How Homeowners Insurance Works

What is Homeowners Insurance?
You may need an umbrella policy if you want coverage beyond a standard homeowners insurance policy.
You may need an umbrella policy if you want coverage beyond a standard homeowners insurance policy.

Another option you'll probably be asked to consider is replacement cost versus actual cash value. Here's where you'll really want to consider the contents of your home. Let's say, while you're not a complete luddite, by comparison to most current homeowners, the amount of electronic gadgets in your home is pretty small. You have a television that's almost as old as you are and you wouldn't miss it if it were gone. You also have an inexpensive stereo and the computer you use is an old loaner laptop from work. So which option is right for you? Going with actual cash value would mean that if these items were damaged, you'd get an amount of money equivalent to the current value of those items (accounting for depreciation). The laptop is covered through work; you won't need to replace that. And since you don't really care about the television, you could simply take the money you get and just get a new, cheap stereo. Meanwhile, your neighbor has everything a home theater should have - a plasma TV, a surround sound speaker system, DVD player, etc. in both her living room and the family room. With that kind of equipment, she'd definitely want to consider replacement cost coverage, which pays for a new version of the item that was lost or damaged - there's no accounting for depreciation. Obviously, in the case of electronics, which can depreciate in value rapidly over time, a replacement cost policy can be a big advantage. However, this isn’t the only scenario that calls for this option. Let’s go back to your household contents. There are other types of items to consider when making this decision. For example, what about the collection of signed prints you have? And there’s also the stamp collection and those original, signed Pearl S. Buck manuscripts. Original pieces of artwork or other costly collectibles can be just as, if not more, valuable than today’s pricey electronics. Replacement cost coverage is usually 10 percent more expensive than actual cash value coverage, but under the right circumstances, it's definitely worth the extra coverage.

Some homeowners may require a higher liability limit than what comes standard with their policy. Getting a higher limit can sometimes be as simple as paying a higher premium. However, in certain cases a special type of policy might be necessary. For example, an umbrella or excess liability policy is a separate policy that pays money to the policyholder after the liability limit on your regular homeowners insurance has been reached. Some umbrella policies defend against things like invasion of privacy, slander and libel. Generally, you have to have $300,000 in regular coverage before you can get an umbrella policy, and the more coverage you have in your regular policy, the cheaper your umbrella policy will be. An umbrella policy of $1 million in extra liability protection can cost $200 to $350 a year.

Other special policies include a special personal property floater/endorsement. This type of policy allows you to insure valuable items individually or together, has no deductible and charges a premium based on what the item is, its worth and where you live. An appraisal or a recent receipt determines the value of the item in question.

Remember that most standard policies do not cover earthquakes or floods. If live in an area prone to these disasters, you'll definitely want to consider special insurance policies that cover earthquakes and/or floods. Many policies do cover other natural disasters such as tornadoes and hurricanes, but it's always best to check with your carrier and, if your area experiences these disasters, consider getting a special policy.

Some homeowners insurance policies cover damage from blizzards and tornados, but it's best to check with your provider to see if you're covered.
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