Home insurance is very important; you want to protect this very expensive investment. If you financed the purchase of your home with a mortgage loan, your lender will require you to get homeowners insurance to protect their investment in your home (note: do not buy homeowners insurance from the lender – it will be two to three times as expensive and lack many protections of a standard policy). If you buy a home with private funds, you may not have to buy insurance, but insurance is worth the peace of mind.

When you purchase homeowners insurance, you are providing financial protection against many kinds of disasters. It's important to understand the different types of home insurance policies available to you, and the steps you should take to purchase the right policy and use it to protect yourself and your financial assets.

What types of homeowners insurance are available?

• Traditional Homeowners Policy: A traditional—or standard—homeowners policy includes four types of coverage:
  1. coverage for the structure of your home
  2. coverage for your personal belongings
  3. additional living expenses in the event of disaster
  4. liability protection

  Standard homeowners insurance usually covers fire or lightning; windstorm or hail; explosions; riot or civil commotion; aircraft; vehicles; smoke; theft or vandalism; falling objects; weight of ice, snow, or sleet; and freezing of a plumbing, heating, air conditioning, or other system.
  

• Renters policy: Renters insurance provides the same kind of general personal property coverage and liability protection as a homeowners policy. Unless you can afford to replace all of your personal belongings in the event of a disaster, you should purchase a renters policy. A renters policy will also protect you in the event you damage or destroy the landlord's building. Without renters insurance, you could be held liable for the total loss. Renters insurance is reasonably priced and should not be overlooked by anyone who is serious about protecting their assets.



• Condominium owners policy: A condominium owners policy protects the inside of the condominium unit as well as what is inside the unit. The condominium association should provide structural insurance to protect the actual building, which is considered common property.



• Disaster insurance (flood, earthquake, etc.): Standard homeowners insurance does not cover floods, earthquakes, and some other natural disasters. If you live in a designated flood zone, you will be required to purchase flood insurance. There may be other reasons you need flood insurance-for example, to protect you from unexpected overflow water from streams. You can purchase flood insurance directly from your insurance agent, but the policy is actually provided by the Federal Flood Insurance Program. You can purchase earthquake insurance either as a separate policy or as an endorsement to your standard homeowners or renters policy.

How much homeowners insurance coverage do you need?
You can determine the value of your personal property based on its actual cash value, which is the replacement cost of the item minus depreciation. Alternatively, you can purchase replacement coverage, which determines value based on the cost of replacing the item without deducting for depreciation. The replacement value, however, is limited to a maximum dollar amount. If you want to purchase coverage beyond the maximum dollar amount, you can purchase extended replacement coverage.

How should you select a company and agent?
When you are ready to select an insurance company and agent, consider the following:

• Price of the policy: Your State Insurance Commission may publish a guide listing the different insurance companies' charges for different policies in various parts of your state. You may find some very different prices.



• Service: Ask for referrals from family, friends, and co-workers. You can also check references for various agencies with your State Insurance Commission. Judge the service by how promptly calls are returned and how fairly and efficiently claims are handled.

The following companies provide ratings on insurance company strength:

A.M. Best Company, Inc.
Ambest Road
Oldwick, NJ 08858
908-439-2200
http://www.ambest.com

Moody's Investor Services
99 Church Street
New York, NY 10007
212-553-0300
http://www.moodys.com

Standard & Poor's Insurance Ratings Services
55 Water Street
New York, NY 10004
212-438-2000
http://www.standardandpoors.com

How can you reduce your insurance premium?
The price of your policy is based on a number of factors, including:

• Property value: This is based on the square footage of your home and any additional structures, the value of comparable homes in your area, construction materials used, and the condition of major systems like plumbing, HVAC, and electrical.



• Deductible: In general, the higher your deductible, the lower your premium.



• Location: Is your home located in a safe area with regard to crime? Is the area subject to natural disasters, such as hurricanes? How close is your home to a fire hydrant and to a fire station?



• Safety features: If your home has a burglar alarm system, a sprinkler system, or other safety features, your premium will be lower.



• Credit rating: Insurers place a value on your good credit rating when determining the price of your policy.



• Past insurance history: Insurers are interested in your past insurance history. The more claims you have filed, the more concerned an insurer might be.

You can't change the location of your home or its basic value in the market; however, there are other steps you can take to lower your insurance premium. For example:

• Shop around! You can contact other companies directly, visit their Web sites, or call your State Insurance Commissioner for comparisons of policy prices.



• Increase your deductible.



• Consolidate by purchasing your car and home insurance from the same agent.



• Add safety devices you don't already have: dead bolts, a security alarm system, smoke detectors, and fire sprinklers.

There are several methods for determining the value of your real and personal property. It is up to you to determine which valuation you prefer and how much coverage you should include in your policy.

• Real Property is your home, garage, sheds, and other structure. The value of your real property is usually based on the actual or assessed value of your home. When purchasing coverage for the structure of your home, be sure to buy enough to rebuild your home.



• Personal Property includes the contents of your home and personal belongings. Most standard policies provide personal property coverage for 50 percent of the amount of coverage you have on your home. So if you have $100,000 coverage on the structure of your home, your personal property coverage would be $50,000. You should conduct an inventory of your personal property to determine if this amount is adequate.
  
  Note that most standard policies cover your personal property for its actual case value, which depreciates the value over time (just like the value of your vehicle deceases over time). To guard against this, you should purchase a separate Personal Property Replacement Cost endorsement. For example, a $750 couch that you purchased 5 years ago may only be worth $300; if you had a claim now with the endorsement, you would be getting the $750 (minus deductible). The endorsement also increases the coverage limit on your homeowners policy to 70 percent of the dwelling coverage. Note that this endorsement applies to homeowners, renters, and condo owners.

Why do a home inventory?
A complete home inventory is one of the most important things you can do to protect your belongings. A home inventory can help determine the right amount of coverage, help speed up the process of filing for a claim, and will also help at tax time as evidence of lost belongings. Use a checklist similar to this sample to inventory your personal belongings. Attach a copy of the sales receipt, purchase contract, or an appraisal for items of significant value.

Taking pictures of rooms and important items is a good idea. Make notes on the back of the pictures. Consider videotaping the contents of your home, describing the contents of each room as you walk through. You can enter items on a spreadsheet or even buy a software program to help you create and maintain a useful inventory system.

Once you have an inventory, no matter what form it is in, be sure to store it in a safe deposit box or other secure location. Don't forget to update your inventory as you acquire new and valuable belongings.

Review and update you insurance policy regularly
You and your insurance agent should review and update your coverage on a regular basis. A specific event, such as the renewal of your policy, a major purchase, a new safety installation, or a major lifestyle change might trigger the review. Consider if you should raise the deductible to reduce costs or comparison shop for less expensive coverage. Review changes, to your coverage. Let your insurance agent know if you have added to the value of your home or if there are any major changes to your lifestyle or living arrangements that could affect your homeowners insurance.

How do you file a claim?
Read your policy to learn what procedures you must follow to file a claim on your homeowners

• If a crime has been committed, report it directly to the police immediately. Request a copy of the police report and make your own written notes, including the name of the police officer and date of the incident.



• Call your insurance company or agent immediately. Many policies have rules on how quickly you must call. When you call, be sure you determine whether you are covered, whether your claim would exceed the deductible, how long it will take to process the claim, and whether you must obtain estimates for repairs. File only claims of significant value.



• The company will send you proper claim forms. Complete and return it as soon as possible to reduce the wait for your settlement.



• If necessary, make temporary repairs to prevent further damage to your property. Be sure to save receipts for any temporary repairs you need to make, and submit those with your claim.



• Itemize lost or damaged property by using your home inventory. Give a copy of your list to your insurance agent and keep a copy for yourself.



• Keep all receipts if you are forced to move to other housing because of damage to your home. Most insurance policies cover loss of use and will reimburse you if you must stay somewhere else while repairs are being made to your home.



• Once you notify your insurance company or agent of a claim, they will have an adjuster visit to assess damage to your home or property.



• After you and your insurance company agree on a settlement, you should receive your payment quickly. You should know that state law mandates that insurance claims be handled promptly.

What pitfalls should you be aware of?
Here are a few of the common pitfalls regarding homeowners insurance that you should avoid:

• The effects of mold and water damage on insurance. According to the Insurance Information Institute, mold is generally not covered by a homeowners insurance policy. Such policies are designed to cover disasters that are sudden or accidental. Mold can be covered, however, if it is a result of a covered peril, such as a burst pipe. Because mold is everywhere, it is important to take active measures to reduce its growth in your home. You can help minimize the growth of mold by reducing the humidity in your home, using mold-reducing products, and keeping your home and belongings dry.



• Settlement of claims-where to go for help. State law mandates that insurance claims be handled promptly and that claims be paid quickly. If you are experiencing problems with an insurance claim, contact your State Insurance Commission for help. Check your local directory or Web site.



• Unseen impact of claims on your insurance history. Do not file frivolous claims (small claims under $1,000) against your homeowners policy. Your claims are tracked by home insurers and become a part of your insurance history. You want to be certain that your history shows only credible claims.