Thursday, November 3, 2011

Homeowners Insurance – Coverage, Costs and Changes

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One of the cornerstones of the home purchase process is the purchase of a homeowners’ insurance policy.  In fact, unless a home has a valid and active homeowners’ insurance policy already purchased prior to the close of escrow, the lender will not proceed to the final stage and allow closing on the property.

There are a few things to know and be prepared with prior to selecting a policy on your new home so it is important to research and know all the options before obtaining coverage on the home.  Here are some basic frequently asked questions to get you started in your research of the right homeowner’s insurance policy for you:

Why is having a homeowners’ insurance policy important?

Without proper coverage on your home, your investment is at risk in the event of a major catastrophe.  For this reason, lenders require the purchase of a homeowners’ policy on any home being sold. The types of events and/or calamities that cause the need for such coverage range from anything like a natural disaster such as tornadoes, hurricanes or blizzards plus fire damage or total loss.

Other than major damage, what things are included on a typical homeowners’ insurance policy?
The single most important coverage outside of replacement coverage of the property is liability insurance.  Applicable to anyone other than those who reside in the home or licensed contractors on the premises to perform professional work, liability insurance protects the homeowner in case the claimant is not covered by their own policy.  Examples of such include a dog bite, visitors slipping and falling while on your premises or other incidents of accidental injury.

How much does it cost to insure a home?

Depending on what type of policy is purchased, the cost can range anywhere from $200-$300 for typical fire policies to $500-$600 for the average homeowners’ policy. Additional riders will increase the price nominally per rider but also improves coverage significantly.

What about coverage of the contents in the home?

All items in the home are covered under the homeowner’s policy with a list of a few policy exclusions that are unique to each underwriter.  There will be a specific amount covered that will be replacement of items in the home. Some specialized items like jewelry will require an additional rider beyond a certain base limit (usually $5,000).

What other benefits are there of having homeowners’ insurance?

Theft and vandalism coverage is usually standard with most homeowners’ insurance policies.  Storm damage and tree removal are standard in some cases and optional riders with other insurance carriers.  Earthquake and flood insurance is covered by some carriers as part of the homeowners’ insurance while most others have it listed as an optional rider.  Glass protection, debris removal and sewer backup coverage are also policy additions to consider.

Is the purchase amount or the loan amount being insured under a homeowners’ policy?

Though the lender will require that the loan amount be covered at the close of escrow, the actual coverage needed is the replacement value of the property.  Insurance companies have a range within which a policyholder can opt to cover.  Coverage that provides eighty percent of the replacement value can be purchased for a lower premium, for instance, but in the case of a catastrophe the homeowner would then only be eligible for that 80%.  In cases where there has been a total loss and the homeowner opted for less than one hundred percent coverage, they can choose to rebuild in a different way than the original home was built.

What changes, if any, are there in the homeowners’ insurance industry?

Most insurance carriers do not insure vacant homes and properties that are under construction.
The homeowner should carefully review the policy before signing it to confirm whether all expected items are covered.  Also needing to be reviewed is the replacement value as well as the coverage amount on any special equipment such as additional structures (tool sheds, barn, detached portions of the home) or jewelry and high-value items like works of art or firearms.

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