Your home may be the biggest investment of your life and with it comes a certain amount of risk. If you have a mortgage, you definitely need homeowner’s insurance. Even if you own the house free and clear, replacing it at today’s construction costs could wipe out your savings. The insurance premium on loss by fire can be reduced somewhat by assuming a larger deductible. For example, a $5,000 deductible would come out of your pocket in case of fire. If you earmark savings for the deductible, you can reduce your overall premium. However, you need to be aware that if you paid $100,000 for your house, it may cost $140,000 to replace it. Your coverage should reflect the replacement cost, which has nothing to do with the market value of your house. The market value may be $200,000, but insurance coverage should address the replace cost.
Most insurance policies do not cover flood or earthquake damage as a standard item. Coverage for this kind of loss must be purchased separately. In areas at high risk for flood, the government may offer a one-time house replacement. Review this with your agent. You may need a supplement to cover total replacement.
Should your home be destroyed and you chose not to replace it, you will receive the replacement cost, less depreciation. This is called actual cash value and may be less than the purchase price of your dwelling.
Generally, a homeowner’s policy has limits on the amount of coverage for accidents that happen on your property. If you have significant assets or income and the injured party sues you, the court settlement may include more than medical and court costs. Consider your liability coverage in line with your assets. For example, if your dog attacks and permanently disables the postman or meter reader, you may experience a significant court judgment, if not of your assets then of your lifelong income. Consult your insurance agent on liability coverage versus your assets.
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