By Susan Doktor
What keeps you up at night? For many of us, financial worries—questions like, “What would I do in a financial emergency?” have us tossing and turning in bed. Some folks even suffer nightmares due to the stress of pressing money matters.
If you’re a homeowner—or plan to become one—the worry you experience may magnify. What if someone were to fall on the cracked and crumbling concrete stairs you haven’t had the money to fix? What would happen if someone broke into your home and stole your brand-new MacBook?
These concerns, of course, are what homeowners’ insurance was designed to address. But many homeowners don’t really understand how insurance works in general, the ins and outs of their own insurance policies, or how to buy coverage. We don’t have a clue about the basic things we should know about homeowners insurance.
So we decided to speak with an expert—someone who could unpack the complexities of homeowners’ insurance and explain how to pick the best homeowners’ insurance for your needs.
Vince Davis is a thirty-year insurance industry veteran and owner of Vince Davis Insurance Agency Inc. He’s pretty famous in the midwestern city of Toledo, Ohio, where he’s lent his skills as a board member for Toledo’s largest businesses and various non-profits, and championed the restoration of the city’s historic district.
We asked Davis why homeowners need homeowners’ insurance. His answer surprised us. “You don’t,” he said. “If you can absorb the cost of a catastrophic loss yourself, then homeowners’ insurance isn’t an imperative.”
But most of us don’t fall into that category of homeowner. A fire that leveled our home or a multi-million-dollar verdict in a lawsuit filed by someone injured on our property would be financially devastating. Few of us could recover from that.
So for the non-multi-millionaires among us, the question remains: are the most important things you should know about homeowners insurance?
5 Things You Should Know About Homeowners Insurance
1. Start By Understanding the Basics
There are two primary parts to a comprehensive homeowners’ insurance policy: property insurance and liability insurance. “You need both types of insurance to be covered in any eventuality,” Davis advises.
Property insurance covers damage to your property caused by accidents, as well as the losses you suffer if your home is burglarized or vandalized. If a windstorm brings down a large tree branch that damages your roof, property insurance would pay for your roof repair. If someone breaks into your home, steals your prized home entertainment system and, just to be vindictive, slashes your leather couch to shreds—it’s been known to happen—property insurance would pay for you to replace your 85-inch ultra-high-definition TV, surround-sound set up, and your sofa.
Property insurance does not cover damage to your home caused by wear and tear or neglect. “That’s one of the most common misconceptions about property insurance. It’s no replacement for properly maintaining your home,” Davis told us. Many people, he reports, mistake property insurance for a home warranty, which might cover the cost of fixing leaky pipes or replacing a broken water heater. But as a homeowner, those costs are on you, not your homeowners’ insurance carrier.
While property insurance is designed to compensate you for any losses you suffer, liability insurance covers the losses other people suffer when they are on your property. But make no mistake—it’s still about protecting you.
Let’s say your kid leaves a pile of Lego on your front steps and a visiting friend slips on them while entering your home. She winds up with a broken elbow, a bad bump on her head, and a big pile of medical bills. She also loses a couple of weeks’ work due to her injuries. By having liability insurance, you’re making it possible for her to recover the costs she incurred as a result of her accident. But the funds don’t come out of your pocket. Instead, you both turn to your insurance company to pay her costs.
2. Figure Out Exactly How Much Insurance You Need
Let’s talk first about property insurance. According to the experts we’ve consulted, how much insurance you need depends on how much your property is worth and whether you want full protection—that is the entire cost of replacing it in the event you suffer a loss.
Take our example of the fabulous home entertainment system. Let’s say it cost you $10,000 and you purchased it two years ago. An Actual Cash Value (ACV) policy would pay out what your system would fetch on the open market—what it would cost to purchase a two-year old system, say, if you bought it on eBay. Replacement Cost Value (RCV) would pay enough to purchase a brand-new system with the same features as your stolen one.
By the same token, if your house burned to the ground completely, RCV coverage would pay enough to rebuild your home completely. Not so with ACV. If you elect to purchase an ACV policy, insurance pros recommend that the property insurance coverage limits you choose should be equal to at least 80% of your property’s worth.
Now, on to liability coverage. Liability coverage, in terms of premiums paid and corresponding coverage limits, is considerably less expensive than property damage insurance. Standard liability policies have coverage limits of between $100,000 and $300,000. But it only costs an extra $30 or so annually to add another $100,000 to your coverage limits.
If you’re a high-net-worth homeowner—perhaps you own several properties or have significant investments—it’s especially important to buy enough liability insurance to insulate your other assets from a lawsuit. By way of example, if you’re worth a million dollars on paper, be sure you have at least a million dollars’ worth of coverage. You may want to consider purchasing an umbrella policy—additional coverage that protects you beyond the limits of your homeowners policy.
3. Choose the Right Agent—and a Reputable Insurance Carrier
As a homeowner, your home and the insurance you buy to protect it are part of your larger financial picture. Consider your agent as part of the team of financial advisors you confer with before making important decisions around money, just as you do your mortgage banker or investment counselor.
Davis sees it this way: “It’s best to establish a consultative relationship with your agent. Find an agent who’s willing to spend time assessing your needs and customizing a policy to meet them.” Davis also suggests you seek recommendations from your financially-savvy friends. Agents who are active in their communities have already demonstrated they care about something greater than their own prosperity.
You’ll also want to chose a reputable carrier. Your agent isn’t responsible for paying your claims, of course. That’s why you should only buy a policy that’s backed by a carrier that’s highly rated for financial strength and stability. You can assess how solid an insurance carrier is by consulting rating organizations like AM Best or Moody’s.
4. Start Your Research Online
You can learn a lot about insurance and insurance providers from the comfort of your couch. Money.com, one of the world’s foremost personal finance publications, has done quite a bit of research on the topic and recommends these companies:
- Lemonade – Best Online Insurance Company
- Erie Insurance Company – Best Range of Coverage Options
- Allstate – Best for Claim-Free Homeowners
- Amica Mutual – Best Customer Service
- USAA – Best for Military Members
- Hippo – Best for Fast Quotes
- AIG – Best for High-Value Homes
Most of these companies will provide you with a quote online. Comparison shopping is a smart move, as is checking consumer review sites like Trustpilot to read about real customers’ experiences when working with an insurer or filing a claim. Bear in mind, once again, our expert’s advice. The quality of customer service an insurer offers is every bit as important as the type of insurance and policy limits you decide on.
Tip #5: Save the Smart Way on Insurance
Many people think of insurance as one of those necessary evils. You can pay for it for years and never use it. That’s why many people are content to pick the insurance company that offers them the lowest price. But the moment you need to file a claim, insurance is transformed from an annoying expense to a blessing you’re grateful to have. Picking the cheapest insurance policy isn’t always the wisest thing to do, but that doesn’t mean you can’t save money on insurance. Here are a few steps you can take to lower your insurance costs without compromising on quality:
- Choose a higher deductible—the amount you’re responsible for paying on any claim you file. Your policy should come with a deductible that you can comfortably absorb in case of a loss. If you have a substantial emergency fund, you can get the same amount of coverage for a lower cost. Only about 5% of homeowners file an insurance claim each year. Chances are, you can set a higher deductible, pay lower premiums, and never have to file a claim or pay a deductible.
- Bundle several types of insurance with one carrier. Most large insurers offer other kinds of insurance in addition to homeowners’. And nearly all reward you with lower premiums for buying more than one policy from them. The average multi-policy discount is about 17%. So if you own a car, a boat, or a motorcycle, consider buying insurance for all of those assets with your homeowners’ insurance carrier.
- Check into any discounts you may qualify for. If you have a home security system, most insurers will give you a break on your premiums. Some insurers extend discounts to veterans and first responders. Insurers also reward customers who haven’t filed any claims with reduced rates. So it makes sense to stick with the same carrier for as long as the company serves your needs.
Finally, there’s one thing you need to know about homeowners’ insurance. If you have a mortgage on your house, homeowners’ insurance isn’t optional. Your lender will require you to carry it in an amount that at least equals what you owe on your home. But don’t go by your mortgage company’s standards. Banks only demand you carry enough insurance to protect their own interests. Your interests are greater. When it comes to purchasing homeowners’ insurance, remember, you’re number one.