All About Home Insurance

Written by: David Scott

Homeowners insurance, also commonly referred to as home insurance, is an essential service for real estate owners to protect their financial future. While people who are borrowing money for the purchase of their property are almost always obligated to have home insurance, the ones who fully own their home should also not miss the opportunity to receive coverage as soon as possible.

What does homeowners insurance cover?

While offers on the market widely vary, most generally cover damage to both the interior and exterior of the house and often include some form of liability coverage to protect you from lawsuits that might arise in case someone is injured in your home. When it comes to damage to the exterior, you’ll have to be very careful selecting what the insurance actually covers. Garages, sheds, and other structures might not be covered automatically, and they might have to be insured separately. The interior includes the furniture, household appliances, and most other valuables in your home. While it should automatically cover most basic items, if you happen to have extremely valuable, hard to replace, or one-of-a-kind items, make sure they are added as ‘riders’ or you might even consider insuring them separately. Liability insurance can cover medical bills or cover lawsuits in case,  for example, your dog bites the postman or someone slips on your stairs suffering serious injuries. 

What does home insurance NOT cover? 

While homeowners insurance generally covers most common occurrences, depending on your situation, you might want to consider adding additional types, ‘riders’ to your basic policy. Here are some you might want to consider adding depending on your situation:

  • Sewer and water line backup: While most basic coverages will not include this type of coverage, adding them is usually not a substantial financial burden. In case the sewer or water pipeline breaks on your side of the property, you will be responsible for covering the cost of repairs, even if the city itself is usually the owner. Since these types of repairs must be done by a licensed contractor, they can be quite expensive to pay out-of-pocket.
  • Flood insurance: If you live in an area where floods are common, not adding flood insurance to your policy can turn out to be a huge mistake. While many policies state coverage for ‘water damage’ most do not include damage in case of floods.
  • Scheduled personal property coverage: It can add additional coverage to highly valuable items such as antiques and help you replace them easier. These items will be called ‘scheduled items’ on the policy.
  • Building code coverage: Depending on the building you own and the area where you live, you might want to consider adding building code coverage as well. While typical policies cover restoring the home to its original state, the ‘building code’ might have changed since your home was built and additional costs might arise to abide by the new rules. 

What additional coverages do I need as a landlord?

  • Rental property insurance: It is also commonly referred to as landlord insurance. It is usually a bundle of services landlords or real estate investors need. It usually covers hazard, liability, and in many cases even loss of income.
  • Tenant rent default insurance: If your financial wellbeing is heavily reliant on your ability to collect rent, you might want to consider adding this rider as a rider to your rental property insurance. If your tenant defaults or tries to skip rent, this policy will ensure you’ll still receive the appropriate amount.
  • Pet coverage: As the landlord, you should consider asking your renter to put pet coverage on his or her policy. While many landlords don’t even consider renters with pets due to the perceived risk of furry companions damaging the home, this type of policy can provide coverage against this risk. It tends to be on the cheaper side, and you can still advertise your property as ‘pet-friendly’ which can drastically increase your chances of finding renters. 

Level of home coverage: Actual cash value vs. Replacement cost vs. Guaranteed replacement cost

Actual cash value

The actual cash value can reimburse the cost of the house and belongings reduced by depreciation. So let’s say you bought a furniture set that costed $1000 and since it was already 5 years old, it has already lost half of its value before the damage. In this case, if for example it was lost in a fire, you would receive $500 for it. 

Replacement cost

Replacement cost covers the cash value of the lost item or property without deducting any depreciation. So if you had lost the previously mentioned $1000 furniture set in a fire, you would receive the full cost you originally paid for it. It goes without saying that the amount reimbursed using replacement cost will always be higher than actual cash value, but having this level of insurance will also cost you more. 

Guaranteed replacement cost

This level provides the best possible coverage you can get, but it’s also the priciest. It does not deduct depreciation from the item’s value and it can even go over your coverage limit in case the price to replace the item increased for example due to inflation. So using the previous example, if you had lost the previously mentioned $1000 furniture set, but during the years, the price of these kinds of sets increased by 10%, you would receive $1100 compensation. It is important to note though that usually the extent the reimbursement value can exceed your coverage is limited.

Tips and tricks to save money on homeowners insurance

  • Compare many providers and get multiple quotes: It could be time-consuming, but it is sure to pay dividends in the long run. Multiple quotes will help you choose the best one for your situation. Please note that cheaper is not always better. Besides looking at the coverage level, when doing research on the companies, you should also look into their ‘claims response’ and whether current clients are satisfied with the service they are provided.
  • Pay off your mortgage: Being mortgage-free will likely result in reduced premiums since insurance companies believe that if you live in your fully owned property, you will likely be a more responsible homeowner.
  • Increase the deductible: Raising your deductible will result in a substantial premium decrease. Note that by doing so, you will be expected to deal with smaller issues by yourself, paying out-of-pocket. Since most are unlikely to contact their provider when it comes to minor claims, it could be a smart way to significantly reduce your premium while still having coverage for major incidents when you need it the most.
  • Install a security system: If you have a monitored security system, you can expect a reduction in your premiums. Monitored usually means that it is connected to the police or other security companies, significantly reducing the chances of successful burglaries. Having such a system usually results in about a 5% reduction in your premiums, but some insurers will even provide a 10% or higher discount.
  • Bundle with other types of insurance: If you have multiple policies at the same company, you can often receive substantial discounts. You can expect a 10% or even higher reduction if you have your home insurance at the same company as your auto or life insurance.
  • Review your existing policies regularly: The insurance market changes rapidly. There are always new entrants, major companies providing huge discounts to acquire new clients, and many more opportunities to get a cheaper or better alternative to your current policy. Compare available offers regularly and when the time is right, don’t be afraid to switch to a new insurance provider.

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