Homeowner's Insurance - Part 1

Your home may be the largest asset you'll ever own, and it is critical to protect it with insurance

Your home may be the largest asset you'll ever own, and it is critical to protect it with insurance. Sure, you need to practice the other modes of risk management such as avoiding loss and controlling loss, but if there is a tornado, you want to have insurance because you cannot move your home out of the path of a funnel cloud. This section is devoted to homeowners, but even if you are a renter, you need to have coverage to protect your possessions.

You want to be insured for at least 80 percent of the replacement cost of your home. If it is totally destroyed and you are not properly insured, the insurance company does not have to reimburse in full for the loss.

Also, be sure you have replacement-cost provision, which compensates you for the full cost of replacement or repair of damaged or destroyed property without any deduction for depreciation. For example, if the pipes in an upstairs bathroom burst one winter while you are at Disney World, the bathroom lands in the kitchen, and you need to replace the kitchen appliances, you'll want to be fully reimbursed for the new appliances. Without this provision, the insurance company adjuster will estimate what your 10-year-old appliances were with when the pipes burst and will reimburse you only that amount.

Depending on where you live in the United States, your insurance needs will be different. If you live in California, you'll want earthquake insurance; if you are in Florida, you'll want to be covered for floods and hurricanes. If your home is damaged or destroyed, you'll want to be able to rebuild. Read your policy carefully and ask a lot of questions.

If you live in a designated flood area, be sure you have flood insurance. According to the Federal Insurance Administration, less than a third of homeowners in those areas are properly insured for floods. Don't be one of them.