By Leonard Baron, MBA, CPA, and author of Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate and Wendy Mihm, founder of FinancialRx.com
Annually you go to the doctor and the dentist, but what about your property and liability insurance professional? Do you consult with that person on a yearly basis too?
Being fiscally fit is almost as important as being physically fit, so why not make sure you’re getting the best from your homeowners insurance, just in case a financial issue arises? That issue could be any number of things: your house could catch on fire, a broken water line could cause a flood, or your Chihuahua could bite a neighbor’s child.
Taking the time to review your homeowners or landlord insurance policy to make sure you’re fiscally fit is a relatively simple exercise – no pun intended – that everyone should do each year.
In this article, we will address 3 main topics:
1. The various categories of a standard homeowners insurance policy
2. The most important categories to analyze
3. Other coverage types you may want to consider adding to your policy
What is Covered by Your Policy?
A typical homeowners policy has a single “Coverage Limits” page that notes the maximum amount an insurer will pay out on each category of risk in case of loss. Let’s look at the top ones:
Building/Dwelling – This covers the main building structure, walls, roof, doors, windows, kitchen, etc. I purchased my house of 1,300 square feet for $500,000 but I only have $200/psf worth of coverage, or $260,000+- maximum loss payout. The rest of the value relates to land $240,000 +- which typically doesn’t need insurance. Rule of thumb: have a big fancy house, have more coverage.
The most important thing you can do each year to get the best from your homeowners insurance is to meet with your insurance agent and make sure that the current coverage amount for Building /Dwelling is enough to pay to rebuild your home in case it is destroyed. You should also discuss “Extended Replacement Coverage” and “Building Ordinance Upgrade” coverage, too, so as to make sure you are fully protected.
Personal Property Coverage – Your insurance also covers personal property (i.e., clothing, computers, couches, flatware, etc.) which costs more than you think to replace. Make sure you have sufficient coverage by discussing this topic with your agent. Special items (i.e., coins, jewelry, paintings, etc.) need to be reviewed and probably separately insured.
Liability Protection – Most people don’t know that homeowners insurance typically covers you if you get sued for a dog bite or injury on your property. Typical coverage is $100,000 or $300,000 and that should be enough if your net worth is that amount or less. If you have significant net worth, consider an “Umbrella” policy to bump liability coverage to $1 Million+ for about $400 per year. That’s a small expense to protect your wealth!
Other Coverage Types – Generally you should have your agent explain each coverage type to you. While you’re there ask, “What other coverages should I consider and why?” Then you can make an informed decision on cost vs. risk of loss, and buy the amount of insurance you feel is appropriate.
Want lower premiums? Raise your deductibles! When you have a loss you are required to pay for the first few hundred or thousand dollars of a claim out of your own pocket. This first dollar amount is called your deductible amount – you select the deductible amount. To lower your premium, you can raise your deductible.
Beware though, the higher deductible the more you pay out of pocket on a loss – have your agent explain in further detail.
What Isn’t Covered and What to Consider Adding
You also need to understand that a typical homeowners policy does NOT cover many perils like earthquakes, floods, business activities and other specialty occurrences. However, there may be separate coverage for these perils.
Insurance is one of those things that most people don’t pay much attention to until they have a loss. That’s a huge mistake because then it’s too late!
To get the best from your homeowners insurance, and to make sure you’re properly covered, go get a checkup once a year. Losses are stressful regardless, but if you have proper coverage then you may at least have a sigh of relief, knowing it could have been a lot worse.
Leonard P. Baron, MBA, CPA, is a San Diego State University Real Estate Lecturer, a long-term real estate owner, an author and loves kicking the tires of a good piece of dirt! At ProfessorBaron.com you can download his free – “Real Estate Buying Due Diligence Checklist” under Chapter 1 – Due Diligence – no sign up or registration needed just download it!
Contributing author Wendy Mihm is the founder of FinancialRx.com, for women who are busy, competent and have it all together — except for maybe one thing: their family’s finances. See more information on the website to get your financial house in order.