What does homeowner’s insurance cover? Or maybe just as importantly, what does it not cover? Whether you are a homeowner wondering if you should file a claim on recent property damage or a new home buyer looking for a homeowner’s insurance policy for the first time, these questions will no doubt come up from time to time. One thing is for sure: having a quality homeowner’s insurance policy can save you from unnecessary expenses if something dramatic happens to your property. That’s why it’s important to know how homeowner’s insurance works and what is does and does not cover. Here’s a brief outline of what homeowner’s insurance is and why you may need it to protect your assets in case the worst case happens to your home.
Most homeowner’s policies have different coverage amounts for different parts of the property. These coverages are broken up between coverage A-F. Here are the basics of each part of your homeowner’s policy:
- Coverage A is the “face amount” of the policy, covering the main dwelling and is the amount used to replace the home if something catastrophic happens. For example, a family friend had their house burn down and they were able to rebuild their dream home because their Coverage A amount was large enough.
- Coverage B provides coverage for other structures, such as your fence, driveway, sidewalks, or other buildings separate from the primary residence on the property.
- Coverage C is meant for your personal property. This coverage protects your possessions from damage or theft. If your house gets broken into while you are on vacation, the insurance company will pay the replacement cost for the items that were stolen. Be careful here, if you have collectibles, you may want to consider additional coverage through a rider or a separate policy because the insurance company covers your possessions at their replacement cost, not the fair market value (which could be higher for a collectible).
- Coverage D covers additional living expenses when the property is not livable due to a covered loss. If your house is damaged and you must move out while it is rebuilt, the insurance company will pay up to a certain amount for expenses incurred while living outside of your house (included rent and food).
- Coverage E is your personal liability coverage. This protects you from claims from other people that get injured on your property or because of your actions. There are a few exceptions, but this liability coverage typically follows you wherever you go. If your dog gets out of your house and bites your neighbor, this coverage will kick in if you get sued.
- Coverage F is your medical expense coverage. The amount stated in your policy is the amount per person per accident that occurs on your property or because of a pet. Just like in the example above, this would pay for medical expenses for yourself or someone involved in an accident because of your actions. The amount listed in your policy is the coverage per person, per accident.
What’s Not Covered?
Your homeowner’s policy covers a lot of different things. Your home, any other structure on the property, personal possessions, living expenses if your home is not livable. It even provides liability coverage. Just as important as understanding what your policy does cover is knowing what it does not cover. Here are some of the main things not covered by a traditional policy:
- Maintenance of your home – ongoing maintenance is entirely up to the homeowner
- Floods or earthquakes – you can purchase “riders” to cover these specific natural disasters. An exception to this is flooding due to an interior problem – pipe bursting or water heater leaking.
- Personal possession replacement less than the value of your deductible – if you have a personal possession lost or stolen but the replacement cost is less than the deductible on your policy, your insurance will not cover the replacement of the item(s). You can, however, insure a specific item that is not subject to your deductible. This means that your policy will cover the replacement of this item no matter the cost and regardless of your deductible. My wife and I have her wedding ring insured separately on our homeowner’s insurance policy. If she loses it or it gets stolen, the insurance company will pay to replace the ring without us having to pay our deductible. This will slightly increase your premiums. The higher cost could be worth it depending on the item.
What Affects your Premium?
There are many things you can adjust on your policy that affect the premium you pay. The largest one is the face amount of the policy, or how much you insure your home for. The larger this amount, the higher the premiums will be.
Another major factor is your deductible. The lower your deductible, the higher the cost of the policy. Think about it this way – if your deductible is only $500, your insurance company has a higher likelihood of paying if something happens. They want to make sure they don’t lose money, so they are going to charge you more for the lower deductible. The type of dog you own can impact the cost of your policy as well. The liability section of your policy, Coverage E, is what protects you if your dog hurts or bites someone.
Another factor in relation to your liability coverage is the presence of a swimming pool or hot tub. Since this increases the chances of someone getting injured, your policy premiums will increase.
Not surprisingly, the age of your home can affect the cost of your policy. The older the home, the higher the cost to repair or rebuild the home. As you improve an older home, the value can increase, and the likelihood of a loss decreases, resulting in a potentially cheaper policy. There is a long list of things in addition to the ones we just discussed that can affect, positively or negatively, the premiums of your homeowner’s insurance policy.
At FMP Wealth Advisers, we try and help our clients see around the financial corner. If you have any questions about your current insurance policy or are buying a new home and need a new homeowner’s insurance policy, we want to help you think about what’s most important to you and make sure your policy lines up with your values. Call us at 512-329-5174 or email us at firstname.lastname@example.org to schedule a meeting.
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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