|The IA Newsletter, May 2011|
|First Time Home Buyers
A Guide to Homeowners Insurance
In This Newsletter
|Individuals looking to purchase their first home often encounter expenses they may not have been previously aware of. One of those expenses is homeowners insurance, a type of insurance carried by everyone who has a mortgage. If you're a first time home buyer, this is a topic you will have to deal with at some point in the purchase process. Armed with the right information it should be fairly straightforward and easy. The following information, although it's not comprehensive by any means, should be enough to answer at least the basic questions about home owners insurance.
Why You Need Homeowners Insurance
There are basically two reasons why you need homeowners insurance, the first being to protect yourself and your assets. In protecting yourself you are covering yourself against financial loss if your home or land is damaged, your personal property is damaged or stolen, or you suffer any other type of financial loss related to the physical premises of your home. You are also covering yourself in case someone else is injured while on your property.
The second reason for homeowners insurance lies in the fact that mortgage lenders require it for the entire length of the loan. A lending institution is taking a large financial risk in loaning you several hundred thousand dollars for a home. They need that money protected against total loss, so they require mortgagees to carry a full homeowner’s policy and list them as a beneficiary. Without homeowners insurance it will be impossible to get a mortgage. Once your mortgage is paid off you may choose to discontinue your homeowners insurance, even though that's a bad idea.
Types of Policies
When we talk of types of policies we are referring to the method by which claim amounts are figured. There are really three different types; actual cash value, replacement cost, and guaranteed replacement.
Actual Cash Value Mortgage Insurance
With actual cash value the insurance company determines the value of your lost assets based on what they would fetch on the current market in their current condition. For example, if you purchased a home for $100,000 ten years ago and due to a poor market and lack of upkeep on your part the house is now worth only $80,000 on the open market, that's the maximum amount you would receive if the house were lost in the fire.
Replacement Cost Mortgage Insurance
With replacement value the payout amount is determined by how much it would cost the insurance company to replace your property with something exactly the same or reasonably close. While this calculation is also market driven, it works to the homeowner’s advantage because he will not end up with less than what he started with, in terms of real property. The only problem with a replacement cost policy would come into play if you have invested in extra enhancements that are not covered under the policy. They will not be replaced.
Guaranteed Replacement Mortgage Insurance
The guaranteed replacement policy is the most comprehensive in that it pays to replace your lost property as close to what it was at the time of loss. This includes property which has been improved by the homeowner to the extent that well exceeds normal market value. This is the most advantageous type of policy in terms of coverage, but also costs the most, and there are limits to what your insurance company will pay; usually they will not exceed 125% of the policy value.
What Homeowners Insurance Covers
Exactly what your homeowners policy covers is entirely up to the type of coverage purchased. However, there are some basic things all homeowners insurance policies, the first being the loss of your real personal property due to fire, theft, and other types of losses. This coverage provides not only for the structure of the house itself, but also any out buildings, the land, and personal property like lawn equipment, pools and patios, furnishings, appliances and electronics, and the like. It's important to note that most basic policies do not offer flood coverage; this is something that's required to be purchased as an additional rider.
The second thing typically covered under a homeowners policy is personal liability for any harm or injury you or your family may cause others. It also covers claims made against you if a visitor to your home is injured or suffers personal property damage while on your property. Some homeowner’s policies also cover pets as part of the standard coverage.
There are certainly plenty of other riders that can be added to homeowner’s policy. In fact, some might even argue that they're virtually limitless if you're willing to pay. For example, if you don't want a separate policy for your boat you can add it to your homeowner’s policy. You can also get umbrella coverage which protects you from any financial loss you incur from any source, at any time, and in any place. Just keep in mind that a homeowners policy with these extra riders added will obviously be more expensive.
The Cost of Homeowners Insurance
Although various insurance companies charge different rates depending on a variety of circumstances, the average annual premium in the United States in 2008 was $791. This takes into consideration all of the different kinds of houses, different geographical locations, and the value of the average home and its contents.
Regardless of how much you pay, this money will probably be collected from you through your mortgage payment and held in escrow until your insurance premiums are due. On that date every month your mortgage lender will forward that money to your insurance carrier in order to continue coverage. Once a mortgage is paid off the escrow account is closed and homeowners are required to pay for their own insurance directly.
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