A client of mine recently asked me about getting homeowner’s insurance — was it really necessary? Well, besides the fact that the lender will most likely require it, you can only hope it won’t be necessary. However, if it ever does become necessary, you’ll be glad you have it.
Years ago, my son fell asleep while reading a book in bed. His lamp fell onto the bed and, hours later, I awoke to the smell of smoke. To make a long story short, the heat from the lamp caused the mattress to smolder, but not actually burn. We got the mattress out of the house and had no actual damage (aside from the loss of the mattress). Except that everything in the house smelled like smoke. The insurance company paid to have an enormous number of items drycleaned to get rid of the smoke smell. I’m just grateful that we didn’t need the insurance for more than we did.
So, here are some things to understand about homeowner’s insurance (also called fire insurance and hazard insurance).
- Look for exclusions to coverage. For example, most insurance policies do not cover flood or earthquake damage as a standard item. These coverages must be bought separately.
- Look for dollar limitations on claims. Even if you are covered for a risk, there may a limit on how much the insurer will pay. For example, many policies limit the amount paid for stolen jewelry unless items are insured separately.
- Understand replacement cost. If your home is destroyed you’ll receive money to replace it only to the maximum of your coverage, so be sure your insurance is sufficient. This means that if your home is insured for $150,000 and it costs $180,000 to replace it, you’ll only receive $150,000.
- Understand actual cash value. If you chose not to replace your home when it’s destroyed, you’ll receive replacement cost, less depreciation. This is called actual cash value.
- Understand liability. Generally your homeowners insurance covers you for accidents that happen to other people on your property, including medical care, court costs, and awards by the court. However, there is usually an upper limit to the amount of coverage provided. Be sure that it’s sufficient if you have significant assets.
© 2006 Susan Pruden.