Like it or not, homeowners insurance is a necessity. The last thing you want is for your most expensive possession, your home, to be destroyed and have no way to pay for it to be rebuilt. Homeowners insurance does more than just protect your home, though. Depending on the options you choose for your policy, you can be covered in case of any accidents that occur on your property, appliance breakdowns, and more. Natural disasters and accidents happen, and you need to have your home and family covered in case of such events. Dave Ramsey explains homeowners insurance like this…
Most basic homeowner’s insurance policies cover the cost to repair or rebuild due to damage caused by events like fire, windstorms, hail, lightning, theft, or vandalism. They also protect your possessions inside the home like clothes, furniture, and electronics.
Why do you need it? Home insurance is a crucial part of your financial plan because it covers expenses you couldn’t pay for outright, even with a fully funded emergency fund.
It’s important to note that most policies don’t include coverage for flooding or earthquakes. Different policies can offer different coverage, which is why it’s important to work with an independent insurance agent who can help you make the best decision for your personal situation.
Your deductible is the amount you are responsible for paying. For example, if your deductible was $500 and you lost your house in a fire, you would have to pay $500 and the insurance company would pay the rest. The choice you have to make is how high you want your deductible to be. A higher deductible equals a lower premium.
You have to weigh out your options like this…
Let’s say you’re comparing a $250 to a $1,000 deductible. That’s a $750 difference. By raising your premium, you risk having to pay $750 more out of pocket if something happens to your home.
If raising the premium saves you $30 a year, then it will take you 25 years without a claim to break even. But if you save $250 a year in premiums, you only have to go three years without a claim to break even—and that’s a good bet.
As you make your decision, consider at how much extra risk you are taking. Are you getting enough savings to justify incurring the risk?
Purchasing liability protection on your home insurance policy is one of the best buys in the business. Liability insurance covers you against any lawsuits for bodily injury or property damage in your home. This coverage will pay for legal representation if you are sued and could also pay for damages if you are found responsible.
It doesn’t cost much, so you should carry a $500,000 minimum. No one sues for $250,000, so have at least $500,000 in liability. Transferring the risk makes liability a good buy.
Guaranteed Replacement Cost
Check your homeowner’s policy to make sure you have guaranteed replacement cost insurance. Several years ago, a lot of the major insurance companies quit offering guaranteed replacement cost insurance—a policy in which your home is replaced no matter what it costs.
The problem was that companies weren’t coming back and raising the premiums, even though the cost of the house increased. But they still had to replace the home if something happened to it.
Now many companies have put a dollar amount on the policy, saying your coverage is for that amount plus a maximum of 25%. So let’s say you bought a $100,000 home with $100,000 worth of coverage. If, in a couple of years, the house’s worth increases to $175,000—but you never changed your policy—then you’ll only have $125,000 worth of coverage. If something happened to your home, then you would be $50,000 in the hole.
Remember, the reason you have home insurance is to transfer risk. Make sure your home is totally covered just in case something happens.
Need more information? Talk with your local insurance agent or give us a call so we can refer you to someone! 720-593-2014