Understanding Insurance: Covering Your Home

House Fire

What would it cost to replace your entire home — and all of the contents inside it — if you were to lose it in a natural disaster?

No matter how fancy or modest your home is, the amount of money that it would cost to replace it probably adds up to a staggering amount. And even if you don’t own a home, replacing the contents of your apartment or rental house in the case of a disaster would cost tens of thousands of dollars. Unless you’re in the unusual position of having a six-figure savings account, you probably don’t have the resources to cover the cost of a home catastrophe on your own.

That’s where homeowners and renters insurance comes into play.

In this series, Understanding Insurance, we’ve been talking about the important role that insurance plays in securing our finances by helping to offset the risk that is inherent in life. We’ve looked at many of the common types of insurance that are important, including auto insurance, health insurance, life insurance and long-term care insurance. Today, we’re going to examine the benefits of carrying policies that protect your home and its contents in the case of a disaster.

Understanding the risks

The safety and stability of our homes is something that we take for granted today, but it hasn’t always been that way. Historically, fire claimed homes around the country with surprising frequency. And although modern construction materials and safety mechanisms have greatly reduced the risk of house fires, disaster still happen from time to time. One electrical malfunction or cooking mishap can send your home up in flames, destroying all of your material goods along with it.

Fire isn’t the only risk to your home. Natural disasters and other weather events can damage or destroy your property as well. Big events such as hurricanes, tornadoes and earthquakes grab the most headlines, but smaller storms and floods can do extensive damage to homes as well. In my hometown, a hailstorm a few years back did an incredible amount of damage, causing home owners all over the city to replace their roofs. Those that had good homeowners insurance were able to repair the damage at minimal personal expense.

The point of homeowners or renters insurance is to protect you and your family financially in case a disaster like this damages or destroys your home and possessions. Since you probably don’t have the cash on hand to pay for a new house and new stuff outright, you pay a small monthly fee for insurance that will reimburse you for the repair or replacement of your home and its contents in the event of a misfortune.

Required for homeowners

If you own a home, you’ve likely already bought homeowners insurance, because your mortgage lender requires you to carry insurance on your property. Your lender has a lot of money invested in your home, and they want some assurance that if something destroys your home, their money isn’t going to go up in a puff of smoke. So they ask you to get homeowners insurance before finalizing a loan. They may even collect that insurance premium as part of your monthly mortgage payment and then send it in to the insurance company — that way they can be certain that the insurance on the house is up-to-date.

This means that if you lose your house in a disaster, the first check that the insurance company writes won’t be to you, but to the bank. If you lose a home with a $150,000 policy, and your mortgage balance is $100,000, the insurance company will pay the bank $100,000 and then give the remaining $50,000 to you.

Homeowners insurance isn’t quite as simple as determining the value of your home and then writing a policy for that amount, however. A good insurance agent will help you take many things into account when drafting your policy. For example, they don’t just look at the market value of your home; instead they examine what it would cost to completely rebuild the same house with current materials and construction costs. That usually comes out to more than the value of the house — so the base coverage on your $150,000 house may start at $175,000.

In addition to the replacement coverage, good homeowners insurance will also take into account the value of the stuff inside your home. You may not think that you have very many valuable belongings — no expensive jewelry, electronics or antiques, for example — but the value of all of your everyday goods still adds up very quickly. The cost of replacing simple things, like your clothes, dishes and furniture, is probably $10,000 or more. These costs are also factored into your homeowners policy as well.

What if you rent?

If you’re a renter, you’re not responsible for the physical premises of your apartment, condo or townhouse, but you still need good insurance. Your landlord carries insurance that will cover the cost of replacing the physical structure in case of a disaster, but that insurance doesn’t extend to you or any of your belongings. If your apartment burns down in a fire, and you don’t have insurance, nobody is obligated to reimburse you for the value of all of your things that burned up in the fire.

Renters insurance changes all that. This is an insurance that you carry to cover the value of your stuff. If you have renters insurance and the building you live in burns down, your insurance company is going to reimburse you for your losses. This makes renters insurance pretty important. Unlike homeowners, who are required by their banks to carry insurance, nobody forces tenants to have renters insurance. But that doesn’t mean you can afford to go without it.

Of course, both renters and homeowners insurance are rather intricate insurance products, and there is much more that goes into them than we can cover here. The important thing to know is that this stuff is really important, and it’s critical to make wise decisions when buying these policies.

You should educate yourself about the basics of these insurances before you go shopping, and work with an insurance agent you trust who will take the time to dig into the details of your situation to find the best insurance for you. And it’s a good idea to revisit your insurance situation every 4-5 years: As life situations change, you may find yourself over- or under-insured, or discover that you could save significant money on your insurance by getting new quotes on the coverage.

Whatever you do, don’t ignore this important component of your insurance life. Because if disaster strikes your home, you can’t afford to be left out in the cold.


Photo by dvs. Used under Creative Commons License. 

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