The purchase of a home is an important decision and often represents the single largest financial transaction that Americans enter into. To protect that investment, homeowners insurance is recommended, and is generally mandated by a mortgage lender.
In addition to protecting your home from a catastrophic loss, and satisfying your lender’s requirements, homeowner policies protect you in other ways that you may not have considered.
Homeowners insurance is generally comprised of six components, often labeled with the letters A-F. You’ll find these listed in the summary section of your policy.
- Dwelling Coverage
- Other Structures
- Personal Property
- Loss of Use
- Personal Liability
- Medical Payments
Dwelling coverage protects your home from damage against risks (perils) such as fire, wind, rain, falling trees or debris, etc., as well as theft. The amount of protection for your dwelling is based on the cost of rebuilding the structure in the event of a total loss. The insurance carrier may cover the entire cost of rebuilding, but more commonly limits coverage to a predetermined maximum. This amount is based on the square footage of your home multiplied by building costs in your area. Other important components of your policy’s coverage may be based on the dwelling limit, so it’s important that this amount accurately reflects the real cost of rebuilding.
It is important to note that a standard homeowners policy does not cover a loss from a flood, mudslide or earthquake. Separate coverage for these risks should be considered, especially for those that live in high-risk areas.
Be sure your insurance carrier has a truly accurate picture of the cost to rebuild your home by noting any special building materials or upgrades you’ve made. Those with older homes, or homes with workmanship or materials that cannot be replaced, should understand how their policy will address these issues.
Other structures coverage refers to detached garages, sheds, pools, fences or other structures that are not attached to the primary dwelling. The coverage for these is generally reflected as a percentage of the coverage for the dwelling. Those with high-value detached structures should consider increasing the amount of coverage.
Personal Property includes your furniture, clothing, electronics and the like. It may also cover belongings located outside of your home, such as the contents of your luggage or an off-site storage locker. Most policies will replace a percentage of the total loss, which is often insufficient to replace the item(s). High value items such as artwork, jewelry or expensive garments should be covered by a separate rider. It is a good idea to have an inventory of the items in your home to ensure they are properly covered. As an added measure of protection, having photos or a video of your home and its contents can be helpful should you need to file a claim.
For those that face a partial or total loss of their dwelling, loss of use coverage will provide for additional living expenses to pay for temporary lodging, food and other necessities. A typical policy covers twenty percent of the dwelling limit and may place a cap on the amount of time over which the benefits are paid. Consideration should be given to the amount of time required to rebuild, as well as the cost of temporary housing and expenses in your area. Finally, remember that most carriers will request copies of receipts for any reimbursable expenses.
Personal Liability is a critical component of coverage and should be sufficient to protect tangible assets that could be attached in a lawsuit. If someone is injured on your property and files a lawsuit, the damages could easily reach seven figures. Your policy can help pay for your legal defense and will cover any awards up to the policy limits. To enhance your liability protection, it is generally a good idea to purchase a supplemental umbrella liability insurance policy. This type of coverage is very cost effective, often as little as a few hundred dollars per year for a million dollars of protection.
Dog bites are a common source of homeowners insurance liability claims. A standard policy may exclude certain breeds that have a high propensity to bite, so be sure to check with your carrier to determine whether your dog is covered. Other sources of claims include slips and falls, falling trees, accidents incurred or caused by intoxicated guests, and injuries to domestic employees. Domestic employees may require additional lines of coverage such as worker’s compensation and disability insurance, as required by some states. Ask your insurance professional what your policy does and does not cover, as some of these risks may be addressed at a nominal cost.
Medical Payments are the final component and pays for medical treatment for injuries or accidents that occur on your premises. It’s important to note that this section does not cover those that are insured under the policy (i.e., the homeowner and immediate family) and payments are made regardless of legal liability. The standard policy limits are generally quite low and may prove to be inadequate.
Having an understanding of your risks and what your policy does and does not cover is a crucial first step to developing an effective risk management plan. Working with a knowledgeable and proactive insurance professional can help you structure coverage that helps protect your assets and those you love.
John Male, CFP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
The Retirement Maven ™
9 East 40th Street, Suite 1500
New York, NY 10016
Tel: 212-221-7067 Ext. 17