Home Insurance 101 for First Time Home BuyersBoxes? Check.

Packing Tape? Check

Moving Van? Check

Homeowner’s insurance quotes and policy review? Huh?

Buying your first home can be the most exciting and terrifying move of your adult life. Packing boxes and picking out furnishings is only the beginning. A new home represents a major investment in your family and your future.

If you’ve been renting a home and are ready to buy, homeowner’s insurance may seem a bit overwhelming. Renter’s insurance is often cut and dry, but how can you possibly purchase one insurance policy to protect your home and everything (and everyone) inside?

We’ve included a comprehensive overview of everything you need to know to protect yourself and your investment. Buying a new home is filled with enough paperwork and regulations to make your head spin.

What Is Homeowner’s Insurance?

At its most basic definition, homeowner’s insurance is a contract between you (the homeowner) and the insurance company. The insurance company pays to repair or replace your house and personal property if they’re damaged or destroyed. You agree to be honest with the insurance company about your home and personal property and pay your premiums as required.

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CONTENTS:

Terms to Know

What Is Covered?

The Claims Process

Cost of Policy

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Terms to Know

Actual cash value (ACV) - The value of your property, based on the current cost to replace it minus depreciation.

Additional living expenses (ALE) – Reimburses the policyholder for the cost of temporary housing, food, and other essential living expenses, if the home is damaged by a covered peril that makes the home temporarily uninhabitable. Policies cap the amount of ALE payable to 20 percent of the policy’s dwelling coverage.

Adjuster - An individual employed by an insurer to evaluate losses and settle policyholder claims.

Appraisal – An evaluation of a home insurance property claim by an authorized person to determine property value or damaged property value. Many policies provide an “appraisal” process to resolve claim disputes.

Cancellation – Termination of an insurance policy by the company or insured before the renewal date.

Claim - A policyholder’s request for reimbursement from an insurance company under a home insurance policy for a loss to property.

Claimant – A person who makes an insurance claim.

Declarations page – The page in a policy that shows the name and address of the insurer, the period of time a policy is in force, the amount of the premium, and the amount of coverage.

Deductible – The amount the insured must pay in a loss before any payment is due from the company.

Depreciation - Decrease in the value of property over time due to use or wear and tear.

Earned premium – The portion of a policy premium that has been used to actually buy coverage, or that the insurance company has “earned.” For instance, if you have a six-month policy that you paid for in advance, two months into the policy, there would be two months of earned premium. The remaining four months of premium is “unearned premium”.

Effective date - The date on which an insurance policy becomes effective.

Endorsement - A written agreement attached to a policy expanding or limiting the benefits otherwise payable under the policy. Also called a “rider”.

Escrow – Money placed in the hands of a third party until specified conditions are met.

Exclusion – A provision in an insurance policy that denies coverage for certain perils, people, property, or locations.

First-party claim - A claim filed by an insured against his or her own insurance policy.

Grace period – The time – usually 31 days – during which a policy remains in force after the premium is due but not paid. The policy lapses as of the day the premium was originally due unless the premium is paid before the end of the 31 days or the insured dies. This is not a “free-insurance” period.

Independent adjuster - A person who charges a fee to an insurance company to adjust the company’s claim.

Inflation protection – Automatically adjusts your home insurance policy limits to account for increases in the costs to repair or rebuild a property.

Insurable interest - Any financial interest a person has in the property or person insured. In life insurance, a person´s or party´s interest – financial or emotional – in the continuing life of the insured.

Liability coverage - Covers losses that an insured is legally liable. For homeowners insurance, liability coverage protects you against financial loss if you are sued and found legally responsible for someone else’s injury or property damage.

Loss – The amount an insurance company pays on a claim.

Loss of use – A provision in homeowners and renters insurance policies that reimburses policyholders for the additional costs (housing, food, and other essentials) of having to live elsewhere while the home is being restored following a disaster.

Market value - The current value of your home, including the price of land.

Non-renewal - A decision by an insurance company not to renew a policy.

Peril - A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy. An all-risk policy covers all causes of loss except those specifically excluded.

Personal property – All tangible property (other than land) that is either temporary or movable in some way, such as furniture, jewelry, electronics, etc.

Premium – The amount paid by an insured to an insurance company to obtain or maintain an insurance policy.

Replacement cost – Pays the dollar amount needed to replace the structure or damaged personal property without deducting for depreciation but limited by the policy’s maximum dollar amount.

Rider – A written agreement attached to the policy expanding or limiting the benefits otherwise payable under the policy. Also called an “endorsement”.

Third-party claim – A claim filed against another person’s insurance policy.

Underwriter – The person who reviews an application for insurance and decides if the applicant is acceptable and at what premium rate.

Underwriting - The process an insurance company uses to decide whether to accept or reject an application for a policy.

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What Is Covered?

A basic homeowner policy will cover three main areas: perils, personal property, and liability. Each of these areas have separate requirements, limits, and coverage options. What is, (and what is not) covered in your basic policy is largely determined by where you live. Most standard homeowner’s policies in Kentucky include the following coverage:

Perils:

In Kentucky, tornadoes, wind, fire, storms, and hurricanes are covered by homeowner’s insurance. But what about flooding, earthquakes, or hail damage? Homeowner’s policies can be tricky if you do not understand them completely. For example, you may be covered for tornadoes, but if the tornado causes a flood, you might be out of luck. In this case, you can purchase additional coverage for your policy.

Extra Coverage (Endorsements)

Some of the most common endorsements include:

Earthquake Pays for damage to the home caused by an earthquake
Flood Pays for damage against flooding caused by rain, storms, or accidental flooding.
Sewage Backup Pays for damage caused by sewer or drain backup.
Foundation Pays to repair a foundation or slab up to certain limits.
Mold Pays for mold remediation up to a certain amount.
Water Damage Pays for sudden and accidental water damage.
Increased Value Items Increase coverage for jewelry, fine arts, or electronics.

 

Personal Property:

Your homeowner’s policy is designed to cover not only your home, but also everything inside. From your couch and 60″ flat screen TV to your kitchen spatulas and underwear, personal property insurance replaces everything in case of complete disaster.

How Much Do I Get?

Homeowner’s policies establish coverage for your personal property as a percentage of the amount of your dwelling. For example, the company will assume that if you own a $100,000 house, everything inside is worth no more than $40,000. This is rarely the case, especially if you have valuable electronics, jewelry, or rare collections. In this case, you can buy additional personal property coverage.

How Much Do I Need?

The best way to determine how much personal property insurance you need is to complete a home inventory. With a video camera and a notebook, it is simple to make a written home inventory. List each item, its purchase date, value, and serial number.

Photograph or videotape each room, including closets, open drawers, storage buildings, and garage. Keep the inventory and receipts for major items in a fireproof safe or another location. This valuable information makes the claims process much easier as well.

Personal Property Caps

Although you may have $50,000 worth of personal property insurance, this is divided up into categories within your policy. Many homeowners are surprised to learn that although you have plenty of coverage, only $2,500 or less is designated for electronics, $1,500 for jewelry, etc. If you have an extensive art collection, heirloom jewelry, or designer clothing, you may be able to buy additional coverage for these specific areas.

Liability:

As a homeowner, you are now open to a wide range of liability. From the neighborhood, kid who gets hurt while playing in the backyard to the mail carrier who slips on your icy steps. You may be shocked how much legal fees and medical bills can cost if someone decides to sue you because they were injured on your property. Homeowners insurance covers injury or property damage suffered at your home by a non-resident, up to your policy limits.

Personal Umbrella Liability Insurance

An umbrella policy is an over-arching protection against massive liability. Typically, an umbrella policy provides $1 million or more in coverage to protect against catastrophic accidents.

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The Claims Process:

As soon as you have experienced a loss, you must contact your insurance company and file a claim. The claims process can take some time, so be sure to make temporary repairs to avoid the problem getting worse, but do not make any permanent repairs until you receive approval from the insurance company. For example, board up the windows, or patch a leak, but don’t replace windows or roofing.

Step 1: Call your insurance company

Step 2: Take pictures and make a detailed report of what happened, use receipts from your home inventory to estimate damages.

Step 3: Make temporary repairs if necessary.

Step 4: The insurance adjuster will prepare an estimate of the costs to repair or replace the damage.

Step 5: Payment is generally issued within five business days.

Payments

There are two main methods insurance companies will use to replace your loss: replacement cost or actual cash value.

Replacement Cost The dollar amount you would pay today to rebuild or repair your home, based on current construction costs. Does not include the value of the land, assuming you could rebuild your house on your current land.
Actual Cash Value The dollar amount you would pay to replace your current property and land, similar to market value. This is better than replacement cost coverage, but more expensive.

 

Disputes

If you disagree with the adjuster’s final estimate, explain your disappointment to your insurance agent and see if perhaps the adjuster overlooked something. You can also hire your own public adjuster or request an appraisal process to settle the dispute.

Both of these options require you to pay for the adjuster or appraiser. Understand your coverage before you file a claim so you have a reasonable expectation of what to expect from your insurance company.

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Cost of Policy

When it comes to homeowner’s insurance, location dominates your premium. Urban areas or areas prone to bad weather, crime, or those near the borders have higher premiums. The age of the house and its construction also contribute to the overall premium cost. Rates and coverage vary from company to company, so it’s a good idea to shop around.

Choosing a Policy:

  • Decide which coverage and an estimation of coverage amounts you need.
  • Consider higher deductibles. Your deductible is your out-of-pocket responsibility before the insurance company will pay. The higher the deductible, the lower your annual premium.
  • Compare the same coverage options across several different companies.
  • Ask about available discounts such as bundling options.

Costs and Discounts:

Your policy is determined by several factors including location of the home. There are, however, a few things you can do to lower your overall costs and take advantage of available discounts.

  • Your claims history plays a role in the cost of your policy. Avoid filing claims for small damages because future insurance companies use your claims history to determine what to charge you for your coverage.
  • Monitor your credit score closely and notify your insurance agent of any major changes.
  • Install additional security systems, fire sprinklers, or burglar alarms.
  • Some home improvements such as solar panels or improving your outdoor areas to avoid negligent injuries reduce your premiums.
  • Bundle other insurance policies with the same company such as auto and life insurance.

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Whether you have the occasional household cleaning, or live-in home help, it is important to ensure that your hired household help is as protected as you are. The type of coverage depends on the nature of the employee.

Types of Home Help

Insuring the HelpThere are several different types of household help that you may choose to hire, or may currently have working in your home. If you need nursing care, you have a registered nurse come to your home daily for home healthcare.

If you are recovering from a recent surgery or accident, you may have regular visits from a physical therapist. In addition, you may have a nanny who watches your children during the day, a landscaper who comes on the weekends, and housecleaners who arrive on a weekly or monthly basis to take care of basic household duties.

Regardless of the type of home help you employ, they generally fall into three main categories: Contractors, occasional workers, and full-time employees. The easiest way to determine what type of worker you employ is by how they are paid, and how often they work.

Type of Help What They Do How They Are Paid How Often
Contractors Any type of home help can be hired through a contractor. You pay an organization, like a maid service company, and the company pays the individual. May be occasional, or on a regularly scheduled basis.
Occasional The occasional babysitter, or lawn mower. You pay them directly after their work is completed each time. Occasionally.
Permanent Permanent employees of your household often provide a variety of duties. You pay the individual on an hourly or salary basis generally paid monthly, or bi-weekly. They are an everyday, permanent fixture in your home.

 

Once you’ve evaluated what type of household help you employ, you can determine what type of insurance coverage will keep you (and your help) protected.

Contractors

Ask the contracting company for a copy of its certificates of insurance. Ensure that each employee is covered by workers compensation. If they offer benefits like health and disability insurance, you can feel comfortable that any worker injured on your property will be taken care of through the contracting company and no additional coverage is required by you.

Occasional

Since these workers are in your home only occasionally, consider getting more liability insurance and/or increasing no-fault medical coverage which covers injuries on someone other than an immediate family member.

Permanent

If you hire a permanent employee, consider purchasing a worker’s compensation policy for this person. This is the best way to ensure they are covered if they are injured on the job at your home. It also provides death benefits.

Some states may require this coverage for any domestic employees. If you’re required under state laws to buy workers compensation insurance and you fail to do so, your homeowner’s insurance policy will not pay for any fines, court awards or any other penalties against you.

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