Money Mondays: Home Insurance Basics

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  • Mellody Hobson talks home insurance.

    Unlike car insurance, homeowners insurance isn’t required by law, but if you finance your home through a mortgage lender, the lender usually requires it. It protects your home, its contents, and, indirectly, your other assets in the event of fire, theft, accidents or other disasters. Homeowners insurance is like a parachute. Most of the time, you’re not going to need it, but you’re going to be really glad you have it if you find yourself falling from 10,000 feet.

    What are the basics our listeners know about home insurance?
    There’s not a one-size-fits-all formula when it comes to home insurance. Your neighbors’ homes may be similar to yours in style and value, but you have to consider the contents as well. Your home insurance policy should cover enough to entirely rebuild and refurnish your home if it were completely wiped off the map. A reliable appraiser can give you an estimate of what it would take to rebuild; use that figure as a jumping-off point to determine how much replacement coverage you’ll need.

    What do the terms “replacement cost” and “actual cash value” mean?
    Replacement cost is the amount it would cost an insurer to replace your residence with a home of similar quality, while actual cash value is the replacement cost of your home less depreciation—the decrease in value to property over time due to wear and tear. A replacement cost policy generally carries a higher premium but provides much more coverage than an actual cash value policy.

    Any tips about managing costs?
    Yes. Insurance companies frequently offer discounts to policy owners who install safety features like indoor sprinklers, smoke detectors or a security system. The best way to find out if you are eligible for any discounts is ask your insurance agent.

    How do you know when to file a claim—and when not to?
    Like auto or health insurance, your homeowners insurance has a deductible—the amount you must pay before coverage kicks in. Like those other policies, you should opt for the highest deductible you can afford because it means a lower monthly premium. Also, remember that if something is just a little higher than your deductable you should consider paying for it out of pocket. You shouldn’t use your home insurance to cover every little expense, just the big ones. A common misperception that that filing a big claim makes you a bad customer for the insurance company, but the truth is that small claims—the ones that are not particularly catastrophic—are disproportionately expensive for an insurer to process because they carry the same administrative costs as large ones. Filing a number of small claims could raise your rate or risk the insurer dropping your coverage come renewal time. So if reinstalling a gutter will cost you $200, just pay it and don’t file a claim. It’s not about gutters—you want the insurance when you have to pay for a whole new roof.

    A good rule of thumb to follow: If you can fix anything for less than $500 to $1,000, depending on what you can afford, don’t file a claim.

    In the wake of Hurricane Sandy’s destruction, what can you tell us about flood insurance?
    Most home insurance policies do NOT cover flooding. The law requires you to have flood insurance if you live in an officially recognized high-risk area. The government created the National Flood Insurance Program (NFIP) to help property owners financially protect themselves. The NFIP offers flood insurance to homeowners, renters, and business owners if their community participates in the program. To find out your flood risk and to find plans, go to floodsmart.gov.

    How about renter's insurance? Does the landlord’s policy provide the same coverage that renters insurance would?
    No. The landlord's property insurance typically only covers the building you live in, not the renter’s belongings and not any liability coverage should someone get hurt while visiting. You’d probably be surprised how much your personal property is worth, and renters insurance is a relatively small expense that millions of people neglect to take on. It’s one of those things, Tom, that you don’t think is worth it until you go to pull the ripcord and find you’re not wearing a parachute.

     

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