Personal Finance Essentials
Homeowners and Renters Insurance
If you own your home, homeowners insurance protects both the structure and its contents.
If you rent, renters insurance covers only the contents. Both types of policies include medical protection and liability coverage. Whether you own or rent, this coverage is not optional – it is a fundamental part of protecting your financial life.
Real Property vs. Personal Property
Homeowners policies distinguish between two types of property. Real property is attached to the earth – your house itself, built-in fixtures, anything bolted or wired into the structure. Personal property is everything that isn’t attached: furniture, clothing, televisions, computers and similar items.
Make sure your personal property is insured for its replacement cost, not its actual cash value. These two figures are very different. Actual cash value is what a used item is worth today. Replacement cost is what it would cost you to buy a brand new equivalent item. If your belongings are destroyed in a fire and your policy only covers actual cash value, you may receive far less than you need to replace what you lost.
How to Prove What You Own
An insurance company won’t pay you for personal property unless you can prove you owned it. This is one of the most overlooked aspects of homeowners and renters coverage, and it’s easy to address now rather than scrambling after a loss. Here’s how to document your belongings:
- Whenever you buy an item of insurable value, record its serial number on the purchase receipt.
- Staple the receipt to the warranty card and store everything in a safe place.
- Photographor video expensive items. Make sure the image includes a reference point for size – have someone stand next to furniture, or photograph small items like jewelry alongside a ruler.
- Keep a duplicate copy of photos or videos at a different location. If your home burns down, photos stored in it will burn too. Update your records as needed.
- Engrave your driver’s license number on expensive items, including your state’s initials.
- Don’t forget Individual items may seem minor, but replacing an entire wardrobe after a fire or flood could cost thousands of dollars.
Fine Arts, Jewelry and Collectibles
Standard homeowners policies do not cover paintings, rare coins and stamps, jewelry or collections. If you own any of these items, you’ll need to purchase a separate rider that describes each item in detail. A professional appraisal is typically required for each piece – keep those appraisals with your other receipts and warranties. Insurance companies often require that you install a burglar alarm before they’ll agree to insure valuable personal items.
Liability Protection
The liability feature of your homeowners or renters policy protects you and your property from claims made by others. Examples include a dog biting the postal carrier, a child hurt playing in your pool, a neighbor slipping on your icy walk or a guest tripping down your stairs. These kinds of incidents happen, and the costs can be significant. Standard homeowners policies may provide only $25,000 in liability coverage – that’s far too little.
Medical Protection
The medical protection feature covers anyone who is injured while visiting the property you own or rent, with the exception of immediate family members who live with you. This coverage is no-fault, meaning it pays even if the guest was responsible for their own injury. There is no deductible. If you were at fault for the injury, your liability coverage will take over once the medical coverage reaches its limit.
How Much to Insure Your Home For
Every home can be described by multiple dollar figures, and it’s easy to confuse them. Consider a property that was purchased for $200,000, carries a current mortgage balance of $130,000, has an appraised value of $210,000, an assessed value of $190,000 for tax purposes, a current market value of $300,000 and an equity value of $170,000. So how much should this home be insured for?
The answer is the replacement cost – in this case, $250,000. Replacement cost is what it would cost to rebuild the home from scratch if it were destroyed. It is not the market value, because market value includes the price of the land, which you won’t need to replace. It is not the purchase price or the mortgage balance. It is simply the cost to reconstruct the structure itself.
You should have your home appraised every five to seven years to make sure your coverage amount is still accurate. You should also review your policy whenever you remodel or expand the home, since these improvements increase the replacement cost.
Natural Disaster Coverage
Most homeowners policies do not automatically cover all natural disasters. Two in particular deserve special attention.
Earthquake coverage is available as a rider added to your standard homeowners policy, though California residents must purchase a separate policy. In areas where earthquake coverage is required or recommended, it is expensive – adding it typically increases the cost of insurance by 50% or more. The deductible is often $10,000 or 10% of the coverage amount, whichever is higher.
Flood damage is not covered by standard homeowners policies. If you live in a flood plain, contact the National Flood Insurance Program. There is a 30-day waiting period after you purchase the policy before it becomes effective, so don’t wait until a storm is approaching. A premium of around $350 buys approximately $100,000 in flood protection.
Ways to Lower Your Homeowners Insurance Premium
There are several effective ways to reduce the cost of your homeowners policy without sacrificing meaningful protection.
Do not file small claims.
Increase your deductible.
New homes built within the last ten years may qualify for a discount.
Add safety features to cut your premium by up to 20%.
Ask about discounts.
If you have questions your agent can’t answer satisfactorily, call the Insurance Information Institute or contact your state’s Department of Insurance.