Homeowners insurance used to be called fire insurance. But that name doesn’t give this insurance policy full credit – a homeowner’s policy covers so much more than just losses resulting from fires.
A homeowner’s policy covers:
- your residence
- detached structures (such as detached garages, workshops, fences, dog kennels or garden sheds)
- your belongings (even away from home)
- additional living expenses in case of a loss
- personal liability
- medical expenses if someone gets hurt
(Besides the coverage for the dwelling and structures, a Renter's Policy has very similar benefits and is available starting at $120 per year!)
There are two types of coverage for your possessions: replacement cost and actual cash value. Replacement cost is better for you, the homeowner.
Under replacement cost coverage, the insurance company will cover the cost of replacing property that is damaged or stolen, up to a maximum dollar amount.
Under actual cash value, the insurance will cover the cost of replacing the property minus an allowance for depreciation. If you have, say, older furniture, that allowance could be quite significant. Unless your policy specifically says it provides replacement cost coverage, the coverage is for actual cash value.
To insure your home appropriately, you want to make sure that you have enough coverage to rebuild your home in case it gets completely destroyed. That means the limit on your policy should be equal to the cost to replace your home. The replacement value is calculated on a “cost per square foot” basis: take the square footage of your house and multiply it by the average square foot building rate in your area.
Your insurance agent will be able to help you calculate the replacement value.
Unfortunately, there are certain exceptions to the coverage on your homeowner’s policy. These exceptions generally include loss to flooding, earthquake, and landslide and certain other perils. You can read more about this in the articles featured in All Insurance Club.
If you live in a flood- or earthquake prone area, or on a hillside, you might wish to consider buying additional protection for these perils.
There are other limitations in the homeowner’s insurance policy: Although there is coverage for the contents in your home, this coverage is limited for certain valuables, including jewelry, art, and computer equipment.
As a rule of thumb, if you have a collection or an individual item worth at least $2,500, you should consider additional coverage options by buying a personal property endorsement or “floater”. A “floater” is attached to your homeowner’s policy and provides the additional coverage you need. The higher the value of the items you’d like to insure, the more the added-on coverage will cost.