Property Insurance

The Importance of Property Insurance

What is insurance for your property?

The main reason to buy insurance is to get your finances back in order after a loss. You agree to pay an insurance company a small, fixed fee today in exchange for a promise from the company that it will pay for a large, uncertain loss in the future. From this point of view, property insurance protects you against damage to or loss of expensive personal property like a home or a car. Auto insurance, home insurance, renter’s insurance, and flood insurance are all types of property insurance.

Let’s say you own your home outright and have a nice savings account. As long as you keep paying your property taxes, the law gives you the right to live in that house for as long as you want. You can live there yourself, rent it out, let it sit empty, or sell it. You have a nice place to live, so you might ask, “Why do I need property insurance?”

Then, out of nowhere, that huge tree in your backyard falls on your house and does a lot of damage. Now you have to pay for all of the repairs on the house, and that nest egg has been cut down a lot. If you had property insurance, it would have paid for some or all of the repairs or replacement of your home. This would have saved you a large amount of money that you hadn’t expected.

 

KEY TAKEAWAYS

 

Anyone who owns an expensive property, like a house or a car, should have property insurance.
It is usually bought at the same time as liability insurance.
Property insurance doesn’t cover everything the same way. For some things, like jewelry, you may need extra coverage, called a “floater.”

Who needs insurance for their property?

 

Well, just about anyone with the expensive property. In fact, the law or the terms of your mortgage may force you to get property insurance. For example, all 50 U.S. states require drivers to have auto insurance, which is usually liability insurance.

Liability insurance pays to fix the damage and give money back to people other than the person who caused the accident. For example, the person at fault’s liability insurance pays for the other driver’s and any passengers’ car repairs and medical bills. When you buy the required liability coverage, you also have the option to buy property insurance, which in the case of auto insurance comes in the form of comprehensive insurance and collision insurance. This protects you from financial trouble if the accident damages your own car.

 

Coverage

A survey in the Journal of Financial Planning found that many homeowners have very wrong ideas about what their homeowner’s insurance actually covers. According to a report in The New York Times about a 2007 survey by the National Association of Insurance Commissioners, 33% of homeowners thought that damage from floods would be covered, 51% thought that damage from a broken main water line would be covered, and 34% thought that damage from a mold would be covered.

In reality, the risks (things that can damage property) that are usually not covered are:

Flood damage (this is a separate policy)
Earthquake (this is also a separate policy)
Mold Maintenance damage (e.g. worn-out plumbing, electrical wiring, air conditioners, heating units, roofing etc., as well as mold and pest infestation)

Sewer backup

 

Policies are often written so that something must be “sudden and accidental” for it to be covered. This means that the damage couldn’t have been caused by a slow leak that went on for months. Most of the time, insurance doesn’t cover this. If your roof caves in because of age and not because of a storm, it probably won’t be covered.

Most insurance covers the following risks:

Fire or lightning
Explosion of wind or hail
Smoke \sTheft
Vandalism or mischief done on purpose
Riot or public disturbance
Damage done by airplanes or cars
Volcanic eruption

Coverage for Liability

 

In addition to covering the value of your home or other property, liability coverage is often an important part of many insurance policies. You might not think this is a big deal. But there are a lot of eager lawyers in every city who are always looking for people like you to sue. Liability coverage is well known to people who own cars, but homeowners may not know as much about it.

If your neighbor’s house burns down because you forgot about your charcoal grill, you will have to pay for the damage. You have paid your premiums to the insurance company so that it will pay for bigger claims when they happen. The same is true if someone gets hurt on your property and needs medical help.

If something like a diamond ring is stolen from you while you are on vacation, you may be able to get your money back. Make sure to write down the theft and show proof that you owned it. You should also be able to give your insurance company a police report.

Know what your policy covers and, more importantly, what it doesn’t cover. Insurance companies can’t stay in business if they only charge a small fee to cover everything that could go wrong with your property.

 

Extra coverage (that isn’t)

 

Most policies don’t cover home-based businesses. This doesn’t include a home office, but it does include a place where customers come to you, like a workshop where you fix furniture. To properly cover this area and the liability that comes with it, you will need a separate business policy.

Again, these rules are different in each state and country.

Also, if your property, especially your house, is empty for more than a certain amount of time, usually 30 days, the insurance company may cancel your policy right away.
It is thought that a house that isn’t being lived in is much more likely to be damaged by things like fire or theft. This changes the risk profile enough to require a separate policy. If you have a second home or a place to stay while on vacation, you may want to get a separate policy to cover it as well.

Know how your policy pays for repairs. Covering the full cost of replacement is better than just the actual cash value (ACV), but the premiums will be higher.

 

Pitfalls to Avoid

 

Check your policy to see if it covers repairs at their actual cash value (ACV) or at the cost to replace them. Most of the time, the second is much better. For example, if your roof was damaged and needs to be completely replaced, the replacement cost will pay for it, minus your deductible, while the actual cash value will pay you what your roof was thought to be worth at the time it was damaged. ACV costs less than replacement cost insurance, which is the trade-off.

 

Jewelry and art

 

Also, if you want to cover expensive jewelry or artwork, you may need to add a “floater.” This is a part of your main insurance policy. Many insurance policies have set amounts that they will pay out for certain types of losses, but they won’t pay more.

 

Coinsurance Clauses

 

Lastly, some property owners only want to ensure their homes for the amount they paid for them. This could bring a coinsurance clause into play. Depending on the laws in the area, this is when the property is insured for less than, say, 80 percent of what it would cost to replace it now. If you have less coverage, the insurance company will ask you to pay a portion of the cost of repairs over and above the deductible.

 

The Best Things

 

Do you live in a place where tornadoes, hurricanes, or floods happen often? Do you have a swimming pool or a big dog? Are you a smoker? What is your credit rating?

Depending on how you answer these questions, you may be more of a risk than most people, and an insurance company will charge you more because of that. These are some of the things that go into figuring out how much your insurance costs. The higher your rates will be, the more of these and other risks you face.

 

Word of Caution

 

Some insurance companies have rates for their policies that seem impossible. If you have never heard of the company and its prices are very low, this should be a red flag. Don’t just take the salesman’s word for how good the company is; ask around. Check the policy to see what it does and does not cover.

You might not find out until it’s too late that what you thought was enough insurance barely met the minimum requirements in your area. If you want property insurance to help you, make sure you get good coverage. Remember that cheap insurance can cost a lot.

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