Most homeowners insurance policies cover your personal possessions for 50 percent to 70 percent of the amount of insurance you have on your home. This may be enough for you, but to find out you’ll need to do an inventory of everything you own, along with an estimate of your possessions’ value at today’s prices. If it all adds up to more than what you policy is worth, you’ll want to consider purchasing additional coverage.
Liability coverage
Homeowners insurance policies include liability coverage to help protect you against lawsuits brought against you by people injured on your property. Most policies provide a range of $100,000 to $300,000 worth of liability insurance, but if you have more than that in assets you should consider buying more.
To determine your net worth, add together your salary, the equity in your home, your investments, the value of any real assets you own (such as art or land) and the value of your business if you own one. Then subtract any debts. If this number if more than what is provided with your insurance policy, you should consider buying an umbrella liability policy.
Options for extra coverage
In many cases it makes good sense to purchase additional coverage, also called riders, for your homeowners insurance policy. If you live in an area prone to earthquakes or floods, you’ll want insurance to cover those possibilities. (Flood insurance can be purchased through the National Flood Insurance Program while earthquake insurance is available through private insurance companies.) If you own art or antiques or other valuables, or even have a home office, you should determine the value of these items and learn more about riders that can protect you from theft or damage.
While it may be temping, homeowners insurance is not an area where you want to skimp. But for those watching their budgets, there are ways to save without forgoing the coverage you need.
This article contains general information. Individual situations are unique; please, consult your financial advisor or insurance broker before utilizing any of the information contained in this article.
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