If you have clients who are first-time homebuyers, they may ask you what you recommend in terms of homeowners' insurance. If, like most homeowners, your clients have a mortgage, their lender will require that they buy insurance for their home. But how much coverage do they need?
Levels of Insurance
Homeowners' insurance is available in packages that, are to some extent standardized. HO1 is a basic insurance package that protects the homeowner from theft, fire and certain kinds of liability. The next level, HO2, also protects against theft, fire and, in addition, against events like broken water heaters and damage to the home caused by the weight of ice and snow or by floods from broken water pipes. HO3 is the most comprehensive of the standardized packages; it protects the homeowner from most contingencies, but it may not cover earthquakes and floods. If your clients feel that they need extra natural disaster insurance, they may be able to get a rider added to a standard policy, or they may need to take out separate flood insurance and/or earthquake insurance.
Checking What's Covered
When your clients are deciding to buy insurance, you should also mention to them the importance of checking exactly what kind of coverage the insurance policy offers. For instance, does the policy provide actual cash value or replacement cost coverage for your clients? There's a considerable difference between the two: actual cash value coverage will only reimburse your clients for what their goods or real property are actually worth today. So if they paid $500 for a refrigerator four years ago, the insurer will only pay them $100—or what the appliance is judged to be worth today. Replacement cost coverage will pay your clients what it will cost them to replace the damaged or stolen items.
Preparing For Worst-Case Scenarios
Hopefully your clients will never have to face the damage or destruction of their home due to a natural disaster. But if this does happen, it will be a comfort to know that they have adequate insurance. Tell your clients to ask if the policy specifies extended replacement coverage. With this kind of coverage, insurance will usually pay no more than up to 120% of the "dwelling limit" in the policy. Your clients should calculate exactly how much it would cost them to rebuild their home in a worst-case scenario, bearing in mind that the price of construction materials will probably go up over time. And you should advise your clients that they should reassess their coverage regularly. According to one recent study, nearly 60% of American homeowners were found to be under-insured, and one reason for that was a failure to update or increase their coverage. And one more question for your clients to ask: Does the insurance policy cover living expenses if your clients need to move out temporarily. For instance, if the house is not habitable due to a fire, and your clients have to stay in a motel while repairs are being carried out, will insurance cover those living expenses? Renovation can be a lengthy process, and your clients may find themselves with a hefty hotel bill if living expenses are not covered in their policy.
Personal Property Inventory
In the event of a disaster, your clients will find it helpful if they have an inventory of personal property, ideally kept in a secure location such as a safe deposit box. The inventory should include serial numbers of electronics and other appliances, and if possible photographs or video footage of the items recorded. Your clients may find this process a bit of a chore, but they can find useful guides to making an inventory of personal property online. Taking an inventory will also help your clients to decide if they need additional coverage for items such as jewelry, antiques, or art. Such items tend to increase in value over time (unlike the family refrigerator), and this should be borne in mind when insurance coverage is updated.
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