Home Insurance 101: What You Need to Know About Coverage and Saving on Your Premium
Do you know what your policy covers? Want to save money on your premium?
Sept. 16, 2010 — -- This is hurricane season, and homeowners along the East Coast batten down every time a storm becomes a potential threat to their homes.
Last week, a natural gas line explosion in San Bruno, Calif., killed at least seven people and injured at least 60. Investigators still haven't arrived at a final death toll.
The blast incinerated the San Francisco suburban neighborhood, leveling 40 homes. Images of the raging inferno have dominated newscasts and newspaper reports.
The affected families are likely turning to their homeowners insurance policies to get back on their feet.
Mellody Hobson, "GMA" personal finance expert and president of Ariel Investments, appeared on "Good Morning America" today to tell you what you should know about your homeowners insurance coverage before you have an emergency.
What You Should Know
Q: What's the number one piece of advice you would give to homeowners about their home insurance policies?
A: Hobson said the most important thing that people should know about their policy is exactly what it covers, noting that the worst time to learn exactly what's covered is after your home is damaged.
In a recent National Association of Insurance Commissioners survey, 60 percent of respondents couldn't answer basic questions about their coverage.
When homeowners are deciding what needs to be covered, they should think about the value of their home and belongings, plus the cost of living expenses, should something happen.
Homeowners should ask their agents about what is limited or excluded from their policies. For example, some items – such as jewelry – may require a separate rider at an additional premium.
Q: For those families whose homes were destroyed by the San Bruno pipe explosion, would their homes be covered under their homeowners policies?
A: Yes. Most homeowners insurance policies cover fire, theft, wind damage and explosion. Damage from floods, landslides and earthquakes are generally not covered and therefore require separate policies.
Hobson encouraged people who live in natural disaster-prone areas to take out a separate policy for natural disasters.
Click HERE to visit the National Flood Program.
Q: How can I tell if I have enough coverage?
A: Get an appraisal. That's the best way to determine your home's replacement cost.
Hobson suggested that homeowners insure their homes for 100 percent of the replacement cost, and urged that they look for what's called guaranteed, or replacement, value coverage.
This may cost a little more, but it will ensure that the cost of your home is replaced even if it exceeds the amount of coverage you have purchased. That coverage usually covers 120 percent of the value, she said.
For example, if you have a policy that's worth $200,000 and you have extended replacement value coverage, your house will be covered for up to $240,000, she added.
A good way to estimate the replacement cost of your home is by having a builder in your area appraise the value. An insurance agent also could give you an estimated value. The higher the level of coverage, the higher the premium.
Q: Are my personal belongings – my furniture, appliances and clothing – also covered by my homeowners policy?
A: To an extent. Most policies only cover your home's contents for about half the insured value of your house, Hobson said.
So if your house is insured for $200,000, your belongings would generally be covered for up to $100,000. With a typical policy, you would get the cash value of lost items, minus any depreciation.
If you want to get the full replacement value, then you should choose that coverage. This will cost more, but will give you the full replacement value of your property, minus the deductible, she said.
If you have something that is irreplaceable, Hobson suggested that you keep it somewhere else – say, in a safe deposit box.
Remember, it's wise to keep an inventory of everything in your home so you can prove you had it if you need to file a claim. Take photos to catalogue everything in your home and keep a copy of those photos outside of your house.
Hobson said you should also keep a list of all the valuables that are in your home. The Insurance Information Institute (IIS) has free software at its website that can help you keep track of those items.
Click HERE to visit the institute's website.
Q: Are there ways that I can save on my premium?
A: Yes. You can increase your deductible in order to lower your premium, Hobson said.
The IIS estimates that people could lower their annual premium by 25 percent if they increase their deductible from $500 to $1,000.
Hobson also recommended that homeowners shop around. Quotes can vary widely, so talk to your agent about different kinds of policies, she added.
You can also find quotes online at insweb.com and at netquote.com. But you should remember that the cheapest quote may not be the best. Check out the insurance company's history with your friends, family, your insurance agent or your state's insurance commissioner's office.
Hobson pointed out that homeowners can get discounts just for making their homes safer. For example, people can get discounts of up to 5 percent for installing burglar alarms, smoke detectors or dead bolts, but they often have to ask for those discounts, she noted.
Some people could get as much at 15 to 20 percent off their policy if they install certain types of sophisticated alarm systems, but they should check with their insurers first to see which systems qualify.
One More Thing
When most people get a homeowner's policy, they think they're covered for just about everything. That's not true. They may often overlook the possibility that they may be sued by someone who gets hurt on their property.
Most homeowner's policies will cover you for up to $300,000, but people are often sued for far more, Hobson said.
Hobson said you might consider getting what's called umbrella liability insurance, which will cover you for an additional $1 million. That coverage costs between $150 and $300 a year, she added.
Web-Extra Tips
Here are some more of Mellody's tips:
Many insurers will offer a discount to people who are over 55. Ask your insurer if you qualify. You could save up to 10 percent on your policy.
More and more insurers are looking at your credit score to help determine your rates. Check your credit report to make sure there are no errors that could affect your rate.
When you are thinking about buying a home, be sure to get a copy of the seller's Comprehensive Loss Underwriting Exchange (CLUE) disclosure report. This report will tell you what claims have previously been made on the property that you're considering. It's a good way for you to find out if the property is more likely to bring additional issues. Past claims may affect that rate that you are charged for your homeowner's insurance.