Because your home is probably the biggest investment you’ll ever make, you’ll want to take measures to safeguard that valuable investment. The best way to protect your home investment is through homeowners insurance. However, you shouldn’t settle for just any insurance policy. The type and amount of insurance you need depends on your specific home, what’s in it and your personal requirements.
Before you purchase a homeowners insurance policy, read all the fine print so you know exactly what the policy covers. Homeowners insurance generally covers damages to your home and “other structures” on your property, such as a shed, detached garage, gazebo or pool. A standard homeowners policy typically protects against fire, lightning, wind, storms, hail, explosions, riots, aircraft wrecks, vehicle crashes, smoke, vandalism, theft, breaking glass, falling objects, weight of snow or sleet, collapsing buildings, freezing of plumbing fixtures, electrical damage and water damage from plumbing, heating or air conditioning systems.
What’s the difference between the “market value” and the “replacement cost” of a home?
While you may be tempted to purchase just enough homeowners insurance to cover the market or resale value of your home, this may not be enough. While the market value may be enough coverage for some homeowners, that’s typically not the case.
Your home’s market value is not the same thing as what’s known as its “replacement cost.” The replacement cost of your home is the amount of money you would need to rebuild your home to its previous condition if a loss were to occur. This amount is different from your home’s market value, purchase price or the outstanding amount of your mortgage loan.
When property values are low, the market value of your home is probably much lower than its replacement value. Therefore, you should not always use the market value to determine how much insurance coverage you need.
Your homeowners insurance company can calculate the replacement cost of your home based on the following:
Square footage of your home
Type and quality of your home’s construction
Any updates, special features or add-ons to your home
Quality and cost of materials used in your home
As you shop around for homeowners insurance, ask each insurance company for a policy quote that includes the full replacement cost of your home.
Do I need to purchase additional homeowners insurance?
If you have particularly valuable jewelry, artwork or collectibles in your home, you may want to opt for additional homeowners insurance protection. You may assume your valuables are fully covered by your homeowners insurance, but that’s not always the case. It all comes down to what’s called the “sublimit”—this is the limit on the amount the insurance company will pay for specific types of personal property. Although your policy’s total personal property limit may be $75,000, the sublimit for jewelry may be as low as $1,500.
Read through your contract and find your policy’s sublimit for artwork, jewelry and collectibles. If your valuables are worth more than the sublimit, you may want to purchase additional insurance to cover it. You can purchase what’s called a “floater” and have this worked into your homeowners policy. Insurance floaters typically cover one specific item, so if you have multiple valuables, you may need to purchase floaters for each item you want to insure.
Most homeowners policies also include personal liability and medical expense coverage. Generally, your homeowners insurance company will pay up to $100,000 on a legitimate civil claim against you for an injury that occurred on your property. However, this still may not be enough to cover a major lawsuit.
You might consider purchasing a personal umbrella liability policy, which can offer additional protection. This type of policy offers a higher level of liability coverage and ensures that you and your family’s assets will be protected if someone sues you for damages. Umbrella policies typically pay up to a predetermined limit, which is usually $1 million, for liability claims made against you and your family.