Homeowner’s Insurance Primer

If you own a home, you should have homeowner’s insurance, and if you have a mortgage on that home, your lender likely insists upon it. Insurance is one of those things that you may scramble for at the last minute when your home purchase is closing, or it may be something you renew without thought each year. There are things you need to know, however, to ensure you’re not caught short-handed when it comes to coverage. Today we’ll take a look at the crucial points of homeowner’s insurance to get you up to speed and in the know.

Actual Cash Value versus Replacement Cost

The purpose of homeowner’s insurance is simple enough, and most people understand that they’re protecting an investment in their home against unforeseen problems. If you’re like many Americans, you’re probably living paycheck to paycheck and your savings are lagging behind where you’d like to be, or tax-sheltered in retirement plans and largely untouchable for day-to-day current expenses.

So when you purchase a home for $150,000, for example, it’s logical to assume you’d purchase $150,000 of homeowner’s coverage, if your purchase price is about the home’s market value. That is, you could turn around and sell the house tomorrow for $150,000.

If your homeowner’s policy is an actual cash value policy, then in the event of a disaster, say a fire that burns your home to the ground, your settlement is limited to $150,000. If you’re thinking, “no problem, it’s a $150,000 house,” you could be in for a surprise. That home could easily cost $200,000 to rebuild to its previous condition, and you’d be on the hook for that additional $50,000, or else you’ll have to scale back to a building that doesn’t have the same features as your previous home. And this is before we consider the value of your possessions lost in the fire.

Instead, most homeowners are better served with replacement value coverage. If your home costs more than its market value to replace or repair, you’re covered, minus any policy deductible you may have in place. While it may be tempting to save money on a basic policy at the time of closing when money may be tied up with other expenses, purchasing replacement cost coverage is your safest bet. Don’t be surprised if your mortgage lender insists on this type of plan.

Named Peril versus All-Risk Coverage

Another place you could potentially be caught is when it comes to the events and disasters that your homeowner’s insurance covers. There are two main approaches to risk coverage. Named peril policies spell out precisely what damage your insurance covers. Should your house be damaged by a tornado, for example, you’re insured if your named peril policy specifies tornado damage is covered. If tornado damage is not named in your policy, you’re not covered.

All risk policies work exactly the other way. You’re covered for all damage except for risks that are specified in your policy. So, for tornado damage, you’re protected if tornados are NOT mentioned in your policy. Exceptions to protection are specifically named. Damage from earthquakes is typically excluded from an all risk policy.

Adding Specialty Coverage

It’s possible to add some types of specialty coverage to your homeowner’s insurance. Called riders or endorsements in the insurance industry, the types of specialty coverage vary in cost and availability, depending on where you are in the country. The same is true for certain luxury items. While a regular policy may include reasonable coverage for your home’s contents, some items, such as expensive jewelry or collectible musical instruments for example, may not be insured for their full value without adding special coverage. Identity theft coverage is a recent extra coverage addition to homeowner’s insurance that’s increasing in popularity. Talk with your agent or broker to find out what extra coverage is available to you.

About Paul Gaulkin

Paul Gaulkin is enrolled with the US Treasury to practice before the IRS. Mr. Gaulkin possesses technical knowledge in the process of securing relief for taxpayers in need of tax help. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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