What's the deal with my Home Insurance?
Homeowners insurance can be very confusing - let’s be honest how many of you have actually read your policy and know its limits, etc.? That's what I thought, not many! After all we only have it because it is required by the mortgage lender and we are confident that, just like life insurance, it will never happen to us, so we would skip it and save the money - right? Even though for many Americans their home is their second most important asset (You can ask me later what the first most important asset is).
If life insurance is any indicator then a full forty percent of the homes would not be insured, simply because that is how many people run around without life insurance. But I digress, back to the subject of homeowners insurance.
Years ago I bought a rental house with my older brother and his wife. Yes the three of us were business partners, imagine going into business with a family member! I owned half and they owned the other half. Well we all remained great friends and kept our family relationship in top order - while the partnership ended 20 years ago when we sold the house, I would do it all over again with them, they were the best business partners I could have had at that young age.
We had a tenant whose 12 year old son was caught playing with matches - unfortunately he was caught after the house caught fire and burned down! They lost everything they owned (they did not have renters insurance) we lost a house. So I know first hand about a house fire and the importance of maintaining the proper insurance.
There are two general types of property coverage for residential real estate: dwelling and homeowners policies.
Dwelling policies are more limited in their scope of coverage, the policy is more basic for the property and most things are added via a “rider” to the policy. Perhaps you could say it is an alls-carte - you can pick and choose what you may need. Often they are used to cover rental houses or vacation homes.
A homeowner policy is more of a package of coverages for the owner of the property. It will typically have the broadest coverages. These policies have two parts: 1. the property coverage, insuring the home and contents, and 2. providing liability coverage, should there be a problem, where the owner is liable for something occurring on the property or through some sort of bad act by the property owner or an immediate family member for which he/she may be responsible.
Having the proper amount of insurance coverage is key. This can be tricky with home values changing on a regular basis. However, you should have the value of the home evaluated on a regular basis.
Here is the rule:
In order to have your home properly insured the insurance property coverage must equal a minimum of 80 percent of the replacement cost of the home. The home’s market value is a pretty good estimate of this figure as replacement cost is one of the factors that contributes to a home’s market value.
People often ask, why 80 percent and not 100 percent? The reason is that traditionally, 20 percent of the home’s value is placed in the value of the land upon which the home sits. If the home is damaged generally speaking the land is not and a new home can be rebuilt in its place, making the land a consistent value of the overall property.
Here is the formula for replacing a damaged home:
(Insurance carried/Insurance required) x amount of loss = amount of reimbursement
This is how it works in real life, a homeowner experiences a $100,000 loss on their home worth $300,000. 80 percent of $300,000 is $240,000, this is the amount of coverage a homeowner should carry. Now lets put this into the formula:
(240,000/240,000) x $100,000 = $100,000 In this case the homeowner would be reimbursed the full amount of the loss.
Here is another example, in this case the same homeowner had not updated their policy in several years, which let the policy fall behind the value of their home, they did not maintain the 80%. The coverage they carried was based on a home value ten years ago when they purchased the home at $200,000, required coverage at that time was only $160,000.
($160,000/$240,000) x $100,000 = $66,667, this is what the homeowner would receive for their $100,000 loss. The balance they would have to come out of pocket to complete the required repairs.
Falling behind on the insurance can be a real problem in high inflationary times because values can increase rapidly
As a side note, neither of these examples takes into account the deductible, that amount would be deducted from the amount of the reimbursement to get the final reimbursement amount. A homeowners policy may have different deductibles for different types of losses, so it is wise to keep track of that deductible amount. This is where a good savings plan is helpful to have the funds at the ready for such a need.
Many people go through life never experiencing such a loss to their home or property, however that does not mean that you should not be covered. This is something that you don’t want to “self insure”, maintain adequate coverage because if and when something happens, you will be glad you did. Pull out your homeowners policy and review it. Make sure the coverages work for your personal situation. If it is lacking in any area call the agent and get it updated or call me and I can walk you through each of the issues.
Regarding Hot Tips: "Assume you are always the last to know." ~ Charles Kirk