Protect What You Own - Home Insurance Basics for Homeowners

You’ve just bought a new home. Before you unpack all the kitchen stuff, set up the stereo, and put up the pictures there’s one very important thing you have to buy: home insurance. Buying a home involves more than just making sure you have home owners insurance coverage. There’s a lot you should be aware about before you go to get a policy.

Your home is one of the single largest investments that you’re likely to ever make. You need to protect that investment. Buying insurance is really about buying something that you hope you’ll never have to use. But if you ever do need to file an insurance claim, you'll understand why having the right amount and the right type of coverage is important. That’s what this report will help you do, provide you with some tips and information that will help you purchase the right type of coverage.

The 3 Basics of Home Insurance

Like everything, the key to a good decision to know what your choices are. But before we get to the choices you have to understand the basics. Getting the right policy for your new home can be an intimidating process, especially for first-time homeowners who may feel overwhelmed by the number of decisions they are faced with.

Since a home is usually a person’s largest asset, protecting it properly can be complicated. First-time homebuyers may not realize that homeowners insurance covers more than just the structure of a house. It also protects the homeowner and generally anyone named on the policy, including a spouse, resident, household employee, guest or visitor. Here are the three kinds of protection most policies offer:

1. Structures - A homeowners policy protects a person's dwelling for damage due to common threats like fire and smoke, lightning, theft and extreme weather. Unless it is listed among a policy's exclusions (specific things your policy does not cover), anything that causes loss to a homeowner or his property is covered. To cover the exclusions, homeowners can often pay to add endorsements to their policy, although some exclusions (such as flood damage) may require the purchase of a separate policy.

2. Personal Property - Family possessions and personal property also are covered by homeowners insurance. In most cases, a policyholder will be reimbursed for damage or theft of personal property, whether the loss occurs on the protected premises (your property) or elsewhere.

3. Liability - Homeowners insurance also provides compensation for liability claims and medical expenses, as well as other claims that result from property damage and personal injury suffered by others. This coverage applies whether an accident occurs on the policyholder's property or while away from home.

Conducting a Home Inventory

Before you go and purchase a policy what every homeowner should do is create a home inventory. Essentially this is a detailed report of everything that you own, that you want your policy to cover. If your household possessions are damaged or destroyed, you'll have a hard time recalling the price (and description) of every item unless you have a thorough home inventory on hand.

When you make an insurance claim for damaged, lost, or stolen property, your renters policy will require you to show the quantity, description, actual cash value (i.e., depreciated value), and amount of loss associated with each item. You'll also be asked to provide copies of bills, receipts, or other documentation to support your figures. If you omit some items or fail to include an adequate description of others, you may receive less than full compensation for your losses. Relying solely on your memory can be an expensive mistake. As an exercise, try to name every item in your kitchen junk drawer, and then imagine having to do that for the whole house.

Your list should include the serial numbers, as well as the dates and cost of purchases for possessions such as furniture, jewellery, artwork, antiques, appliances, kitchen contents, clothes, carpets, drapes, computer equipment, television sets, DVD players (and other audio or audiovisual equipment), musical instruments, clocks, mirrors, linens, lawn mowers, snow equipment, tools, sports equipment, and any other item of value.

The best time to conduct an inventory is before you move into your new house. That way, if something is lost or damaged, you'll be prepared to file a claim against the moving insurance that you've purchased (or the insurance that the mover has provided).

Going room by room is perhaps the best way to conduct your home inventory. Make a list of each item in the room, opening drawers, closets, and storage boxes. Be as descriptive as possible. For example, don't simply note that a bed exists--describe the headboard, footboard, mattress, and bedding, writing down colors and dimensions. Don't forget the attic, hall closets, basement, and outbuildings. If possible, try to include the following information for each item:

 * Item description (and quantity)

 * Manufacturer or brand name

 * Model number or serial number

 * Description of where (or how) the item was obtained

 * Date of purchase or age of item

 * Receipt or other proof of purchase, showing cost

 * Current value

 * Replacement cost

 * Photocopies of any appraisals

It often helps to photograph or videotape your possessions, especially if the items are hard to adequately describe on paper or if you don't have a receipt. This is especially easy, and cheap, to do if you have a digital camera. If you use a camera, label each photo with information about the item shown. If you use a camcorder, provide a commentary about each item in view. Date-stamp your video or take a shot of the date on that day's newspaper.

Your inventory (whether it takes the form of a written list, a series of photographs, or a videocassette) will do you no good if it's lost in a fire or has otherwise vanished. Although you may want to have a copy of your inventory at home, you should also store a copy in a secure location, such as a safe-deposit box or your office at work. Include copies of your receipts and other supporting documentation. Finally, you should update your inventory at least annually to make sure that it accurately reflects your home's contents.

After you know what you have and can prove it, it’s time to go get that policy. There’s a lot to know, so let’s start with the basics.

Find Out What’s Covered

If you have a mortgage, your lender probably required you to obtain some level of homeowners insurance coverage. Most standard homeowners insurance policies will provide coverage for damage to your home (and many of the items in your home) caused by:

 * Theft

 * Fire and lightning

 * Smoke

 * Frozen pipes

 * Ice and snow

There are some things that your policy won’t cover. Read your homeowners insurance policy to find out exactly what is and is not covered. Do this before you suffer a loss, so you won't be surprised. Most insurers exclude damages caused by an act of war, nuclear accident, flood, earthquake, and terrorism. Of these, earthquake and flood are the most important. If you live on a riverbank, near the ocean or even if you live in a low-lying area (e.g., near a creek), you’ll probably want to look into purchasing flood insurance. And most in most locations it’s wise to get earthquake coverage. Most companies that sell homeowners insurance also sell flood and earthquake insurance, and you may be able to purchase special policies or endorsements that will cover the rest if you want. Try contacting your own insurance company for more information.

An insurance policy is a legal contract that may be loaded with technical terms that are hard to understand. But read it anyway before you sign on the dotted line to find out about the coverage you're buying. For instance, the policy will tell you:

 * Who or what is covered

 * What coverage exclusions and limitations apply

 * When coverage begins and ends

 * How much coverage is provided

 * How much you'll pay for coverage (the premium)

 * How you report a loss or file a claim

You'll want to make sure that the amount of coverage that you have will adequately protect you for all possible losses. Most homeowners insurance policies limit coverage for certain high-priced or hard-to-replace items. Additional endorsements or floaters will be necessary to protect items like engagement rings, watches, furs, antiques, and other valuables. You'll need to have each item appraised.

How Much Insurance Do you Need?

Mortgage lenders require that borrowers purchase a minimum amount of homeowners insurance (typically equal to the appraised value or the purchase price of the home). But this is often not the amount of coverage you truly need. How much insurance you need depends on a lot of factors including how much you owe and own, how much your assets are worth, whether you have dependents, and how much out-of-pocket cost you could afford to bear. You can estimate your coverage needs using calculators or worksheets available on-line, but it's a good idea to sit down with an insurance agent or broker who can thoroughly evaluate your needs.

Are you willing to pay more to have damaged personal property replaced? If so, consider purchasing replacement cost coverage with your homeowners insurance. When it comes to valuing property, insurers generally use one of two methods. The first, actual cash value, pays you an amount equal to the replacement value of the property, minus depreciation for the years you owned the item. The second, replacement cost, is more expensive, but it pays you the full value of the item today, so that you can replace the old item with a new one.

To save money, consider choosing a deductible of $250, $500, or even $1,000. In the event of a loss (e.g., water damage from a leaky roof), you'll be required to pay this amount out of your own pocket before your homeowners insurance takes over, but in the meantime, you'll save on premium charges.

Don't forget to tell your insurer if you have a home security system (e.g., fire, burglar, emergency). Most insurers offer discounts for such safety features. You may also qualify for a lower insurance premium if you live near a fire department or hydrant, own a newer home, own a home built out of fire-resistant materials, or get your auto insurance from the same company.

Comparison Shop

No matter what type of insurance you're buying, the process is essentially the same. Once you've decided what type of insurance and how much coverage you need, you can begin contacting insurance companies online, directly by phone, or through an insurance agent or broker to obtain quotes.

Get quotes from several insurance companies when shopping for homeowners insurance. But remember, the lowest price does not always equal the best deal. Compare the coverage each policy offers because premium costs can vary widely. But compare the coverage offered, too. A policy might cost less because it offers fewer, or different, features and benefits. And make sure the company you've settled on is reputable, with good customer service and claims-paying ability. All insurance companies are rated by major rating agencies on their ability to pay claims. You can access these ratings online, through public libraries, or through insurance company literature.

After You Have Your Policy

Make sure to evaluate your insurance needs periodically. As your life changes, your insurance needs change, too. So every once in a while (annually, some experts suggest), review your insurance to see if you need more (or less) coverage or an additional type of coverage. Here are some times in your life when you'll definitely want to re-evaluate your insurance needs:

 * You're getting married or divorced

 * You're starting a family

 * You're renting an apartment

 * You're buying a house or a car, or making a major purchase

 * Your child is going off to college

 * You're starting a new job or becoming self-employed

 * You're buying or selling a business

 * Your income increases or decreases substantially

 * You're taking care of an aging parent

 * You're retiring

As mentioned, home insurance is really about buying piece of mind. It’s about purchasing something that you hope you’ll never need, but that you’ll be happy you had if something does go wrong. With the myriad of choices available out there, it can be confusing to say the least. It’s a good idea to talk over your options with an insurance professional and to never be afraid to ask your expert to explain any terms, conditions, or benefits that you don't understand. Happy insurance hunting!

This paper is intended for informational purposes only. Nothing contained herein constitutes legal, financial or other professional advice. Transmission of these materials is not intended to create, and receipt does not constitute, any relationship of any kind between the provider and the recipient. Some of these points may not apply in your area. Different term and conditions may vary from state to state and province to province. All articles, text and photographic material presented here is for the use and pleasure of the recipient only.