Homeowners Insurance 101

What's up, everyone? Welcome to the School of Personal Finance. My name is Rich McCormick. In this video, we're going to be talking about homeowner's insurance. We're going to go through the basic sections of a homeowner's policy to make sure that you know what type of coverage you have and that you're fully protected. So the first part of the policy that we're going to talk about today is the dwelling coverage. And the dwelling coverage, what that does is it covers the structure of your home, the actual dwelling. So if your house was to burn down in a fire, this is the part of the insurance that would kick in to cover you. And what it covers is the actual cost to replace your home. So it's not the market value of your home. It's not what you think the home is worth. It's not what you paid for the home. The insurance company is going to actually use an estimator to figure out what the cost per square foot is to rebuild your home. And that's the amount that they're going to use in this coverage. So if you look at your homeowner's policy and you check out the declaration page, this is part A. And the dollar amount next to that, that's how much that they would kick in to rebuild your home if it were to be destroyed. The next section is other structures. So this is all the structures on your property that are not your primary dwelling. So this might be a pool or a shed or a detached garage. It could even be your landscaping or your fence. And typical coverage for this is going to be 10% of your dwelling coverage. So if your dwelling coverage is $300,000, your other structure coverage is going to be $30,000. So the third part we're going to discuss is personal property, part C. And this is the part of your insurance that covers all of your stuff. So you want to make sure that all of your stuff is covered, right? So this will cover your bed, your furniture, your TVs, computer, your refrigerator, your dining room table, all of the stuff in your house. And the amount of coverage. So if you have 300,000 in dwelling coverage, then your personal property coverage is going to be $150,000 to $200,000. So it's a pretty good amount of money. And what I always recommend people is walk through your house with a video. Take your phone and go room by room and record everything that you own, all of your stuff, just so it is easy to show the insurance company what you have. And there's no questions. You know, you could say, I have this 70 inch flat screen TV. I have this surround sound system. I have, you know, all this awesome stuff in my house that I'm going to need to go out and buy new stuff for. And you'll get more money that way. If you have evidence, if you have proof of everything by taking the video, it's definitely going to help out. And another tip is that you want to have the actual cost, the actual replacement costs, as opposed to the cash value of your personal property. So if you have the actual cash value of it, then they're going to depreciate it. They're going to say, well, you know, for your couch, you've owned it for 10 years. You bought it for three grand after 10 years, it's worth like 500 bucks. So we'll give you 500 bucks for it. You don't want that. You want to have the full replacement costs of that couch, not the actual cash value of it. And the next part is D, loss of use. And that is what covers you to go stay somewhere else while you've lost the use of your house. So if you need to go stay in a hotel or go rent somewhere, this will cover all of the costs associated with doing that. So the typical amount for loss of use coverage is going to be 20% or so of your dwelling coverage. So again, 300,000 dwelling coverage, you're going to have 60,000 of loss of use coverage. And then the next section of your homeowner's insurance is the liability. So for part E, this is your personal liability. And this covers you in case, you know, something bad happens and somebody gets hurt on your property. So if somebody slips and falls and they break their neck, you know, whatever it is, if somebody gets badly injured on your property, your personal liability will cover you. So I typically recommend that you have at least 500,000 of personal liability, just in case it happens and you get sued, you want the insurance coverage to be enough that you're not going to be held, you know, liable above and beyond the insurance coverage. So you could go up to a million dollars, I believe, but you know, around 500 to a million, you want to be in that ballpark for your personal liability. And I always recommend people have an umbrella policy above and beyond that for personal liability. And then the last section is F, that is medical payments to others. So this is like your liability coverage. It's just a small dollar amount. So it could be from, you know, a thousand to 5,000 and this will pay medical bills. So for example, if you have kids and they have friends over and they're playing in the backyard and one of them, you know, trips and breaks their ankle and they have $4,000 in medical costs from that, this medical coverage payment will cover that. So you don't have to go to the big liability piece. This will stop any litigation. It's just a simpler, quicker way, you know, to pay for small medical bills that come up as a result of, you know, somebody getting hurt on your property. A couple of other points with homeowner's policies, flood and earthquake insurance are not part of homeowner's insurance. So if those are risks for you, you need to have a separate policy that will cover that. So if you have a flood that happens and water coming into your home, your homeowner's insurance policy is not going to cover the damage from that. You need to have a flood policy. But one thing that you do want to make sure that you have, and not all policies come with this, you may need to add it, is water and sewer backup. So if you have, you know, sewer that backs up into your house, that would then cover this. And you could get, you know, like up to $10,000 of coverage and that will also cover a sump pump. So if you have a sump pump in your basement that doesn't work for some reason and you have damage from that, then this water and sewer backup coverage will protect you in that instance. Another thing to consider is that for your personal property coverage, they limit the amount that they'll pay out for specific categories. So like for jewelry, you might only be covered up to $2,000 for jewelry. So if you have, you know, a really nice engagement ring or you have $30,000 worth of jewelry in your house, you want to get a separate rider that's going to cover that jewelry where you have to get it appraised and have a value to it. And then you would have a separate cost for insuring that specific jewelry. And there could be other things too, artwork. If you have things that are very, you know, valuable in your house, that is not going to be covered under your basic insurance policy or it'll only be covered up to a certain amount. And then the last piece that I wanted to touch on is the deductible. So a deductible is the amount that you have to pay out of pocket before any insurance will kick in. So for example, if you have a $1,000 deductible, which is probably the most common amount, and you put in the claim, something happens where you have $10,000 worth of damage. You put in the claim, the first thousand dollars, the deductible, you're going to have to pay out of pocket. And then the insurance company would kick in for the next $9,000 of coverage. So now if you have adequate savings in the bank, if you have an emergency fund, then I recommend having a higher deductible. So you could have a $2,500 deductible. This in turn reduces the premium, the cost of your homeowner's insurance policy year after year. So if you have a $2,500 deductible, you have a claim, you have to pay the first 2,500 out of pocket. So obviously if you have something that is only going to be a thousand or $2,000 in a claim, then you would just pay for that out of pocket. You would not put a claim in for that. But if you have a small deductible, like a $250 deductible, your cost of insurance is going to be higher year in and year out because you only have that first $250 out of pocket that you would be responsible for before the insurance kicks in. The purpose of homeowner's insurance is to really cover you in big catastrophic situations. You have a fire, you know, your house burns down. You need to make sure that you're not skimping on that coverage, that you have everything that you need in order to make yourself whole when it's all said and done. All right, everybody. That's it for homeowner's insurance. Hopefully you learned something from that. Please check out schoolofpersonalfinance.com. Subscribe to my email list so I can send you out emails every time I do a new video. Subscribe to my YouTube channel and I will see you again the next time. Thanks.