What to Look for in a Homeowners or Renters Insurance Policy

Insuring your home and its contents is a prudent step toward controlling your financial future. While no one expects a catastrophe, disaster can strike. It could be a fire, roof leak, hail storm, flood, break-in or some other mishap caused by nature or by another individual. Being protected makes sense.

If you are a renter, your insurance should cover your belongings and provide some liability coverage for injuries to others in your home. If you own your home, your protection should also cover the costs of repairing or replacing your home if needed.

Components of a homeowners policy

Homeowners insurance covers the cost of rebuilding or repairing your home and other structures (garage, shed, etc.) if the home is destroyed or damaged. It covers the contents of your home in the event of damage or theft. It also protects you against your liability for injuries to other people or damages to their property.

The structure. You should have enough insurance to cover the cost of rebuilding your home if it is completely destroyed. You may want to get an estimate of actual replacement costs for the structure. Your mortgage lender or an insurance agent can probably give you an estimated per square foot replacement cost. Do the math and make sure you have at least that much coverage. Also, it makes sense to review your coverage every few years as costs of construction continue to rise.

Contents of your home. Most homeowners policies include coverage for your personal property in your home. This includes furniture, clothing, some electronic devices and even food in the pantry. The key is to know what you have. Prepare an inventory of everything in your home. While this can be a thankless task, it will be invaluable if you have a claim. At a minimum take pictures or video tape your belongings. Keep a copy of this inventory in a safe place away from your home such as a safe deposit box. Having a complete inventory that burns in a fire does not do much good.

There are two methods used by the insurer to determine the value of items or property lost or damaged. One way is the Actual Cash Value (ACV) method which is based on the original cost less any depreciation. For example, the stove you bought for $800 six years ago may have an actual cash value of $300 today.

The other method is Replacement Cost which considers the actual cost of replacing a lost or damaged item with a new one at its current price. Replacement cost is the preferred form of coverage, but it is usually more expensive than actual cash value.

If you have especially valuable items, such as jewelry or art works, you may want to consider a special rider to your policy to cover those items. Although most policies provide coverage for valuables, their limitations may not cover their full value if thy are valued higher than the policy limits.

Liability coverage. Most policies include coverage for liabilities that occur in and away from your house. If your neighbor’s child is injured while playing with your children in your yard, you’re covered. Many homeowners policies include a standard amount of liability coverage of $100,000 or $250,000. Examine your policy. With the high level of jury awards being given out in today’s society, you may want to buy an additional umbrella policy to provide additional protection. These "umbrella" policies are usually inexpensive and can provide coverage up to $1 million or more.

Deductibles.

This is the amount of money the insurer expects you to pay towards a claim before it will pay its portion. For example, if you agree to a $1,500 deductible in your insurance policy, and you incur $3,000 in covered damages or losses, you will need to pay $1,500 before the insurer pays the remaining $1,500. The deductible amount you choose will affect the amount of premium you pay with a higher deductible resulting in a lower premium amount.