Your family’s financial security depends on you. Have you thought about what your family would do financially speaking if you were to die today or tomorrow? None of us like to think about death, but it is real and inevitable. If you have not thought about your family’s financial needs before, you need to that now.
There are seven key areas of insurance that you need and you to get them immediately. These insurances will not only protect you and your family now, but also when you are gone. They are:
- Homeowner’s or Renter’s Insurance
- Auto Insurance
- Health Insurance
- Disability Insurance
- Long-Term Care Insurance
- Identity Theft Insurance
- Life Insurance
These insurances main purpose is to transfer the risk from you to them. The risk of a financial loss goes from you to them. They provide coverage for you from financial loss.
When you buy a home, especially if you have mortgage, you need to obtain homeowner’s insurance. You should purchase enough insurance to cover the cost of replacing the home. You also need to ensure that your insurance has replacement cost coverage.
Homeowners insurance is a “package” policy. In that it covers both damage to property and liability or legal responsibility for any injuries and property damage policyholders or their families cause to other people. It also includes damage caused by household pets.
While it covers damage caused by most disasters, there are exceptions. A standard homeowner’s policy does not cover flooding, earthquakes, or poor maintenance. The federal government’s National Flood Insurance Program provide flood coverage. Even though it is purchased from an insurance agent. You can obtain earthquake coverage either in the form of an endorsement or as a separate policy. Most maintenance related problems are the homeowners’ responsibility.
A standard homeowner’s insurance policy includes four essential types of coverage. They include:
- Home structure coverage:
This part of a policy pays to repair or rebuild a home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in the policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear. Most standard policies also cover structures that are not attached to a house such as a garage, tool shed or gazebo
- Coverage for personal belongings
If furniture, clothes, sports equipment and other personal items are stolen or destroyed by fire, hurricane or other insured disaster they are covered. Most insurance companies provide coverage for 50 to 70 percent of the amount of insurance on the structure of a home. This part of the policy includes off-premises coverage. What this means is that belongings are covered anywhere in the world, unless the policyholder decided against off-premises coverage. Coverage for expensive items like jewelry, furs and silverware usually have dollar limits if they are stolen. You can purchase a special personal property endorsement or floater and insure the item for its appraised value. If you have trees, plants, and scrubs, they too are covered under standard homeowners insurance—generally up to about $500 per item. Also covered are perils such as, fire, lightning, explosion, vandalism, riot, and even falling aircraft. However, they are not covered for damage by wind or disease.
- Liability protection
Liability covers against lawsuits for bodily injury or property damage that policyholders or family members cause to other people. It also pays for damage caused by pets. The liability portion of the policy pays for both the cost of defending the policyholder in court and any court awards—up to the limit of the policy. Coverage is not just in the home but extends to anywhere in the world. Liability limits generally start at about $100,000. If you want more coverage, an umbrella or excess liability policy, can be added to the policy. It provides broader coverage, including claims for libel and slander, as well as higher liability limits.
- Additional living expenses
If your house is inhabitable due to damage from a fire, storm, or other insured disaster, this pays the additional costs of living away from home. It’ll covers hotel bills, restaurant meals and other living expenses incurred while the home is being rebuilt. Different companies provide different coverage for additional living expenses.
Types of Homeowners Insurance Policies
Types of homeowner’s policies are fairly standard throughout the country. However, individual states and companies may offer policies that are slightly different or go by other names such as “standard” or “deluxe.” The one exception is the state of Texas, where policies vary somewhat from policies in other states. The Texas Insurance Department (http://www.tdi.state.tx.us) has detailed information on its various homeowner’s policies.
When you own and live in your home, you have several policies to choose from, with HO-3 being the most popular policy. It covers the structure of the home and personal belongings including personal liability coverage. It has the broadest coverage, protects against 16 disasters or perils:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles
- Vandalism or malicious mischief
- Volcanic eruption
- Falling object
- Weight of ice, snow or sleet
- Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance
- Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning or automatic fire-protective system
- Freezing of a plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, or of a household appliance
- Sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor or similar electronic component)
Owners of multifamily homes generally purchase an HO-3 that includes an endorsement to cover the risks associated with having renters live in their houses.
An HO-2 policy provides more limited coverage. The HO-1 is a bare bones policy that is not widely available.
An HO-8 is designed for older homes. There is also a version of the HO-2 designed for mobile homes.
An HO4-policy (Renter’s Insurance) was created specifically for those who rent the home they live in. It covers a policyholder’s belongings against the aforementioned 16 perils. It provides personal liability coverage for damage the policyholder or dependents may cause to third parties.
The HO-6 policy is for owners of condominium and cooperative units. It provides coverage for belongings and the structural parts of the condominium or co-op that the policyholder owns. It too protects against all 16 perils and provides personal liability coverage. Both cover additional living expenses.
Levels of Coverage
There are three coverage options:
- Actual Cash Value replaces the home or possessions minus a deduction for depreciation.
- Replacement Cost pays the cost of rebuilding or repairing the home or replacing possessions without a deduction for depreciation.
- Guaranteed/Extended Replacement Cost offers the highest level of protection. Guaranteed replacement cost pays whatever it costs to rebuild the home as it was before the fire or other disaster—even if it exceeds the policy limit. It provides protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It won’t generally cover the cost of upgrading the house to comply with current building codes. However, an endorsement (or an addition to) the policy called Ordinance or Law can help pay for these additional costs. An extended policy pays a certain percentage over the limit to rebuild the home. It is generally 20 to 25 percent more than the limit of the policy. For example, if homeowners take out a policy for $100,000, they can get up to an extra $20,000 or $25,000 of coverage, depending on the percentage. Guaranteed and extended replacement cost policies are more expensive; but they offer the best financial protection against disasters for a home. However, these coverages may not be available in all states or from all companies. Replacement cost coverage is available for the structure of the home but only actual cash value coverage is available for possessions.
While the need for homeowner’s insurance seems pretty obvious, renters don’t always think about obtaining renter’s insurance
Renters insurance provides financial protection against the loss or destruction of your possessions when you rent a house or apartment. While your landlord may be sympathetic to a burglary you have experienced or a fire caused by your iron, destruction or loss of your possessions is not usually covered by your landlord’s insurance.
The premium for renter’s insurance is relatively inexpensive because in most cases it covers only the value of your belongings, not the physical building.
When you purchase renters insurance, you are covering your possessions against losses from fire or smoke, lightning, vandalism, theft, explosion, windstorm, and water damage (not including floods). As with homeowner’s insurance, renter’s insurance covers your responsibility to other people injured at your home or elsewhere by you, a family member, or your pet. It pays legal defense costs if you are taken to court.
It also covers your additional living expenses if you are unable to live in your apartment because of a fire or other covered peril. Most policies will reimburse you the difference between your additional living expenses and your normal living expenses. However, they still may set limits as to the amount they will pay.
There are two types of renter’s insurance policies you may purchase:
- Actual Cash Value pays to replace your possessions up to your policy’s limit, less a deduction for depreciation.
- Replacement Cost pays the actual replacement cost of your possession up to the limit of your policy without a deduction for depreciation.
If you have items such as jewelry, silver, furs, etc., with either policy, you may want to consider purchasing a floater. The standard renter’s policy offers only limited coverage for those. Supplement your policy with a floater if you own property that exceeds these limits. A floater is a separate policy. It provides additional insurance for your valuables and covers them for perils not included in your policy such as accidental loss.
We will cover the other insurance needs in separate posts.