The first thing you should know about homeowners insurance is that it should not be regarded as an optional extra but as a necessity. In the first place, it protects your house and your personal possessions against damage and theft. Secondly, it’s nearly a given that the mortgage provider will require you to have proper home insurance.
Are all homeowners insurance policies alike?
The answer to this question is an emphatic no. Generally speaking, the cheaper the policy, the lower the amount of coverage will normally be. Read the fine print to determine the level of cover a specific policy provides - and how that amount is determined.
Replacement cost. This type of policy covers the actual amount your home and personal possessions will cost to replace or rebuild.
Actual cash value. This might look similar to the above, but it’s not. The insurance firm will use the original cost of your home and possessions and then deduct depreciation to arrive at a (much lower) figure that is based on how much these are currently worth, not how much it will cost to replace them.
Extended or guaranteed replacement value. If you can afford this, it’s your best option because it covers whatever it will cost to rebuild or replace your home and possessions, even if that amount exceeds the policy limits. Please note that the insurance firm might have a maximum amount, e.g., 20% more than the limit mentioned in the policy.
The three different kinds of home insurance
Building insurance. This covers the structure of your home against accidental damage or loss. Depending on the policy, it might also provide cover for other structures such as greenhouses, garages, or swimming pools.
Home contents insurance. This covers your household contents against damage or loss caused by fire, burglary, theft, malicious damage, and (depending on the policy) natural disasters.
Household contents in this regard refer to things like furniture, home appliances, curtains, and clothing. It typically doesn’t cover fixtures such as immovable carpets.
Personal valuables insurance. Although your homeowners insurance might cover any or all of these to a certain limit, it also might not. In that case, you will need separate insurance for personal valuables such as laptops, handbags, clothing, jewelry, or bicycles.
This type of policy typically covers both non-specified and specified items. The former refers to a list of standard general items most people have in their homes. The specified list is for when you want to individually insure your most valuable possessions, for example, laptops, Van Gogh paintings, and smartphones, for specific amounts.
What does the typical homeowners insurance policy not cover?
Although your home insurance will cover most cases where you suffer a loss, it will also exclude certain events. Examples include acts of war and ‘acts of God’ like natural disasters. So what should you do if your region is prone to the odd earthquake or hurricane? You will most likely have to pay extra to get separate clauses for flood insurance and earthquake insurance added, While you are busy, you might also want to add sewer and drain backup insurance.
How to save on your homeowners insurance
Increase the deductible. The higher the deductible, the lower your insurance premiums will typically be. The downside is that you might end up paying the full cost of smaller claims such as leaky pipes or broken windows.
Install a monitored security system. If you have a home security system that is linked directly to the local police station or a central command unit, it could reduce your yearly homeowners insurance premiums by around 5%. The insurer will most likely ask you to deliver proof that the system is centrally monitored. If the contract clearly states this, it should be good enough.