Choosing the Right Homeowner’s Insurance Policy Will Help You When You Need It Most
When it comes to choosing the right insurance coverage for your home, you’ll want to get it right.
What makes it hard is that every home is as different as its owner, and you need a policy that fits you and your home.
There are different types of insurance for different types of coverage.
For example, personal property insurance covers the possessions in your home—from everyday furnishings to expensive, one-of-a-kind jewelry. Personal liability insurance, meanwhile, protects your financial assets if someone tries to sue you for an accident or a mishap that took place in your home, explains Carolyn Gorman, a vice president with the Insurance Information Institute (www.iii.org).
Renters should make sure the policy they choose includes both types of insurance, Gorman says.
"If you have a grease fire in your apartment and you burn up your kitchen, the liability insurance would protect you if your landlord sued you for damages to the building,” she says. “The personal property insurance would help you replace the possessions that you lost in the fire."
In addition, a renter's policy would also include coverage for living expenses at a hotel while the apartment is cleaned up and renovated after the fire.
Likewise, the owner of a single-family home would need personal property and personal liability insurance, but he or she would also need to cover the structure itself, says Gorman.
"If the roof of your home was damaged by a falling tree branch, you would need to have that covered by your homeowner’s insurance," she says.
You have a number of options when choosing homeowner's insurance, and you'll want to pick the policy that will provide the best protection for your situation. But don’t make these common mistakes:
If you have a grease fire in your apartment and you burn up your kitchen, the liability insurance would protect you if your landlord sued you for damages to the building. The personal property insurance would help you replace the possessions that you lost in the fire.
Carolyn Gorman,
Insurance Information Institute
Underinsuring your home and your possessions. "People may buy their homeowner's policy when they get married and pay the premium dutifully for years," Gorman says. "But they never revisit the policy. Meanwhile, they upgrade their home in significant ways—[from] adding an addition to remodeling a kitchen. And they upgrade their possessions."
Make sure an existing policy reflects your home’s current value. "You need enough coverage to rebuild the home at today’s construction costs as well as coverage to replace all of your possessions," she says.
Saving money by avoiding flood insurance. Flood insurance is rarely part of a homeowner’s insurance policy. But “not having flood insurance can be the source of so much heartbreak,” Gorman says.
In reality, you’re more likely to have a flood than a fire in your home. To determine whether you need flood insurance, research your community and its flood plain status at your local building department and check sources such as Floodsmart.gov, the official site of the National Flood Insurance Program.
One thing to keep in mind: flood insurance may be different from optional sewer and drain backup insurance, Gorman says.
"Most mortgage lenders typically require flood certification and will tell you if the property is located in a flood plain," says Charles Nyce, the senior director of knowledge resources for the American Institute for CPCU/Insurance Institute of America. "Mortgage lenders will typically not lend to someone in a flood plain without flood insurance."
Assuming private mortgage insurance (PMI) is the same thing as homeowner’s insurance. When you’re checking into insurance policies, note that private mortgage insurance (PMI) is not homeowner’s insurance.
Homebuyers who put less than 20 percent down on their homes are required to buy PMI, which covers the lender in the event that a homeowner defaults on a loan. It doesn't protect a home or any possessions in it.
"On average, most consumers are not clear on what protection their homeowner's insurance provides," Nyce says. “They don't read their policies. But they need to know what type of coverage they do have.”
If you have only PMI and your house is destroyed in a fire, you’ll be out of luck—and out of pocket for the renovation.
Assuming a condo building’s insurance means you’re covered. If you own a condominium or a co-op, the insurance policy your building or development purchases to cover the common areas of the property won’t cover your property or your personal possessions.
A condo or co-op owner will need a separate policy to protect his or her possessions and liability. But if your unit is on the 30th floor, you may not need flood insurance.
