Insuring Your
Home by Kathy Scott
When purchasing a home, most mortgage companies
require the buyer to have homeowners insurance
as a condition for receiving the loan. According
to the Insurance Information Institute, the average
cost per year for a standard homeowners policy
in 2004 was $608. While standard homeowners policies
will cover the structure of the home and its contents
against fire, theft, and some natural disasters,
(excluding floods, earthquakes, landslides, mudslides
or sinkholes), the amount of coverage varies.
Even if you’re not in the market for a new home,
it’s a good idea to review your policy to make
sure your coverage is in line with your home’s
current appraised value.
The declared value of your home should not take
into account the price of the land that it sits
on, since the land would generally not need to
be rebuilt after a catastrophic event. Insurers
approximate the land price to be about 25 percent
of the full home price. For example, if your home
is appraised for $200,000, the amount your home
should be insured for is about $150,000 or 75
percent of the full appraised value.
If you live in an area that is subject to earthquakes,
you should consider adding an endorsement on your
policy for coverage in the event of a quake. For
California residents, the California Earthquake
Authority (earthquakeauthority.com) underwrites
the coverage. If you live in a flood-prone area,
additional insurance must be purchased for protection
against loss associated with flooding as well.
Standard homeowners policies do not cover these
perils and will not pay out for damage associated
with earthquakes or floods without the necessary
coverage being added to the policy.
The Insurance Information Institute also suggests
that homeowners who live in areas frequently hit
by major storms should speak with their insurer
about an “extended or guaranteed replacement cost”
policy. This policy will provide a certain amount
over the current policy payout if building costs
rise unexpectedly due to high contractor and supply
demands.
Your homeowners policy also covers your personal
belongings. You should make a detailed inventory
list of your property. When estimating the full
replacement value of your personal belongings,
75 percent of the home structure’s value or $50,000
per person living in the home is a general rule
of thumb to use for coverage. Even with content
coverage of $100,000 or more, there are payout
limits on various goods like jewelry, art, computers,
coins and firearms which usually cap out at $1000.
To properly insure items over the $1000 limit,
you should obtain a separate policy for each item
that extends beyond the cap. The separate policy
covers those items if they are lost or stolen
and can cost as little as $30 per year for a piece
of jewelry appraised at $3000.
While there are many factors that go into the
cost of a policy premium, the deductible accounts
for a significant portion. In fact, the higher
the deductible, the lower the premium.
Lowering Your Premium without
Minimizing Your Coverage
1) Get at least three bids – The price you pay
for your homeowners insurance can vary by hundreds
of dollars, depending on the insurance company.
2) Raise your deductible – Most insurance companies
recommend a deductible of at least $500. Raising
it to $1,000 can save as much as 25 percent on
your annual premium.
3) Consider using the same insurer for your automobile
– Many companies offer discounts if you have at
least two policies with them.
4) Add a home security alarm system – Smoke detectors,
burglar alarms and dead-bolt locks can save the
insured as much as 5 percent annually.
5) Ask about additional discounts – If applicable,
inquire about senior discounts. Some employers
or professional associations also have negotiated
discounts for their members.
Source: Federal Citizen Information Center
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