Buying Homeowners Or Renters Insurance
August 12, 2008 – 3:28 amWelcome back!
Last post we talked about Buying Long Term Care Insurance. This post will talk about Buying Homeowners Or Renters Insurance.
No matter where you live or whether you own your home or rent, you need to have insurance to protect your belongings against loss from theft and against damage by fire and other hazards. Homeowners insurance also covers the value of the home itself. In addition, property insurance on your home provides personal liability protection for members of your household, covering you for claims against you involving injuries to people on or off your property. Many renters think they can get away without buying insurance for their apartment. They think differently after a burglary or other disaster, though. Don’t be chintzy about paying to cover what you own.
For homeowners, the amount of coverage you should buy is whatever would be enough to pay for rebuilding your house if it were leveled by disaster. (Standard homeowners’ policies cover your home’s contents for half the dollar limit you place on your house). Your insurance agent can help you figure rebuilding costs, or you can hire a real estate appraiser for about $150. Essentially, you’ll be multiplying the square footage of your house by building cost per square foot in your area. If you have fancy add-ons like Jacuzzi, factor those in.
Your annual premium depends on many different factors, among them the value of your house; its age; whether your area is prone to natural hazards such as hurricanes or earthquakes; the crime rate in your neighborhood; and what materials your house is made of (fire-vulnerable wooden houses cost more to insure than stone ones, for example). Annual premiums might run $500 to $1,000 for a $150,000 house.
The best kind of coverage to get is known as HO-3, or “special form” insurance. It protects your house against all perils not specifically excluded by the policy. (So-called HO-1 and HO-2 policies are 15% to 20% cheaper, but they cover fewer risks). Depending on where you live, common exclusions are damage from floods, earthquakes, sewer and drain backups, war, and nuclear accidents. Your insurer may cover you some of the excluded perils – at extra cost, of course. For instance, earthquake insurance – advisable for all Californians –runs about $400 to $900 a year for a $200,000 house.
If you want to buy flood insurance, ask someone at your town hall whether your community is among the 18,000 or so that participates in the federal government’s National Flood Insurance Program. That list includes almost every place with a serious risk of floods. To better gauge your vulnerability, ask your homeowners insurance agent to show you a flood insurance rate map; that will show you if live in a minimal, moderate, or “special” hazard area. If your risk is high, buy (think Mississippi River in 1993). Cost: about $300 a year for a $100,000 house. The coverage is available through your regular homeowner’s insurance agent; for insurers, call 800-427-4661.
Make sure you purchase guaranteed replacement cost coverage for your home, if you can. This simply means that you’re insured for the full cost of replacing your house, even if the amount exceeds the dollar limit ser in your policy. Your coverage will rise yearly with inflation, but the provision adds just $5 to $30 or so to your annual premium. Not every home is eligible for guaranteed replacement cost coverage, though. Some insurers won’t provide it for properties built more than 40 or so years ago. One reason: the intricate moldings and other detail work common in old houses can be very expensive to replace.
If guaranteed replacement cost is not an option, go for the second-best type of coverage: replacement cost. It covers the full cost of replacing your house, but with the price cap. If you buy one of these policies, it’s important that you’re covered for 100% of your rebuilding costs. Never let that amount fall below 80%. If your coverage is at or above the 80% mark, your policy may not pay the entire cost to rebuild your house if it’s completely destroyed –but it will pay the entire repair cost if a portion of your home is damaged, such as after a fire. If your house is insured for less than 80% of its replacement cost, insurers will reimburse you for only that percentage of what is lost. For instance, if you’ve insured your house for only 60% of its value and your roof blows off, your insurance will pay only 60% of the cost of replacing the roof. Cash-value coverage is the cheapest way to go. Avoid it, since such policies pay only the current value of any part of the house you lose.
Another feature to insist on is replacement-value coverage on the contents of your home. That means if a tree falls into your living room and reduces your 10-year-old couch to a pile of twigs, your insurance will pay the entire cost of a new one. Otherwise you may get only the cash value of the old couch at the time it was destroyed. If you don’t have replacement-value coverage and the entire contents of your house are destroyed, the insurer will generally pay you no more than half the face value of your policy.
What if you have lots of expensive jewelry, silverware, or furs or a valuable stamp collection? You’re right to ask, because most policies have a low $1,000 to $2,500 limit for these items. Hardly enough for such valuables. The solution: buy a so-called floater, or rider, to make up the difference. Floaters cost about $4 per $1,000 for furs, $5 per $1,000 for jewelry. Another advantage of a jewelry rider: it covers you for losses that occur on or off your property. So if a mugger takes off with your $10,000 engagement ring, you’re covered.
In the past few years a number of homeowners insurers have jacked up their premiums or stopped offering coverage altogether in certain areas around the country. If you find that your insurer has announced a giant rate hike, call your state insurance commissioner to see if the proposal is likely to go through.
If you can’t find private homeowners or renters insurance at any price, you may be able to get coverage by joining your state’s “risk pool”. Premiums are steep, though. Often they go for 10% to 100% more than those on the open market. Similarly, if you live in a high-crime area and have been turned down for a policy, you may be able to buy federal crime insurance. If covers losses due to robberies and burglaries and is available in California, Florida, Illinois, Kansas, Maryland, New Jersey, New York, Pennsylvania, Tennessee, and Washington, D.C. The crime insurance pays losses up to $10,000 after a deductible of $100, or 5% whichever is greater.
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