Homeowners Insurance

What you need to know about insurance for your home.

Homeowners insurance not only protects you from potential liability claims when someone else is injured on your property. It also helps to protect your own property from damage or destruction. A comprehensive homeowners policy provides protection against potential losses from perils such as fire and smoke, theft, vandalism, burglary, bursting pipes, and wind and storm damage. Most homeowners policies exclude coverage for earthquake damage, although in states such as California this coverage can be purchased in addition to the standard coverage. Most policies also exclude flood coverage, but in some parts of the country it's possible to obtain flood insurance through the federal Flood insurance Program. Your insurance agent or your state's department of insurance can provide additional information about this program.

Homeowners policies come in a variety of forms, but the best kind of policy to buy is the most comprehensive policy you can afford. You should buy a policy that covers at least 80 percent of the value of your property if you own a single family home, and 100 percent of your property if you live in a condominium or cooperative.

You only need 80 percent coverage for a single family home because at least twenty percent of the value of your property is in the land, which won't need to be rebuilt if your house is completely destroyed. You need 100 percent coverage for a condominium, however, because since you don't own the land on which it's built, it won't be calculated into the replacement cost.

You should also buy a policy that will pay the replacement cost of your personal property, up to the policy's limits. That means buying a policy that will, for example, buy you a new television set if your old one is stolen or destroyed. If you purchase a policy that pays the "fair market value" for your losses, you won't get a new television. Instead, the policy will reimburse you for the depreciated value of the television. So if your television was five years old when it was destroyed, the insurer will give you enough money to buy a five year old television.

Your policy should provide coverage for additional living expenses that you might incur if your home is damaged or destroyed and you have to find temporary living quarters elsewhere. This coverage should pay for hotel accomodations or a temporary apartment, as well as meal expenses you have to pay while living out of your home.

You should also consider buying a policy that provides automatic inflation coverage. With this coverage, the limits of your policy (and your premium) are adjusted annually to reflect the increase in the value of your home and property. However, be sure to review the proposed increases when you receive your policy renewal notice each year. Some insurers raise these values far more quickly than circumstances warrant, and being overinsured just means that you are paying for coverage you don't really need, and which you can't collect on if you do suffer a loss.

Finally, you'll want to be sure you have a substantial amount of liability coverage in your policy. Most homeowners policies offer a minimum of $100,000 of liability protection. In most cases however, you should consider purchasing additional liability coverage, since you could face a potentially much larger claim if someone is injured while on your property.

An umbrella policy provides large amounts of liability coverage above the limits of your homeowners policy, but you need to buy the homeowners policy first, since an umbrella policy only pays for damages when they exceed the primary coverage in your homeowners policy. You can usually buy an umbrella policy with a million dollars of liability coverage for around $200 or so. If you have a lot of assets to protect, an umbrella policy may be worth considering. But for most people, buying the highest amount of coverage you can get in a homeowners policy is probably enough.

Whichever company you pick, there are a number of things you can do to lower the cost of your homeowners insurance. Increasing your deductible (the amount you have to pay before the insurance policy reimburses you for losses), and installing deadbolt locks, burglar alarms, fire extinguishers and smoke detectors can reduce your annual premiums as much as 15 percent or more, depending on the insurance company.