Homeowner's Insurance: How To Get The Best Coverage and Value

Since maintaining adequate Homeowners' insurance is a vital part of owning a residence, your Homeowners' policy should be chosen carefully. This Financial Guide discusses the policy provisions that you should consider when deciding which Homeowners' insurance policy to buy so as to be sure that your home is adequately insured and that you are getting the most insurance value for your money.

This Financial Guide advises you as to the questions to ask your insurance broker or agent, about Homeowners' insurance, instructing you on effective methods for shopping for the right insurer and advises you on keeping a list of personal possessions (and provides a Homeowners' inventory sheet to make a list of your belongings). It offers useful tips on how to qualify for a discount and helps you purchase the policy that best fits your needs at an affordable price.

What Homeowners' Insurance Generally Covers

Tip: It is equally important that renters maintain insurance. Many renters neglect to obtain insurance, perhaps deterred by cost or perhaps because, unlike Homeowners', they are not required to maintain insurance. Studies show that about three-quarters of all those who rent a residence do not maintain renters' insurance. Adequate replacement cost coverage and liability insurance can be obtained for about $200 per year.

Note: Homeowners' insurance is usually required by mortgage lenders

What's Covered

Although exact coverage and policy limits vary, Homeowners' insurance usually covers damage done by the following events/catastrophes:

• Fire
• Lightning
• Explosion
• Smoke
• Vandalism
• Theft, including check forgery and counterfeit currency
• Unauthorized use of credit cards
• Falling objects
• Ice, snow, or sleet weighing on vehicles
• Windstorm
• Hail
• Riot
• Volcano
• Freezing of plumbing
• Flooding due to plumbing overflow
• Hot water heater bursting
• Heating system malfunction
• Power surges

Basic coverage may also include food spoilage, lock replacement, temporary repairs, removing debris. If these items are not initially included in your basic coverage, it is possible to have them added.

Planning Aid: For information about the standard types of Homeowners' policies, see Homeowner's Insurance from the Better Business Bureau.

If you incur expenses for temporary living quarters because your home is rendered uninhabitable by an insured event/casualty, most policies will reimburse you in part for this so-called "loss of use."

Tip: Floods, hurricanes, and earthquakes may have to be protected against separately-either with a separate policy or with a floater or endorsement.

There is usually a deductible of $100 to $500 for personal property losses. Raising the deductible can reduce the premium.

Actual Cash Value Or Replacement Cost

If you insure your belongings for their "actual cash value," you will not get their replacement value at the time of a loss. Actual cash value refers to the value of your belongings after taking into account depreciation and wear and tear. For instance, the actual cash value of a television you bought ten years ago may be worth only $50. On the other hand, "replacement cost" coverage provides you with the costs to replace your belongings. Thus, you would get the $500 you need to replace that ten-year-old television, not the $50 "actual cash value."

Limits on Coverage

You choose the limits on the amounts of coverage on your home and personal property. The premium you pay will depend on the limits you choose. Regardless of the policy limit, there will be a separate limit on the replacement of high-value items, such as jewelry and computer equipment. If you want increased coverage for certain items, you must purchase an endorsement or floater (also known as a "rider"). You must generally pay extra for the following:

• High-value items (e.g., jewelry, furs, silverware, weapons)
• Personal computers and other home-office equipment
• Waterbeds
• Business operated in the home
• Earthquake, flood, and hurricane (depending on location)

Policy Coverage To Consider

If your home is damaged or your possessions are stolen, will your Homeowners' policy pay as much as you are expecting? If you are willing to pay the premium for full protection, here are the policy coverages you might consider.

100% of Rebuilding Costs

The amount of insurance you buy should be based on the cost of rebuilding, not on the price of your home. The cost of rebuilding your house will usually be higher than the price you paid for it, and even the price you could sell it for today. Most insurance companies recommend you insure your home for 100% of the cost of rebuilding it.

Tip: Your insurance agent or company representative may be able to help in calculating rebuilding costs. If not, you might hire an appraiser to do this. Real estate agents can provide you with the names of appraisers.

The cost of rebuilding is affected by local construction costs and by the type of house you have. The following (among other factors) will enter into the calculation:

• The type of exterior wall construction-frame, masonry (brick or stone) or veneer
• The square footage of the structure
• The style-ranch or colonial, for example
• The number of bathrooms and other rooms
• The type of roof and the materials used
• Whether the home was custom built
• Whether the home has an attached garage, a fireplace, exterior trim, and special features such as arched windows

Tip: For a rough estimate of the cost of rebuilding your house, calculate the square footage and multiply it by local building costs per square foot for your type of house. Ask a real estate agent or appraiser for average building costs in your area.

If you already have Homeowners' insurance, make sure you have enough. If your home is one of the few that are totally destroyed, and it is insured for less than 100% of the rebuilding cost, you risk not having enough money to replace it with one of similar size and quality.

Make sure your insurance agent or broker knows about any improvements or additions to your house that have been made since you last discussed your insurance policy. If you choose not to increase your limits to cover the cost of rebuilding the new deck, second bathroom, or other improvements that have increased the value of your home, you risk being under-insured. Depending on the kind of policy you have, your insurer may pay only a part of the cost of replacing or repairing damaged items if you lack sufficient insurance.

Look at your policy to see the maximum amount your insurance company would pay if your house was damaged and had to be rebuilt. The limits of the policy usually appear on the Declarations Page under Section 1, Coverage A Dwelling. Your insurance company will pay no more than this amount to rebuild your home.

Some banks require that you buy Homeowners' insurance to cover the amount of your mortgage. However, if the limit of your insurance policy is based only on your mortgage, your policy is unlikely to cover the cost of rebuilding.

Caution: Make certain that the value of your insurance policy keeps up with increases in local building costs.

Caution: If the limits of your policy have not changed since you bought your home, it is likely that you are under-insured.

Tip: Ask your agent about adding an "inflation guard clause," which automatically adjusts the limit to reflect current construction costs when you renew your policy.

Replacement Cost

Consider buying replacement cost coverage for structural damage. A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality. The insurance company will not deduct for depreciation-the decrease in value due to age, wear and tear, and other factors.

If you own an older home, you may not be able to buy a replacement cost policy. Instead, you might buy a modified replacement cost policy that will pay for repairs using the standard building materials and construction techniques in use today, rather than repairing or replacing features typical of older homes, like plaster walls and wooden doors, with similar materials.

Insurance companies differ greatly in the way they insure older homes. Some refuse to insure older homes for 100% of replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for 100% of replacement cost as long as the dwelling is in good condition.

Caution: If you cannot insure your home for 100% of replacement cost-or choose not to do so because the cost of replacing a large old home is prohibitive-make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.

Guaranteed Replacement Cost Insurance

A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster, even if it exceeds the policy limit. This policy protects you against sudden increases in construction costs due to a shortage of building materials, for example, or other unexpected situations, but it generally will not cover the cost of upgrading the house to comply with building codes.

Tip: Building codes require structures to be built to minimum standards. If your home is severely damaged, there may be an extra cost in rebuilding it to comply with newly enacted standards. Complying with the code may require a change in design or building materials. Generally, Homeowners' insurance policies will not pay for this extra expense, but some insurers offer an endorsement (a form attached to an insurance policy that changes what the policy covers) that pays a specified amount toward these costs.

Note: A guaranteed replacement cost policy may not be available if you own an older home.

Flood Insurance

If your home is in an area prone to flooding, contact your insurance agent or the Federal Insurance Administration (800-638-6620) and ask about the National Flood Insurance Program.

Tip: Your Homeowners' insurance policy does not cover flood damage. If you buy a federal government flood insurance policy, consider insuring your home for 100% of replacement cost and buying insurance to cover the contents of your home as well as the dwelling.

Contents Insurance

This list should include everything you and other members of your household own in your home and in other buildings on the property, except your car and certain boats, which must be insured separately. Among the items you should include are indoor and outdoor furniture, appliances, stereos, computers and other electronic equipment, hobby materials and recreational equipment, china, linens, silverware and kitchen equipment, and jewelry, clothing and other personal belongings.

Tip: Estimate the value of your personal possessions at current prices. The total is the amount of insurance you would need to replace the contents of your home with new items if everything were destroyed.

Check your Homeowners' policy to find out how much insurance you have for the contents of your home. The limit of the policy is shown on the Declarations Page under Section 1, Coverage, Personal Property. The contents limit generally is 50% of the amount of insurance on the dwelling. On a home insured for $100,000, for example, the contents limit would be $50,000. Now compare the contents limit with the total value of the items on your list of personal possessions. If you think you are under-insured, discuss this problem with your insurance agent or broker.

As discussed before, there are two ways of insuring your personal possessions. If you have a homeowners' insurance policy, find out whether claim payments for damage to your personal property would be based on replacement cost or actual cash value. Check your policy under Section 1, Conditions, Loss Settlement or ask your agent. As with insurance for the structure, a replacement cost policy pays the dollar amount needed to replace a damaged item with one of similar kind and quality without deductions for depreciation. An actual cash value policy pays the amount needed to replace the item minus depreciation.

Special Limits

Check the limits on certain kinds of personal possessions, such as jewelry, silverware and furs. This information is in Section 1, Personal Property, Special Limits of Liability. Some insurance companies also place a limit on what they'll pay for computers and other home office equipment. If the limits are too low, consider buying a special personal property endorsement or floater.

Note: An endorsement is an addition to your policy. A floater is a form of insurance that allows you to insure valuable items separately. Under a floater, you will be able to insure these items for higher amounts than under a standard homeowners' policy.

Tip: If you have a claim, the more information you have about the damaged items-a description of each and the date of purchase and purchase price-the faster the claim can usually be settled. Videotape or take photographs of rooms and their contents. Note where and when you bought each item and the price. Write down the brand names and model numbers of appliances and electronic equipment. Add new items as you buy them, and keep receipts with the list. Store the list, photos, and other records in a safe place outside the home-in a bank deposit box or with a neighbor or relative-so that they are not destroyed if your home is damaged.

Shopping For A Policy

The price you pay for Homeowners' insurance can vary by hundreds of dollars, depending on the insurance company. Companies offer several types of discounts, but they do not offer the same discount or the same amount of discount in all states. Here are some things to consider when buying homeowners' insurance:

Shop Around

Although it may take a few phone calls to shop for the best insurance, you could save a few hundred dollars by taking the time to do so. Conduct a preliminary search by compiling a list of possible insurers. Check with your insurance broker or agent, ask your friends, check the Yellow Pages, check consumer guides, and/or call your state insurance department. A thorough investigation of available insurers will give you an idea of price ranges and tell you which companies or agents have the lowest prices.

Tip: Do not consider price alone. The insurer you select should offer both a fair price, good coverage and excellent service. Quality service may cost a bit more, but it provides added conveniences. Talking to insurers will give you a feel for the type of service they offer.

When talking to insurers, ask them what they would do to lower your costs. Once you've narrowed your search to three companies, get price quotes.

Raise Your Deductibles

Deductibles on homeowners' policies typically start at $250. You might save up to 12% of the premium by increasing your deductible to $500, up to 24% by increasing it to $1,000, up to 30% by going up to $2,500, and 37% by raising it to $5,000.

Considering Buying Home And Policies From the Same Insurer

Some companies that sell homeowners', auto and liability coverage will take 5 to 15% off your premium if you buy two or more policies from them.

Consider Insurance Cost Before Buying A Home

When buying a home, don't overlook the insurance costs. These may affect the price you are willing to pay for the home. Among the factors to consider:

• The home's construction in relation to the geographical region. (For example, brick houses may result in less costly premiums in the East whereas frame houses are less costly in the West. Choosing wisely could cut your premium by 5 to 15%.)
• Whether the area is prone to floods (if so, you might have to pay $400 or so a year for flood insurance).
• Whether the home is new or used (insurers may offer you a discount of 8 to15% for a new home).
• The electrical system, plumbing, and structure.
• Whether the town has full-time or volunteer fire service and whether the home is close to a hydrant or fire station (the closer it is, the lower your premium will be).

Don't Insure Land

When deciding how much homeowners' insurance to buy, do not include the value of the land under your house. It is not at risk against theft, windstorm, fire, or other disasters, so why pay for wasted coverage.

Increase Home Security

You can usually get discounts of at least 5% for a smoke detector, burglar alarm, or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20% if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or other monitoring facility. Although these discounts are incentives to invest in home security and yard maintenance systems, be aware that these systems are not inexpensive and that not every system qualifies for the discount.

Tip: Before you buy an alarm system, find out what kind your insurer recommends and how much you'd save on premiums.

Stop Smoking

Some insurers offer lower premiums if all the residents in a house do not smoke.

Check Discounts For Seniors

If you are at least 55 years old and retired, you may qualify for a discount of up to 10% at some insurers.

Investigate Group Coverage

Employers, alumni and business associations can often benefit from an insurance package at competitive rates. Ask your company's human resources department or your association's director if such a package is available.

Stay With An Insurer

If you've kept your coverage with one company for several years, you may get a reduction in your premiums of 5 or 10%, depending on the insurer.

Check Your Policy Once A Year

Compare the limits in your policy with the value of your possessions at least once a year to make sure your policy covers major purchases and/or additions to your home.

Tip: On the other hand, you do not want to spend money for unnecessary coverage. If your five-year-old fur coat is no longer worth the $20,000 you paid for it, reduce your floater and cut your premium.

Look For Private Insurance First

If you live in a high-risk area-e.g., one vulnerable to coastal storms, fires, or crime-and have been buying your homeowners' insurance through a government plan, you may find that there are steps you can take to buy insurance at a lower price in the private market. Check with your insurance agent or broker.

* * * *

To be sure you have adequate Homeowners' insurance, ask your insurance agent questions about the issues discussed in this Financial Guide. A thorough inquiry into specific coverage and costs should result in a policy that offers the best coverage and value. It is also important to ask your agent or broker to explain what factors were used to calculate the policy limits for the dwelling.

Planning Aid: National Flood Insurance Program provides information about National Flood Insurance.

Tip: If you have a problem or need more information, contact the Consumer Federal of America (CFA) Insurance Group.

Glossary

For your convenience, several common insurance terms are defined below:

Actual Cash Value. The current value of property measured in cash, arrived at by taking the replacement cost and deducting for depreciation brought about by physical wear and tear, age and other factors.

Endorsement. A written form attached to a policy that alters the policy's coverage, terms or conditions.

Floater. A policy or endorsement that applies to moveable property whatever its location. The coverage floats or moves with the property.

Guaranteed Replacement Cost Insurance. Insurance providing for payment of the cost of replacing the damaged property without deduction for depreciation and without a dollar limit

Inflation Guard Clause Provision. In a policy or endorsement that automatically adjusts the dwelling limit at policy renewal time to reflect current construction costs in your area.

Replacement Cost Dwelling Insurance. Insurance providing that the policyholder will be paid the cost of replacing the damaged property without deduction for depreciation, but limited by the dollar amount displayed under Section 1, Coverage, A. Dwelling on the Declarations Page of the policy.

Replacement Cost Contents Insurance. Insurance that pays the dollar amount needed to replace damaged personal property with that of similar kind and quality without deducting for depreciation.

Inventory of Belongings

Use this form to determine whether your personal property coverage is adequate. Inventory your belongings, going through each room. Write in the year you bought the item and how much you paid for it. Then write in the approximate cost to replace the item today. Finally, calculate the totals at the end of the form. This list will also help in case you need to submit a claim.

Tip: Make a photographic or video record of your belongings, too, and of the outside of your home. This will help should you ever need to submit a claim.

KITCHEN & DINING ROOM	Year of Purchase	Cost	Replacement Cost
Table, chairs
Hutch, sideboard
Large appliances (list)
Small appliances (list)
Microwave
Dishes, two sets
Silverware, flatware
Glasses
Linens
Other
TOTAL ESTIMATED REPLACEMENT COST
LIVING ROOM	Year of Purchase	Cost	Replacement Cost
TV, VCR
Stereo
Sofas
Chairs
Tables
Cabinets
Books
Book shelves
CDs, videos, tapes, albums
Artwork
Collections
Curtains
Carpeting, rugs
Lighting
Other
TOTAL ESTIMATED REPLACEMENT COST
BEDROOMS	Year of Purchase	Cost	Replacement Cost
TVs, VCRs, radios, stereos
Bedding, sheets
Furniture
Lighting
Personal Computers
Carpets
Overcoats
Formal Wear
Shoes
Sweaters
Jackets
Dresses
Accessories
Suits
Jewelry
Curtains
TOTAL ESTIMATED REPLACEMENT COST
Sports, Hobbies, Bathroom, Miscellaneous	Year of Purchase	Cost	Replacement Cost
Towels
Grooming gear
Bathroom appliances
Golf clubs
Bicycles
Guns
Cameras
Ski gear
Camping equipment
Exercise equipment
Telephones, answering machines
Fans, heaters, air conditioners
Luggage
Desk, chairs
Piano, musical instruments
Sewing machine
Lawn mower
Garden tools
Office equipment
Computers
TOTAL ESTIMATED REPLACEMENT COST
TOTAL OF ALL CATEGORIES

Recommended Books

• Lynn Brenner and Barbara Taylor, How to Get Your Money's Worth in Home and Auto Insurance, (McGraw-Hill, October 1990), ISBN 0070631786.

• Understanding homeowners' Insurance, (Dearborn Trade, 1995), ISBN 079311277X.

• Gerald Curran, A Comprehensive Guide to Understanding Your Homeowner's Insurance Policy, (Edwin Mellen Press, 1996), ISBN 0773442324.