Insurance is All About Managing Unacceptable Risk
Home insurance provides a perfect example of why people need insurance generally. One’s home is generally one’s biggest investment, and one pays a significant amount of money each month for a very long time generally to acquire ownership of it.
If they end up losing the home, to fire for instance, than all these years of payments can be wiped out in a single day, not only leaving them with no place to live, but with all of their personal possessions lost as well.
This is not an acceptable situation to be in, and while one could simply set aside the money that they would have paid for insurance if they bought it, let’s say $100 a month, given that the potential loss is a six figure amount, you just aren’t going to get there by doing that.
So you start out with a huge gap, and the gap never gets to the point where it’s acceptable. So if the amount that is at risk is 200,000, this is going to reduce by $100 a month, and even after several decades have passed, you’re still not going to be close to being able to cover this, and will face a ruinous situation if the event ever happens in your lifetime.
Now some insurable assets can be covered by saving up for it, where the gap can be reduced much more quickly, but with the average premium that people pay for home insurance, $1000 a year, it would take 200 years of this to get to $200,000, and by then the amount you would need would be much higher than just that, due to inflation.
If you increased the amount that you are saving tenfold, to $10,000 a year, then you would get to the $200,000 in 20 years, although your needs would have gone up by a lot by then, doubling for instance, and requiring another 20 years of saving this much to get there, and by then it’s gone up by a lot again.
Home Insurance Is Therefore Pretty Much Mandatory
So there’s no substitute for home insurance at all, as long as you want to be protected, and given the impacts of a major loss here, few people are going to be in a position to be able to deal with these losses on their own.
Lending institutions will always require adequate home insurance to be maintained at all times, as the risk of non payment should a loss occur is an unacceptable risk to them, and their financial resources are far vaster than any homeowner. That should tell us something about the wisdom of this insurance though.
It’s possible to price in the cost of insurance into the mortgage rate, but it’s just easier for lenders to just require it, and if they did price it in they would use the extra money to insure the value of the home being mortgaged, or to be exact, the amount that is owing on it. Instead, they will just force you to get it as a condition of the mortgage.
Should the same situation happen to someone who is renting, they can be placed in a very bad situation as well. They didn’t lose the value of the structure, but their possessions can be wiped out by this. Renters often don’t have the means to manage the transition, and even finding a place to stay after the loss can be a real challenge, and they may be left homeless and in an extremely bad financial predicament.
Insurance not only covers the replacement of the contents of one’s home, it also provides financial assistance in allowing those who suffer these losses to get back on their feet, covering the cost of alternative accommodations in the meantime.
In cases where one owns the home, there will be a transition period involved in getting another home, and even renters may be in a jam here, as it can take some time to acquire a suitable residence. This may involve paying money up front that they don’t have, and they also are going to have to deal with the fact that they have lost their furniture and other possessions, making the transition more difficult while they wait for their claim to be settled.
Home Insurance Provides A Wide Variety of Options
There are three main options that home insurance policies generally offer. The first option is to receive the value of the contents at the time of the loss, which includes depreciation. One may also purchase insurance to cover the full replacement value, buying the items new in other words.
A third option covers full replacement of both the home and its contents, including the costs of rebuilding the home even though it may cost more to do so than the dollar amount of the total coverage. This option does cost more and is limited to a certain maximum value over the stated coverage, so it’s important to ensure that your coverage is up to date to ensure that the protection you desire is maintained.
Insurance covers specific types of events, and one must always be aware of the limitations of these policies. They do not automatically come with insurance against all hazards, for instance you may have a policy but if a flood or an earthquake destroys your home, you may be left out in the cold.
Additional coverage for these events can generally be added on, or insured by a separate policy with another company, provided that the risk isn’t so great that it is seen as unacceptable by the insurance company. You always want to be aware of what your policy does and does not cover and look to add on coverage as desired.
One must choose the amount of coverage that one buys, and as a general rule, one wants to select a level that would cover off one’s exposure to financial hardship, and not necessarily insure all losses.
There are often limitations on personal possessions in policies, maximum amounts for certain things such as jewelry or art, although as usual, one can generally purchase additional coverage to take care of these additional needs.
Home insurance also has provisions for liabilities that may occur, so if for instance someone gets injured on your property and sues you, this is something you would want to protect yourself against.
There are limitations on this as there generally is with insurance, for instance you can’t be negligent or reckless with your property, and this coverage only really protects you against situations where you are blameless.
How Home Insurance is Priced
The price for home insurance is determined by a combination of the amount of risk that the insurance company is exposed to in combination with the specific risks involved. So the more you insure, and the more likely a claim is going to be made, the more you will pay.
Given that fire and theft are the two biggest risks in these policies, if one takes steps to protect themselves against these perils, one can obtain lower rates. This really is all about being fair and if you reduce your risk you will be rewarded with lower costs on your end.
Things like smoke alarms, sprinkler systems, proximity to a fire hydrant, having an alarm connected to a police station, and other similar factors can contribute to lower premiums. Not having these things in place will conversely result in higher costs to insure.
Home insurance comes with deductibles, meaning that the insured is responsible for paying a certain amount, the first $1000 or whatever the deductible amount is, and this actually makes sense for both the insurer and the insured.
The whole idea behind insurance is to protect yourself from hardship, and minimal losses aren’t going to represent that, and wouldn’t really make sense to insure. Insurance companies also don’t want to have to deal with all the added cost of setting very small claims either, costs that would be passed on to their clients.
There are many factors that go into assessing the cost of a home insurance policy, and therefore prices can vary, so like car insurance, one is well advised to shop around for it. Insurance companies do provide discounts to those who have other insurance products with them, so often you can get a better deal from a company you already have coverage with, but this may not always be the case, so it still may pay to look around.
The most important thing with home insurance is to get the right coverage, protecting yourself well against what you cannot handle, and limiting your coverage to just that. Not having to worry about these things, and being prepared for whatever life may throw at you, is a valuable thing in itself, and might even be the biggest benefit to home insurance.
Home Insurance FAQs
What is the average cost of homeowners insurance?
The average cost of home insurance is $1083 per year. The average cost varies considerably by state, with Oregon having the lowest average cost at $574 per year, and Texas having the highest, where homeowners there pay an average of $1947 per year. The value of your home is also a big factor in determining how much you will pay for this.
How can I get cheap homeowners insurance?
The first step to getting cheap home insurance is to shop around, and shopping for insurance does take real effort but is worthwhile. You also want to make sure you are taking advantage of any discounts that you may receive. Installing safety features and having good credit also helps in lowering the cost of your homeowner’s insurance.
How is home insurance calculated?
The value of your home, and specifically, its replacement value factors in heavily in your premiums, which is different from what you would sell your home because you’re only insuring the structures. Where you live matters a lot as well, with both replacement costs and risks of claims varying by location, as well as other factors such as alarms and other protection.
How much home insurance do I need?
The goal of any insurance is to replace the portion of a loss that you cannot bear yourself, and this is why choosing the right deductible is important. That last $1000 will cost you a lot more than that to insure against. Other than that, we want to get enough coverage to return us to our original state less the portion that we can bear.
How do I calculate the replacement cost of my home?
Estimating the replacement cost of your home is a fairly complex process, but there are online calculators out there these days to assist you. We don’t need to be too exact here but it is important to know how much coverage is enough and what is too much. The same applies to assessing the replacement value of your personal items.
Does home insurance go up every year?
Home insurance, like everything else, goes up in price over time due to inflation. Some things go up more than others though and home ownership has risen more than inflation lately, and higher construction costs is one of the reasons. The number of claims going up also influences the cost of homeowner insurance considerably.
Do I really need homeowners insurance?
If you have a mortgage, your lender will insist on you getting homeowners insurance, to protect themselves as well as you. They can’t foreclose on homes that are destroyed or significantly damaged, and if you can’t live there anymore, you will need to pay both your mortgage payment and rent on another home. You also need to protect your equity in your home.
How do I choose homeowners insurance?
The first criterion in selecting homeowner’s insurance is to make sure that the insurance policy you select provides adequate coverage and doesn’t commit you to excess coverage. Prices for policies do vary and this is why pays to shop around. The reliability of an insurance company also may matter, as well as their level of customer service.
Do you pay home insurance monthly or yearly?
Insurance can either be paid yearly, or with periodic payments that will either be made monthly or through a lump sum payment and the rest paid over a 10-month period. Your mortgage lender may pay it for you and collect payments for this up front in your regular mortgage payment, in order to ensure that you maintain it.
Can I change home insurance at any time?
While contracts for homeowner insurance typically run year to year, this contracts the insurance company to provide you with your coverage at a specified rate, and does not bind the insured. Homeowner insurance is an at will product which allows the insured to cancel at any time if they wish, if they find a more suitable deal elsewhere.