Determining
Coverage Levels
Insuring your home
Homeowners insurance provides three basic
coverages.
- First, the policy covers damage to your home--the
dwelling itself.
- Second, it provides coverage for the contents of
your home.
- Third, it provides a level of liability
protection for claims arising from the actions of you and your
family.
Two methods to determine value
Insurance companies use one of two methods to determine
the value of property:
- Replacement cost--pays you the cost of replacing
damaged property, with no deduction for depreciation.
- Actual Cash Value--pays you an amount equal to
the replacement value of damaged property minus a depreciation
allowance.
Unless a policy specifically states that property is
covered for its replacement value, coverage is for the lower, actual
cash value. If you are not sure which type you have, first check
your policy, or ask your insurance agent or representative if you
are not sure what level of coverage you have.
Assessing your need
Certain factors can affect the appropriate level of
homeowners coverage. If, in the event your house is destroyed, you
want to rebuild your home with materials of like kind and quality,
and replace the contents, you should insure your home for an amount
which may be considerably larger than your mortgage balance. On the
other hand, if you just want to be able to pay off your mortgage and
walk away, then your level of coverage should match the balance of
your mortgage. Be careful, however, because this is where some
consumers slip up by thinking that "cheaper" is "better".
Without sufficient insurance coverage, the insurance company may pay
only a portion of the cost to replace or repair your home and its
contents.
In most cases, policy holders want to insure their
possessions for replacement values. But make no assumptions.
The replacement value is probably different than the market value of
your home and the depreciated cash value of its contents.
Determining your level of coverage--the
building
If you have a mortgage, your
lender may require you to maintain a certain level of insurance, and
the lender will be named on your policy as an insured party or
copayee. While the level of coverage required by the lender may be
enough to cover its exposure, that actual level may not be
sufficient to fully protect you. The reason for this is easy
to explain... Lenders want to know that the mortgage balance will be
paid if the home is destroyed. They have no specific interest
in seeing that your home is built back to its former level of
glory.
To decide how much homeowners coverage you should
have, determine the cost to rebuild your home. As a licensed
independent agent we can help you calculate the current cost of
construction for a house like yours, or you can hire a professional
appraiser. You may or may not be surprised to discover that it would
could cost more today to rebuild your home than the price you
initially paid for it. This is not something you want to discover
after your home has been destroyed and you need to rebuild
it.
Often, consumers mistake market value or taxable
value for the amount at which they should be insuring their home,
but this could result in being horribly underinsured. For example,
assume your home is a 2,000-square-foot-home, has a taxable value of
$75,000, and would cost $45 per square foot to rebuild. The total
cost to rebuild this home would be $90,000. If you were insured for
the taxable value, you would be trying to rebuild a your home while
facing a $20,000 deficit. Plus you don't want include the value of
the land your home is on when calculating your coverage; land is not
at risk from theft, fire, windstorm, and other perils covered in
your homeowners policy.
Determining your level of coverage--your home's
contents
In a standard policy,
possessions are usually covered at stated percentage of the value of
the structure coverage, and there are listed limits for certain
items. This level may not be sufficient to cover the replacement of
all your property. To determine how much property insurance coverage
you need, make
an inventory of all your home's contents. Don't forget to
include furniture, appliances, draperies, jewelry, artwork, and the
contents of your closets, cabinets and the toy chest. When possible,
list the serial number, date and cost of purchase. Include receipts
if possible. An easy way to inventory your possessions is to use a
video camera or take photos. When using a video camera, you can talk
about the specific items, their cost, and when you bought them.
Ideally, you would want enough insurance coverage to replace your
possessions if they were destroyed. If the value of your possessions
is larger than the stated percentage of your structural coverage,
don't panic--you can buy additional coverage for your
possessions.
Keep a copy of your inventory in a location away
from your home--like a safety deposit box, or with a trusted friend
or family member. This way, if your home is destroyed, your
inventory list will be safe at another location. When you make major
purchases, remember to add them to your inventory and check your
policy--you may need to increase your coverage levels.
Determining your level of coverage--liability
protection
The standard amount of
liability coverage in a homeowners policy is $100,000, which covers
personal liability, medical payments, and property damage for
damage, or personal injury caused to others. If you feel you need
more coverage, talk to us about the availability of a higher level
of coverage or the possibility of purchasing a separate liability
umbrella policy.
Periodically review your existing
coverage
At least once a year, review
your homeowners coverage to make sure it is keeping pace with any
major purchases or additions to your home. In addition, if you fear
inflation will decrease the value of your policy, an inflation guard
endorsement, which is built-in to many homeowners policies these
days, ensures that your coverage amount increases a bit every year
to keep up with inflation. What this means, for example, is if
your house increases in value next year by 5% your policy's
replacement limit will also increase, according to some
predetermined index of local home values.
TERMS
Actual cash value (ACV)
This is a method used to figure the values for property when
settling a claim. If your policy says it provides for Actual Cash
Value settlement, it generally means that your policy will pay the
depreciated cost of your property, up to the amount of coverage in
your policy. For example, a new TV costs $1,000. Your insurance
company would determine the amount of your settlement by
subtracting from $1,000 an amount that reflects your usage.
Additional living
expense coverage The extra costs of living someplace else
when your insured home is unlivable due to damage caused by a
covered loss.
All-risk insurance
An all-risk policy pays for losses from damage to property
when the cause of damage was direct, sudden and accidental and is
not excluded from your policy. An "all-risk" policy
covers all perils (causes of loss) that are not specifically
listed as excluded within the policy. May also be referred to as
"comprehensive" or "open peril."
Claim An
instance in which an insured seeks to recover payment under an
insurance policy for a loss covered by that policy.
Claims Adjuster
Person who directly investigates a claim filed by the insured. The
adjuster also assesses whether or not the loss is covered by the
policy.
Coinsurance
Requires the customer to carry insurance equal to a specified
percentage of the value of the property insured in order to
receive full payment of a loss.
Comprehensive
Coverage that covers any direct, sudden and accidental physical
damage losses except those excluded in the policy (See All-risk).
Coverage limit
The extent of protection against losses provided under the terms
of an insurance policy. Also called "insurance" or
"protection."
Debris removal
Covers the cost of hauling away materials or wreckage left by a
covered peril. For example, this might pay for the cost to haul
away roof sections, burnt walls and damaged furniture after a
fire.
Deductible Some
policies are written to pay only after the policyholder has
suffered an agreed amount of loss. The amount the policyholder
must pay first is the deductible. Its "deducted" from
the total loss amount to determine how much the company must pay.
Even though a policy has a deductible, there may be coverages
within a policy that are not subject to that deductible.
Extended coverage
A group of perils that are either packaged or offered as an
option with dwelling fire policies. These perils are: windstorm,
hail, smoke, explosion, riot, riot attending a strike, civil
commotion, vehicle and aircraft.
FAIR Plan An
insurance program made available to risks that are unable to
secure coverage through regular channels because of various
reasons (i.e., vacancy, high vandalism). Not available in all
states.
Flexible payment plan
Allows you to pay your premium in 1, 2, 4 or 10 installments.
Liability coverage
Covers losses that result when an individual causes accidental
injury to another person or damage to their property. If you
accidentally set fire to your neighbors garage while burning
leaves in your yard, this is the type of coverage that would
apply. Liability insurance often includes coverage for defense
costs in a liability lawsuit.
Loss of rents coverage
If a loss covered by the policy damages the part of a dwelling
that is rented to others, we will pay for the loss of normal rents
resulting from that dwelling not being fit to live in or use.
Sometimes referred to as "fair rental value."
Named peril coverage
Named peril policies specify the perils, or causes of damage,
which are insured against as distinguished from "All-risk
Insurance"
Open peril coverage
(also called "comprehensive coverage") See All-risk
Other structures
In the BASICS policies, this coverage insures other structures you
own on your premises which are separated from the dwelling or
connected to your dwelling by only a fence, utility line or some
other similar connection (See also Adjacent Structures Coverage).
Personal Property or
Personal Effects Things you own that you use to set up
your rentals, such as refrigerators, stoves, or furniture.
Personal property includes everything except land, buildings and
any other structures attached to the land. Personal property may
also be called "contents."
Scheduled policy option
This option allows you to place all your rental properties on
the same policy.
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