Home Insurance Basics
Article By Joseph Herron III
Dreams By Owner Marketing Consultant & American Family Insurance Agent
In this article, two aspects of homeowner’s insurance will be discussed concluding with a few tips and suggestions regarding home insurance. The two aspects include: 1) What Am I Insuring? 2) How much Insurance is needed?
What am I insuring? This might seem like an obvious answer, and to some extent it is. But to most, there are some surprises along the way. For example, home insurance does not insure the land the property sits upon. Its main and original purpose is to insure the physical structure of the actual home. Home insurance today is a package, it comes with much more than insuring simply the walls, roof, windows and all that goes into building a home from specific perils like wind, hail, fire, and lightening.
It also gives coverage for personal property. Typically 50-75% of the dwelling coverage limit for the structure is automatically given here. Furniture, electronics, clothing, jewelry and appliances are a few examples. There are specific limitations to certain classifications of personal property. For example, often $1,500 per item and $2,500 aggregate limits are provided for jewelry. But, more can be purchased if necessary. Computers, guns, silverware, and cash are a few other common examples of personal property with specific limitations. In addition, coverage for personal property typically extends to items off premise as well.
Home Insurance also provides personal liability to those listed on the policy along with any dependents. Many are surprised when they learn that this coverage applies even away from the location insured. If you accidently hit someone in the eye with a golf ball, and they are injured or mad enough to sue, the homeowner’s insurance will pay up to the limits up the policy. At the very least, $100,000 is automatically provided. Or let’s say golfing is not a concern. Hunting is your specialty. The deer is in sight, you pull the trigger and the shot rings out. Congratulations! The 10 point buck was not hit, but Bert across the way is yelping in pain from the lead just inserted in his thigh. If good ole Bert is again, hurt enough or mad enough to sue, the homeowner’s personal liability will cover that claim.
Another coverage provided by homeowner’s insurance is “Loss of Use”. This will cover any additional living expenses if one is displaced from their residence. For example, let’s assume 50% of the home is damaged by fire. The city deems it “uninhabitable” and you are forced to live elsewhere for 6 months or until repairs are completed. A hotel or apartment might be as much as an additional mortgage payment. The current mortgage still wants their payments despite the current turmoil and displacement. Can one afford two mortgage payments for six months? Homeowner’s insurance will cover the additional living expenses for up to a specific time frame or dollar amount.
These are but a few of the coverage’s automatically given in the vast majority of homeowner’s insurance policies. Of course there are many more Endorsements and/or Options that can be added to the standard packages for additional premiums. Here are a few common examples.
1) Personal Property Replacement Cost - This Endorsement will provide what an item (i.e. television) would cost to buy new in today’s dollars as opposed to “Actual Cash Value”, which figures in depreciation values.
2) Backup of Sewer/Sump Pump Overflow - Protects home if the sewer backed up or if sump pump failed and as a result water got into the basement.
3) Scheduled Personal Property - For those specific items that exceed the internal limits of what is automatically given.
How much to insure your dream home for?
Remembering that the main and original purpose of homeowner’s insurance is to protect the physical structure of the property, determining how much insurance to have becomes less complicated. And the shortest answer is this: Whatever it cost to replace/build your property. One of the biggest misconceptions about home insurance is that one needs to have coverage to match the market or appraised value. The insurance value and market/appraised value of a property is almost always different! Why? The main reason is because of the land value. For instance, if one buys a home for $200,000, insuring the property for this same $200,000 is probably a natural conclusion. But, lets use a more extreme example and say that the property is sitting on lakefront property. Furthermore, it is only a 750 square foot ranch used for summer vacations. Would 200,000 of insurance coverage still be warranted? NO. A 750 square foot ranch , unless lined with gold, would not cost 200,000 to build. On average, a good estimate would be closer to 100,000. Insuring this property for 200K would be over insuring this home and consequently over-paying premiums. If the property burns down resulting in a total loss and it cost 100K to build this property and the home insurer had 200K of coverage…an additional 100K check would NOT be paid out to the home insurer.
As said before, the land value is the main difference between what a property is insured for and the actual market value. Paying premiums to cover the land value simply is a waste of money. No matter what happens to the property, the land will always still be there. Likewise, the threat of someone stealing your land with a new shovel from Home Depot is not there.
Again, a property should be insured for what the replacement cost is calculated to be. Replacement cost is typically calculated by an insurance professional. Sometimes there is a conflict of what the mortgage company is demanding and what the insurance company calculates for replacement cost and consequently advises the insured to insure the property for. Many mortgage companies want the insurance coverage to be at least what the loan amount is. But,
Fannie Mae's guidelines for determining the amount of hazard insurance coverage are set forth in the Fannie Mae Selling and Servicing Guides. For any first lien mortgage (excluding a reverse mortgage), required coverage should be equal to the lesser of:
1) 100% of the insurable value of the improvements, as established by the property insurer; or
2) the unpaid principal balance of the mortgage, as long as it equals the minimum amount (80% of the insurable value of the improvements) required to compensate for damage or loss on a replacement costs basis. If it does not, then the coverage that does provide the minimum required amount must be obtained.
Notice that it is the LESSER of these two. Furthermore, the state of Wisconsin prohibits insurance agents to increase the insurance coverage for the sole sake of the loan on the property as laid out by the Department of Financial Institutions:
According to the State of Wisconsin, Office of the Commissioner of Insurance, an insurance agent is not allowed to arbitrarily raise the policy value so that it will equal the amount of a homeowner's pending mortgage loan. This Department would therefore object to any mortgage broker or mortgage banker asking or persuading a Wisconsin licensed insurance agent to arbitrarily raise the limit of a homeowners insurance policy to make it equal to a mortgage against the property, based on the following sections of the Wisconsin statutes:
According to s. 628.34(6), Wis. Stats., it is considered an unfair marketing practice for an insurance agent to "make any charge other than premiums and premium financing charges for the protection of property, as a condition for renewing, obtaining, renewing or continuing the financing of a purchase of the property or the lending of money on the security of an interest in the property." Therefore, it would be an unfair marketing practice to include land in insurance policy limits.
Further, s. 632.05(2), Wis. Stats., provides that "whenever any policy insures real property that is owned and occupied by the insured primarily as a dwelling and the property is wholly destroyed, without criminal fault on the part of the insured or the insured's assigns, the amount of the loss shall be taken conclusively to be the policy limit of the policy insuring the property."
Insurance agents understand why mortgage companies want to cover the loan amount. That is their total risk at stake and they have the right to be fully compensated if the loan goes bad or the home is destroyed. But what often is not taken into consideration by mortgage companies is the land value that is still present if the physical structure of the property is destroyed by fire, wind or whatever the peril might be.
Lastly, a few things to remember concerning home insurance.
1) Review the homeowner’s policy at least once a year. Most policies include an “inflation rider” that automatically will increase the dwelling coverage to account for inflation for the cost of materials, but it does not hurt to make sure one is not under or over insured.
2) Consider high deductibles. Over the years, assuming there are not many claims, one will save money on premiums for the discounts associated with higher deductibles.
3) Avoid smaller claims. Property insurance should be saved for larger claims as opposed to anything under $500. Most insurance companies will cancel your homeowner’s insurance if there are multiple claims in a certain period of time. Typically, this period is three years. If one is dropped by an insurance company, many times the only place to purchase it again is through the Wisconsin Insurance Plan. These rates are usually much higher and do not give nearly as good of coverage.
4) Increase Personal Liability limits. In this day and age where lawsuits abound, spend a couple extra dollars to increase your liability limits. Often 300K or at least 100K will be included in your policy, but it normally is a mere $15 to increase to $500K or even $1 Million. Or consider purchasing a Personal Umbrella Policy.
5) Ask your agent about all available Endorsements and Options. There might be one that fit’s a specific situation for a nominal fee. Often these are learned about AFTER a claim, which does one no good.
6) Take an inventory of your personal items. Take pictures, a video shoot, and/or paper documentations. This is really important if you have anything that could raise flags during a claim. If you have $10,000 worth of baseball trading cards and they are burned up with no evidence of one ever having them….they might not be covered under the claim.
