July 26th, 2012
When purchasing a home, people often get so caught up in the fine print of the mortgage that they pay little attention to the homeowner’s insurance, and what is and isn’t covered. It’s important to understand what that payment you make every month offers you for protection, and whether it’s adequate for your needs.
In his Zillow blog post “The Ins and Outs of Homeowner’s Insurance,” Leonard Barron highlights the major components of insurance, and how you should go about traders insurance and deciding what is best you for.
Dwelling coverage. This is the big one that covers the cost of your home in the case of a fire or vandalism. It does not include floor or earthquake damage, which are both additional policies that you should consider if you live in an area prone to such disasters.
Dwelling coverage is based on the estimated cost of your home without the land. Your agent will work with you to decided how much is enough, and the amount can change every year. If building costs go up, or if you do a lot of work to your home, you may want to increase the amount.
Liability coverage. Another big one. You are financially liable for any accident that happens on your property. So if a person slips and gets hurt at your home, this part of your insurance would cover the cost of the fall.
Barron explains how that coverage typically works:
“But that coverage has a limit of how much they will pay, usually about $300,000. If you have net worth above that, you can buy additional liability coverage called an umbrella policy in increments of $1,000,000 of additional coverage. It’s dirt cheap too, like $350 per year for an additional million dollars in coverage, so go for it if you think you need it.”
Deductibles. The deductible amount is chosen by you, and it determines how much you pay out of pocket if an accident does occur. So if your deductible is $500 and a fire causes $20,000 in damage, the insurance will pay $19,500 and you cover the rest.
It really is a matter of risk assessment when it comes to picking a deductible amount. The higher the deductible, the lower the monthly premium. On the other hand, the lower the deductible, the higher the monthly premium.
Also note that the higher the deductible, the more expensive an accident has to be for the insurance to kick in. It’s a good rule of thumb, which Barron mentions, that you shouldn’t use your insurance for small claims. Paying for the damage out of pocket may end up costing less than your increase in premium due to the claim.
Specialty items. It’s important you understand what is and isn’t covered by insurance, because artwork, jewelry and other valuables aren’t necessarily included.