How Does Homeowner’s Insurance Work? 9 Things to Know
Homeowners insurance is an absolute necessity nowadays. Not only does it protect your home and possessions in a variety of situations, but it’s also pretty much required by nearly all mortgage lenders before they’ll qualify you. At Absolute Choice Insurance in Miami, FL and Kissimmee, FL, we pledge ourselves to provide you with affordable insurance options for you, your friends, and your family. If you’re new to home insurance, below are 9 things you should know before you buy.
How Does Homeowners Insurance Work? 9 Things to Know
1. What Does a Homeowner’s Policy Do?
Homeowner’s policies are extremely customizable because no single policy can meet the varying needs of multiple clients. There are, however, certain standard elements that most home insurance policies will cover.
2. Covers Damage to Your Home Inside and Out
Whether it’s due to vandalism, fire, hurricane, lightning, or any number of other covered disasters, your insurer will compensate you to make repairs to your home. In some cases where the damage was extensive, your insurance can help you rebuild your home.
Note that not all damage will be covered by your home insurance. Damage that comes from floods, earthquakes, and neglect will generally not be covered by your run-of-the-mill insurance policy. If you’re worried about these disasters specifically, you can usually purchase additional policies or add them as a rider on the one you have now.
3. It Covers Some Personal Property
Your home insurance policy will cover a wide variety of personal property, including clothing, furniture, appliances, and other things in your home that were destroyed by a covered disaster. With some insurers, you can tack on an “off-premises coverage” clause that allows you to file a claim for lost expensive items (such as jewelry) no matter where you lost them (this includes off of your property).
Your policy will have a limit on the amount your insurer is willing to reimburse you. Most policies will cover 50% to 70% of the amount of insurance you have on your home’s structure. For example, a $100,000 policy will provide $50,000 to $70,000 dollars in protection for your possessions. For particularly valuable items (art, jewelry, antiques, etc.) you may need to purchase a separate policy to cover those specific items.
4. You’ll Receive Personal Liability Coverage
Liability coverage protects you when someone files a lawsuit against you. It even covers dogs, since many, many claims are filed due to dog bites. Your insurer will pay the medical expenses of a person injured on your property or theirs (if your dog bites them while you’re on their property). This is a very important feature of homeowners’ insurance because medical bills, even for relatively small injures, can be considerable.
Your liability insurance covers much more than medical bills for dog bites. If you’re at someone’s house and you break or ruin an expensive item, you can file a claim with your insurance company to reimburse them. It can also pay for extensive pain, suffering, or lost job wages. Make sure your insurance policy contains robust liability coverage – particularly if you’re someone who has frequent guests.
5. It Covers Lodgings During Repair or Rebuild
Hope repairs usually don’t require that you stay somewhere else, but it does happen. If you and your family are unable to stay in your home due to repairs or being rebuilt, your home insurance policy can cover your lodgings, whether it be a hotel, motel, or rental home. Which options are covered will depend on the specifics of your policy.
This coverage doesn’t begin and end with paying for your lodgings. It can also cover additional living expenses, including meals and other incidental costs you pay while you await your home’s repair. Know that these policies usually have a daily cap, so no prime steaks or crab legs.
6. There Are Different Types of Coverage
Insurance companies design multiple policies to cover the myriad needs of their clients. However, these policies generally come in one of three different levels of coverage.
Actual Cash Value (ACV)
The ACV covers the cost of the house plus the value of your personal items after deducting what’s known as “depreciation.” Depreciation is how much your items are worth right now, not what you paid for them. Just because your Rolex cost you $10,000 originally doesn’t mean your insurance company is going to pay that. With ACV, your watch will be valued at what it could be sold for today given its condition and any nicks, scratches, or other damage.
Replacement cost policies cover the ACV of your home and possessions, but it does NOT include depreciation. Replacement cost policies are nice because they can allow you to rebuild or repair your home to the exact specifications and with the same materials it was built with. You can also replace your personal items.
With replacement cost policies, that $10,000 Rolex will still be worth $10,000, and you can purchase a new one if you wish. It should be noted that these policies tend to pay out more than ACV policies and therefore carry a higher premium.
Guaranteed/Extended Replacement Cost/Value
If you’re someone who wants the most coverage possible, a guaranteed replacement cost policy is going to be your best bet. This is the most comprehensive type of homeowners insurance policy, and it pays for whatever the cost is to repair your home. It will pay out even if the cost is higher than your policy limit.
Some insurers offer an extended replacement, which offers more coverage than you purchased. These policies generally have limits set at 20% or 25%. Some feel all homeowners should buy extended replacement policies because “just enough” coverage usually isn’t enough at all. You never know what kind of damages your home will incur, or what the price of materials is going to be. Hardwood floors cost a lot more today than they did twenty years ago.
7. Save Money on Home Insurance
Purchasing a home insurance policy is all but mandatory. If you’re looking for a mortgage loan to pay off your home, your lender will almost certainly require it. However, if you’re not forced to buy homeowners insurance and you opt not to, you’ll be left completely exposed to events that are completely outside your control.
Since so many people buy home insurance policies, insurance companies compete with each other by providing discounts and incentives to clients. Below are a few things that can help you reduce your homeowners insurance costs.
Invest in a Security System
The insurance business is all about risk; the more risk an insurance company incurs through insuring you, the higher your costs will be. One fantastic way to significantly reduce your risk level is to invest in a home security system. Often, just the sign alone will deter would-be criminals from burglarizing your home.
By obtaining a security system, you could reduce your home insurance costs by as much as 5% or more. Couple that with a few other tips below and you could be saving serious cash on your insurance policy.
Increase Your Deductible
Your deductible is the amount of money you need to pay out-of-pocket before your insurance policy kicks in. The higher your deductible, the lower your premium, and vice-versa. The reasoning behind this is simple: if you choose to pay a higher deductible you’ll require less insurance coverage and your costs will go down.
Raising the deductible to lower your premiums can be very effective, but it’s not for everyone. If you have a poor driving record or have had to file insurance claims in the past, you may want to steer clear of lowering your deductible. This strategy is generally best for those who aren’t at risk of filing a claim.
Bundling Is Better
Insurance companies like it when you buy a policy from them. They love it when you buy multiple policies. As a matter of fact, they love it so much they’re almost always willing to give you a discount if you buy more than one policy from them. This is known as “bundling” plans and it’s a sure-fire way to pay less.
There’s really not much argument against bundling your insurance plans. If you have a car you need insurance, if you have a home you need insurance, and life insurance is always a nice option to keep your family safe and secure.
Pay Your Mortgage Off
Paying off your mortgage isn’t easy, and if this tip seems like too much, it probably is. However, owning your home outright often results in a drop in insurance premiums. This is because insurance companies believe that if you own the house completely, you’ll be more conscientious with your maintenance and take better care of the home.
If you have the money to pay off your mortgage faster than it requires, you can also save significant money on interest payments. Generally, this is more of a long-term goal, but it’s definitely something to look into if you want to save money (and who doesn’t)?
Regularly Review Policies and Make Comparisons
Never go with the first policy quote you receive. You’ll want to know how much the quote is in relation to what other insurance companies are offering. Check for group coverage options through trade unions, your employer, or association. Even after you’ve purchased a policy, you should check every 6 months and compare those quotes against your policy.
After reviewing your policy, you may find that some of the options are redundant. For example, if you no longer have a dog, a swimming pool, or a jungle gym, you may be able to save on insurance costs by cutting coverage you no longer need.
8. How Should You Compare Insurance Companies?
Comparing insurance companies based solely on price is a mistake if you don’t know the specifics of the policy. Often, less expensive policies provided by other insurers don’t provide the same coverage as the plan you already have. Below are a few steps to follow when comparing insurance companies.
Check Your State’s Department of Insurance Website
Before you even think about pricing or policy features, you want to make absolutely sure the insurance companies you’re looking into are reputable and legitimate. On your state’s Department of Insurance website, you can see the rating for every homeowners insurance company that is licensed to conduct business in your state. If you don’t see your insurer on there, switch companies.
Check the Company’s Health
You don’t insure your home with a policy you purchased from a company that is in a precarious financial situation. Check the websites of the top credit agencies as well as those of the National Association of Insurance Commissioners. They track consumer complaints against companies in addition to general customer feedback, how claims are processed, and other info.
Look at Their Claims Response
When someone suffers a catastrophic loss, having to pay out-of-pocket for repairs and waiting for your insurer to reimburse you can be an extremely stressful period, and place you in a hard financial situation. Many insurers outsource some of their workforces, and that includes handling claims.
Before you buy, find out whether the insurer uses licensed adjusters or a third-party call center to receive and process your claims. You want an insurer with a proven track record of fair, timely settlements. You should also make sure you understand the insurer’s stance on holdback provisions, a situation where an insurance company holds back part of the payment until the homeowner can prove they have started repairs.
9. The Previous Owner’s Claims History May Affect You
If you’re thinking of buying a home, check its history of insurance claims first. In some areas, previous claims made on a home can affect your insurance premiums. As previously mentioned, insurance companies are all about risk. They base their prices on how likely they feel the client is to file a claim.
That being said, a home with a history of claims filed will probably need more, therefore your perceived risk to the insurance company is higher than someone buying a brand new home or a home that doesn’t have a history of claims being filed.
In the end, homeowners insurance is a necessity – not a luxury. By taking the time to evaluate different plans and companies, you should have the knowledge necessary to find a policy that fits your needs. If you have any questions or concerns about home insurance, don’t hesitate to contact Absolute Choice Insurance in Miami, FL at 305-275-1777 or in Kissimmee at 407-344-3444.