What is homeowner’s insurance and why do I need it? That is a question that you may be asking yourself when your mortgage lender requires that you get one.
Homeowner’s insurance, also called hazard insurance and home insurance, is an insurance policy to protect you, the homeowner, against disasters that affect or damage your home. It is setup as a package policy that covers not only damage to your property but also protects you against liability for any injuries and property damage that you and members of your family may cause to other people.
For example, if someone were to have an accident in your property and then sue you, the homeowner’s insurance would cover such liability. Damage to the home caused by most disasters is covered by the homeowner’s insurance policy except for flood and earthquake coverage, which is usually sold as a separate policy. If you fail to maintain your home in the proper conditions, the homeowner’s insurance will not cover you either so make sure to keep everything in tip top shape.
Does homeowner’s insurance cover the full cost of your belongings? The short answer to that question is: it depends. Homeowner’s insurance can have two distinct ways of paying claims: market value or replacement cost. Market value means that they’ll pay for your damaged goods based on the market value of the product at that point in time. For example, your TV may have cost you $2,000 when you bought it, but when you filed the claim 3 years later for the fire that destroyed your TV, the insurance company may determine that the market value for the TV is $800. That is the amount that they’ll send you. On the other hand, if your policy is a replacement cost policy, they’ll pay you the $2,000 it cost you to get the TV originally (make sure to have receipts or other evidence). Replacement cost policies are more expensive than market value policies so ask your insurance agent about the price difference. You’ll be surprised to see that it isn’t too much.
Does homeowner’s insurance cover your expensive jewelry? Probably not. Most homeowner’s insurance have a cap set for jewelry. For example, your engagement ring might be appraised at $10,000 but if you read the fine print of the policy, jewelry is covered up to $3,000. You’re in the hole for $7,000. What homeowners will typically do is get a supplemental policy, also known as a rider, to cover the full amount of their jewelry. In order to do that, they’ll need a bill of sale or an appraisal on the jewelry that supports the claim that they are worth that much.
When should you file a claim? First of all, make sure to have all your policy paperwork handy so that you can verify if the event that just happened is covered by your policy. When in doubt, always call your insurance provider and ask them if the event is covered. You might be surprised that policy actually covers an event that you wouldn’t think it covers and you get a check in the mail. One thing to keep in mind is that there are time limits to filing claims. If the time limit on a claim is 14 days after the event and you file the claim 30 days after, you’re out of luck. Also make sure to document everything: from the phone conversations, to the estimates, so that your claim can be approved quickly. Insurance companies need proof and good documentation.
You can also lower the price of your policy by doing simple things like installing a deadbolt, having a working smoke detector or putting an alarm system in your home. These things might save you up to 15-20% on your homeowner’s insurance policy!
Last but not least, make sure to shop around with the different insurance providers before selecting a policy. We have a nifty tool to the right of this page that can generate quotes from several providers. Make sure to check it out.
Until next time…keep making smart financial decisions.
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