When buying homeowner's insurance, just how much is enough?
When hurricanes wild fires rage, gaps in basic homeowner policies become more evident. Most policies cover a limited amount in damages caused to personal possessions and some even have caps on the amount they'll pay if the home is destroyed --and they're typically far less than the cost to rebuild or buy new.
Sixty-four percent of U.S. homes in 2008 were undervalued for insurance purposes, according to a Marshall & Swift/Boeckh survey. That's an improvement from 73% in 2002, but the average homeowner still has only enough insurance to rebuild about 81% of his or her home. Complicating matters for homeowners is that 31% don't know how much their home is insured for and 46% don't know what coverage their homes' contents have, according to an August survey by MetLife.
Typical homeowner insurance policies include liability protectionn--which covers homeowners against lawsuits for bodily injury or property damage caused to others--coverage for the home's structure (like if it's destroyed by a fire or hurricane), and coverage for personal belongings in the home. But, there are caveats.
Here are six situations that might warrant additional coverage:
If you're a high-income earner:
A basic homeowner's policy typically provides around $100,000 of liability coverage per year should someone get injured on your property. But that might not be sufficient for homeowners with an expensive home, a pool or even for those who entertain often.
Coverage "often does depend on income," says Michael McRaith, director of the Illinois Department of Insurance and chair of the National Association of Insurance Commissioners property and casualty insurance committee.
"The more income and assets an individual has, the better reason for a higher coverage limit."
If you fall into this category or are concerned, an umbrella liability policy might be right for you. On average, umbrella premiums cost about $200 to $300 per year for $1 million of additional liability protection, says Loretta Worters, a vice president at the Insurance Information Institute. Plus, other items, like a policyholder's cars and boat, would be covered.
If you live in a fault zone:
Earthquakes are not covered by traditional home insurance policies.
Homebuyers should ask their mortgage lender whether their home is in a fault zone or close to one. Another option is to check out the U.S. Geological Survey's Earthquake Hazard Program, which includes historical and present-day maps of earthquakes that have occurred in the country.
The cost of an earthquake policy will vary based on the construction of the home, its age, how close it is to a fault line, and the stability of the soil in the area. Homes made of wood, for example, usually have lower premiums than those made of brick or other masonry. Without reinforcement, brick homes do not hold up well under the stress, says Worters. (By contrast, brick homes are better equipped to withstand hurricanes.)
A 2,000 square-foot wood frame house in Seattle with a replacement value (the amount needed to rebuild the house) of $250,000 would cost $250 to $750 a year to insure, according to the III. A similar house in Buffalo could cost $100 or less a year to insure. In California, where earthquakes are most common, premiums average $500 but can cost more than $3,000 a year.
If you live in a flood zone:
In most cases, a traditional homeowner policy won't cover damages caused by floods. Insurance companies define floods as any water that comes across the ground, like an overflow from a lake, river or the ocean, mudslides and rapid snow melts. By contrast, damage from water that's coming down like torrential rain is typically covered by homeowners insurance -- even if it's a hurricane, tornado or tree caused damage to the house that allows rain to enter.
To determine whether you need flood insurance, find out if you live in a high-risk flood zone, which is defined as having a 1% chance of flooding per year. (Local engineers and the Federal Emergency Management Agency, which runs the National Flood Insurance Program, determine whether an area meets this threshold.) FEMA's FloodSmart.gov site provides flooding maps.
On average a flood policy costs $600 per year, a spokesman for FEMA says. Homeowners in low-risk areas (with less than 1% chance of flooding) will pay $355 in premiums for maximum coverage of $250,000 for the home and $100,000 for its contents. Homes in high-risk areas will pay $1,489, on average.
Homes on or near marshes, swamps and some coasts are classified by the U.S. Fish and Wildlife Service as part of the Coastal Barrier Resources System and are ineligible for this insurance.
If your home isn't in a flood zone, you may not need flood insurance, says Scott Simmonds, a Saco, Maine-based insurance consultant who doesn't sell insurance. But 'just because an area hasn't flooded, doesn't mean it won't,' he says. Consider whether you stand to lose more by paying a premium for a policy that you might never use or paying thousands of dollars to restore your home should unexpected weather conditions lead to flooding.
If you have a basement:
Neither homeowner's insurance nor flood insurance covers flooding from sewer backups. Sewer back-up coverage cost about $40 per year and can be tacked on to your standard home policy, says Worters.
If you have a basement or crawl space, this coverage makes sense, says McRaith.
If you live in an area prone to heavy rains and basement floods, expect to pay more in premiums, he says. But, you might need to shop for a policy. "Not every company offers this coverage for sewer backup or sump-pump failure, and state laws don't require that an insurer offer [it]."
If you have expensive jewelry or valuable family mementos:
Homeowners insurance policies usually provide around 50% to 70% of their value for the contents of your home, like electronics, furniture and appliances, that are stolen or destroyed by a fire, hurricane or other insured disaster.
But some personal possessions, like jewelry, fur and silverware, are covered at a value of up to only $1,000 to $2,000 each for losses by theft, Worters says. Even a simple engagement ring is likely to pass that limit. If your valuables are worth more than the cap, consider purchasing a floater, says Simmonds. You'll need to get your items appraised first.
Recovering losses for damaged family memorabilia is trickier. Insurance will pay the appraisal value of a collector or dealer. Your great grandmother's coin collection, for example, has a specific value in the marketplace, Simmonds says. Your grandmother's wedding album likely has little or no monetary value.
On average, premiums for a floater cost $7.50 per $1,000 worth of jewelry, he says. So, a homeowner who wants $15,000 worth of jewelry coverage would pay $113 on average. Premiums tend to be more expensive in cities where crimes are more common, and expenses decrease if valuables are in a safe or a bank safety deposit box.
If you employ people in your home:
If you depend on a nanny, a housekeeper or other individual who you employ within your home, chances are you'll need to sign up for workers' compensation insurance. (Note: By taking this step, you must also have domestic workers as on-the-book employees for tax purposes.) If a domestic worker is injured in your home, the policy will pay for their medical bills and lost wages. Without it, most states require homeowners to pay for employee injuries out of pocket, says Simmonds.
Each state's law varies. In New York, for example, workers' compensation insurance is required when you have a domestic worker in your home for 40 hours or more per week. Coverage makes it less likely an employee will sue although there are exceptions. In New York, a domestic worker can sue if he or she falls from an elevated structure like a ladder, even if their employer has this insurance. For more details on how your state's policy works, contact its workers' compensation board or labor department.
On average, the policy's premium costs $200 to $300 per domestic employee per year and covers medical bills and wages lost from the injury, Simmonds says.