We have a great deal of freedom to choose our own financial paths. We can decide how to invest or save – or even whether we invest or save – and how we spend the money we earn. But there are some areas of personal finance in which we are effectively required to participate or to buy certain services.
Homeowners insurance is one of those areas. For those of us who have an outstanding mortgage on our homes, our mortgage lenders require us to have adequate homeowners insurance as a condition of borrowing. Since buying insurance in those circumstances is required, let’s take a closer look at a typical homeowners insurance policy to make sure that we understand the basic parameters.
Here is some insurance advice to help you understand the basics of a home insurance policy.
Coverage Amount. Perhaps the most important element of any home insurance policy is the coverage amount. This specifies the maximum coverage that a homeowner can receive in the event of damage or complete destruction to the covered property. A larger amount of coverage will require the homeowner to pay a larger annual premium.
Scope of Coverage. Note that most homeowners insurance policies cover more than just the home structure itself. Policies will generally also cover the personal property (furniture, appliances, clothing, etc.) within the home, as well as damages that may be suffered by guests who get injured inside the property. These additional coverages are usually provided in amounts that are calculated at a predetermined percentage of the coverage amount for the home itself. For example, a policy might cover personal property losses in an amount up to 20% of the covered value of the home structure.
Deductibles. A significant factor affecting the price of your home insurance will be the deductible you select. Similar to deductibles for health insurance or auto insurance, a deductible on your homeowners policy specifies how much financial damage you are willing to pay for out-of-pocket before your insurance company will pay out on a claim. The higher deductible you select, the lower your annual premium will be.
Additional Coverages. Most homeowners policies specify certain types of claims that are either not covered by the policy, or are only covered up to a particular amount. For example, standard policy coverage for expensive computer equipment and jewelry is often capped at a fixed dollar amount. Homeowners who want additional coverage must purchase a “rider” to their standard policy, at an additional cost.
Escrow. As noted above, adequate coverage is mandatory if you have a mortgage on your home. In order to make sure that the insurance coverage is paid, your bank or lender will handle the process of actually paying the premiums. This is accomplished by adding a charge to your monthly mortgage payment, collecting that money into an escrow account, then using the funds from that account to pay the insurance premium. (The escrow account is normally used to pay your annual property taxes as well.) These amounts are generally adjusted each year as your insurance premium and other escrow charges change.
Understanding how your homeowners policy works, and what types of things are covered, is key to making the right policy decision, and being sure that you have the coverage you need.
We have a great deal of freedom to choose our own financial paths. We can decide how to invest or save – or even whether we invest or save – and how we spend the money we earn. But there are some areas of personal finance in which we are effectively required to participate or to buy certain services.