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Homeowners insurance basics - the coverage

Fri Jan 12, 2007 12:01PM | By Tony

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When you buy a house, you want a true protection, that is why a homeowners insurance coverage is very important. If you are ever going to experience a major repair or have to rebuild your house from the scratch, you need a bullet proof homeowners insurance coverage. So here is short list of the very basic things you must grasp before you buy a home insurance policy.

The biggest mistake first time buyers make

Many people I meet buy only a minimum coverage required by the mortgage lender at the closing. Such a policy covers only the value of your mortgage, thus insuring only the lender against any financial risk it is assuming. You, on the other side have literally no protection against a loss.

Coverage needed

The amount of insurance is called dwelling limit coverage. You must have enough to cover all the costs of rebuilding the house. Keep in mind that construction labor costs and materials are going up every year. If your state allows homeowners insurance policy with guaranteed replacement coverage clause, go get it. Such a clause will pay as much as necessary to fix or replace your home.

If this policy type is not allowed in your home state, buy an insurance with extended replacement cost coverage. It allows you typically get up to 25% more than the maximum dollar amount you have in your policy. So if your home is insured for $100,000, you can get up to $125,000.

Inflation adjustment

Few policies I have seen include an annual inflation adjustment. Again the building costs are rising each and every year, and you should get the inflation coverage.

Personal possessions

Many policies allow up to total of $2,500 in coverage for jewelry, guns, furs and other valuables. But the thing to watch for is the abbreviation ACV or actual cash value. This is something you don't want to have on your policy as it means that insurance company will only pay what the lost possession would cost at the time of the loss. So if your three-year old TV set is finished, you will be compensated based on the depreciated value of the three-year TV.
Insure your possessions for a full replacement cost. It is especially important if you posses high end computers, plasma and LCD TVs, furs, firearms, jewelry, furniture and so on.

Living cost coverage

If your home is rebuilt or repaired and unlivable, you need a place to stay for as long as it takes. And you still must pay mortgage, insurance and taxes on your home. To have enough money for both homes, you should have extended living cost coverage which pays as long as needed. Typical policy gives you only 12 months which may not be enough.

Personal liability coverage

This one I truly hate. This policy is solely for your protection against often frivolous lawsuits, but it is a must-have these days. If you ever get sued, and you lose, you will have to satisfy a judgment. Homeowners insurance policy allows a maximum of $500,000 in personal liability coverage. If your home and other assets worth more, consider buying a separate personal umbrella liability policy. It is not too cheap, but not very expensive for a peace of mind.

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