The Importance of Property Insurance: If you skip it, you’re playing with your future; however, make careful purchases.
What Is Insurance for Property?
To restore your financial stability in the event of a loss is the fundamental purpose of purchasing any insurance. In exchange for a promise from an insurance company that it will cover the cost of a sizable but uncertain loss in the future, you consent to pay a small, predetermined fee to the company today. In light of this, property insurance safeguards you against loss or damage to pricey personal property, such as a home or a car. Auto insurance, homeowners insurance, renter’s insurance, and flood insurance are examples of different types of property insurance.
Assume you have a tidy nest egg and free and clear title to your home. You have every right to enjoy the use of that house for as long as you like, as guaranteed by law, as long as you continue to pay your property taxes. You can occupy it yourself, rent it out, let it sit empty, or sell it. You may be in a comfortable position and wonder why you need property insurance.
Then, all of a sudden, that enormous tree in the backyard collapses onto your home, seriously damaging it. Your nest egg is significantly reduced because you now have to pay for the entire cost of the house’s repairs. If you had property insurance, it would have paid for the repair or replacement of your home in full or in part, saving you an unexpectedly sizable sum of money.
KEY LESSONS
Anyone who owns an expensive asset, such as a home or a car, is advised to carry property insurance.
It is frequently bought along with liability insurance.
Not all property is equally covered by property insurance; for some items, like jewelry, you might need additional floater coverage.
Does Anyone Need Property Insurance?
Basically anyone who owns expensive real estate. In fact, having property insurance is often required of you by the law or a mortgage contract. For instance, all 50 U.S. states mandate that motorists carry auto insurance, typically in the form of liability insurance.
Liability insurance pays for repairs and monetary compensation to parties other than the party at fault in an accident. For instance, car repairs and medical expenses for the other driver and any passengers are covered by the at-fault party’s liability insurance. Fortunately, you have the option to purchase property insurance when you buy the necessary liability coverage (in the form of collision and comprehensive insurance for auto insurance), protecting you from financial hardship if your own car is damaged in the collision.
Coverage
Many homeowners have wildly erroneous ideas about what their homeowners insurance actually covers, according to a survey that was published in the Journal of Financial Planning. A 2007 survey by the National Association of Insurance Commissioners was reported in The New York Times, which found that 33% of homeowners thought flood damage would be covered, 51% thought damage from a main water line break would be covered, and 34% thought mold damage is covered.
The risks (causes of property destruction) that are actually not typically covered are:
- flooding harm (this is a separate policy)
- Earthquake (this is also a separate policy)
- Mold
- Maintenance-related harm (such as mold and pest infestation) includes worn-out plumbing, electrical wiring, air conditioners, heaters, roofing, etc.
- backup sewer
In order for something to be covered by a policy, it frequently states that it must be “sudden and accidental,” which means that it wasn’t a slow leak that caused damage over a long period of time. This is frequently not covered by insurance. Your roof won’t likely be covered if it caves in due to aging rather than storm damage.
The risks that are frequently covered include:
- Lightning or fire
- hailstones or wind
- Explosion
- Smoke
- Theft
- Vandalism or intentional harm
- rioting or other unrest
- damage resulting from vehicles or aircraft
- eruption of a volcano
Liability Protection
Many insurance contracts also have a crucial clause for liability insurance coverage, in addition to covering the value of your house or other property. This may not seem like a big deal to you. However, there are countless eager attorneys looking everywhere for cases to bring against people like you. Automobile owners are likely more familiar with liability coverage than homeowners are.
You’ll be responsible for any damage caused by the fire if you neglect your charcoal grill and it causes your neighbor’s home to catch fire. You have paid the insurance company’s premiums in order for it to cover more substantial claims when they do arise. The same rule applies to anyone hurt on your property who needs medical care.
You might be entitled to compensation if something you own—like a diamond ring—is stolen while you’re away. Make sure to provide proof that you owned the item stolen, and you should be able to provide the insurance provider with a police report.
You should be aware of the coverage your policy provides and, more importantly, excludes. Insurance companies can’t stay in business by offering cheap coverage for any damage that might occur to your property.
Further (Non) Coverage
Typically, home-based businesses are not covered. This excludes a home office, but rather a location where guests enter your home, like a workshop where you fix furniture. To properly cover this area and the associated liability, you will require a different business (commercial) policy.
Once more, these laws differ from one state and one country to the next.
Additionally, your homeowners policy may be immediately canceled by the insurance company if your property, particularly your house, is vacant for longer than a predetermined amount of time, typically 30 days.
It is assumed that a vacant home is much more vulnerable to hazards like fire or theft, changing the risk profile sufficiently to necessitate a separate policy. If you own a second home or a vacation home, you might obtain a different policy to cover it as well.
Fallacies to Avoid
Verify whether replacement cost or actual cash value (ACV) repairs are covered by your insurance policy. The latter is typically far superior. As an illustration, if your roof needs to be entirely replaced due to damage, the replacement cost will cover the cost of the replacement less your deductible, whereas ACV will pay you what the roof’s estimated actual value was at the time of the damage. ACV is less expensive than replacement cost coverage, which is the trade-off.
Jewelry and artwork
You might also need to include a floater if you want to protect any pricey jewelry or works of art. To your main policy, this is an addition. For losses to specific items, many policies have set maximum payouts that they will not exceed.
Coinsurance Provisions
Finally, some property owners may only want to cover the amount they paid for a property under insurance, which could activate a coinsurance provision. If the property is insured for less than, let’s say, 80% of its current replacement cost, this is the case (depending on local laws). If you have less coverage, the insurance provider will ask you to pay a portion of any repairs that cost more than the deductible.
Premium Elements
Are there frequent tornadoes, hurricanes, or floods where you live? Do you have a big dog or a pool at home? Do you use tobacco? What is your credit rating?
Your responses to these questions may indicate that you pose a higher-than-average risk, and an insurance provider will charge you accordingly. It considers these elements when determining your insurance rates. Your rates will be higher the more you are exposed to these and other risks.
One Word of Caution
Some insurance providers offer rates for their policies that seem improbable. If a company has no reputation but offers incredibly low rates, this should raise suspicions. Don’t just trust the salesman’s assurances; research the company’s reputation first. Examine the policy to see what it includes and excludes.
It’s possible to discover too late that the insurance you thought you had was barely the bare minimum required by law in your region. Make sure to get high-quality coverage if you want to benefit from property insurance. Keep in mind that cheap insurance can cost a lot of money.
