It probably won’t surprise you that Ben Franklin was the Founder of the first home owners insurance company in the United States.
His company, Philadelphia Contributionship for the Insurance of Houses from Loss by Fire was formed in 1752.
For a long time, there were many policies covering specific needs like fire, burglary, lightning, floods, etc. Today, a basic homeowners insurance policy covers all our needs.
Odds are, unless you work in the insurance industry, you don’t pay very close attention to your policy. That being said, odds are your home is the most expensive and valuable thing you’ll ever own. For that reason, it makes sense to ensure you’ve got the right insurance.
This post will talk about the fundamental parts of homeowners insurance to pay attention to.
Here’s what we’ll cover:
- Why you need it
- What it covers
- What to look out for
- How much does it cost
- How to save money
- How to get coverage
Let’s get started.
Why you need it
If you have a mortgage on your home, your lender requires you to have it. On top of that, here are the three key reasons to own a policy:
- Should our physical house experience major damage, we need money to fix it. Unless you’re independently wealthy, it makes sense to purchase insurance to cover the costs of repair
- Should our personal property be stolen or destroyed by a covered cause, it can also make sense to purchase insurance to cover the costs of repair or replacement.
- Should someone have an accident at our home, a policy would protect us from personal liability.
While the odds of you experiencing one of these three things are relatively low, the consequences should they occur are too high not to have a homeowners insurance policy.
What it covers
While there are technically 8 different types of policies, your policy will be designed specifically for you and your situation. With that in mind, here are the six areas covered by most policies:
- Section A covers physical damage to your house. While it’s natural to assume your policy will cover all possible types of damage, that’s not the case. You need to read the policy and ask questions to ensure you’re getting the proper coverage.
- Section B covers physical damage to any other existing structures on your property. Think detached garages and fences.
- Section C covers damage or theft of personal property. It’s common for policies to provide coverage for a percentage of the value of your home. Make sure you know the value of your personal property and your coverage provides the right protections. More on this later.
- Section D covers expenses incurred for living expenses brought by a claim. For example, the cost of a hotel if you’re unable to live in your house.
- Section E covers personal liability. This coverage applies when someone gets hurt on your property, or you cause damage to someone else’s property.
- Section F covers the cost of medical expenses resulting from someone getting hurt on your property.
What to look out for
While there are many different types of policies covering many different hazards, you may still have gaps in your coverage. These gaps can be extremely costly.
Damage caused by animals, earthquakes or floods are not always covered by standard policies. If you’re not sure if you should have these risks covered, ask the agent you’re working with.
If you’re looking at purchasing a home and want to know what kind of claims have been made on that home in the past, you can order a CLUE report. This report will list any claims that have been made on the property over the past five years.
How much does it cost
While the average cost of homeowners insurance is consistently increasing, the average annual premium is around $1,300 a year.
There are many factors that go into the costs including:
- Your credit score
- The square footage of your home and any additional structures on the property
- Building costs in your area
- What your home is made of
- Crime rates in your area
- The likelihood of natural disasters
- Distance to a fire station
- The condition and age of your plumbing, heating and electrical systems
- The number of claims filed
- Recent of future remodels or additions
- The age of the house
- The amount of your personal property
There are a lot of factors that go into your premium. The good news is there are ways to save money on your policy.
How to save money
Price is what you pay, value is what you get. With that in mind, simply buying the cheapest coverage is not a wise decision. But here are ways to potentially save yourself money.
Consider bundling coverages. Is there an opportunity for a discount if you have additional policies with the same insurance company? Oftentimes, you can get a discount by also having an auto and or life insurance policy with the same company providing your homeowners insurance.
Improve and maintain your credit score. Depending on your state, a poor credit score can increase your premium.
Install a home safety and security system. Many insurance companies offer discounts when a homeowner installs a security system and has proper smoke detectors.
Perform preventative maintenance. An ounce of prevention is worth a pound of cure. Making sure you’re performing routine maintenance on critical areas like your roof, heating and AC units, can help you reduce costs.
Get a higher deductible. As with other types of insurance, the higher your deductible, the lower your premium. When making your decision on the proper deductible, consult your agent and take into consideration other aspects of your financial life. How much short-term savings do you currently have? If you have a six month cushion, it could make sense to have a higher deductible.
Shop around for coverage. While finding the proper coverage is the most important thing, it’s probable one insurance company could be charging less for the same coverage. While it’s not necessarily smart to switch companies every year, it’s smart to shop around.
How to get coverage
The better prepared you can be when you start shopping for homeowners insurance, the better. Here’s are three common questions potential insurance companies will ask:
- What year was the home built?
- How old is the roof and plumbing?
- What is the current value of the home?
We talked earlier about creating a list of all your personal property.
It’s smart to write down serial numbers, make and/or model numbers, purchase prices, present value, and date of purchase.
Document everything with photos or video, and attach receipts if you have them. Store the inventory and visual records somewhere other than your home. Keeping them in the “cloud” works well.
Make sure you update your inventory as you make new purchases.
Conclusion
So what is the “right” coverage? It’s having enough coverage to
- Rebuild your house if it’s destroyed in a fire or some other covered disaster
- Replace all your personal property
- Protect yourself if someone is injured on your property
We’ve got great Certified Partners like the Zebra who can help you get the proper coverage. If you’d like to speak with an agent, you can do that here.
Check out our The Right Coverage course to ensure you’ve got the right protections in place.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
Connect with one of our Certified Partners to get any question answered.
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Check out these episodes of the LifeBlood podcast:
House Insurance with Sean Harper
Climate Change and Insurance with Sean Harper
Comparing Auto Insurance with Nicole Beck
Simplifying Insurance with Laura Adams
Personal Lines Insurance with Justin Staebler
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