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Key insurance issues when you're buying a house

Home insurance is an easy product to buy. When you're purchasing a house, you'll call up an insurance agent who will take down some information about the house and you, quote you a price, and issue you a policy. Like many homeowners, you probably won't even read the policy.

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So do you really know what's covered by your home insurance? For example, did you know that your dwelling is insured but not the land underneath it? Did you know that you should be insured for the cost of rebuilding your house, not its market value? And did you know your policy doesn't cover you for many natural disasters, particularly floods and earthquakes, unless you've bought special coverage?

The proper home insurance coverage consists of buying the right type of policy, having the proper levels of protection within that policy — including special provisions for jewelry, your computer stuff, and other particularly valuable possessions — and supplementing this coverage with special protection against natural disasters that are not covered by your basic policy.

Homeowners with mortgages are required by their lenders to have home insurance. Many people may think that the policy terms required by their lenders represent suitable levels of insurance, but this may not be true. Lenders want to make sure their exposure is covered, but that can happen without you being fully protected. Thus, it's important that you calculate your needs as well and make sure they are reflected in your coverage.

Seven basic policies

There are seven basic kinds of home insurance policies and they're pretty much the same regardless of where you live (except for Texas). They tend to be defined by the perils they cover:

HO-1. Basic homeowners. Covers your dwelling and personal property against losses from 11 types of perils: fire or lightning; windstorm or hail; explosion; riot or civil commotion; aircraft; vehicles; smoke; vandalism or malicious mischief; theft; damage by glass or safety glazing material that is part of a building; and volcanic eruption.

HO-2. Basic homeowners plus. Covers dwelling and personal property against 11 perils plus six more: falling objects; weight of ice, snow or sleet; three categories of water-related damage from home utilities or appliances; and electrical surge damage.

HO-3. Extended or special homeowners. Covers 17 stated perils plus any other peril not specified in your policy, except for flood, earthquake, war, and nuclear accident.

HO-4. Renters coverage. Covers only personal property from 17 listed perils.

HO-5. All risk coverage for building and personal property. This policy form isn't sold very often anymore.

HO-6. Condominium coverage. Covers personal property from 17 listed perils along with certain building items in which the unit owner might have an insurance interest.

HO-8. Basic older home. Covers dwelling and personal property from 11 perils. Differs from HO-1 in that it covers repairs or actual cash values — not rebuilding costs. This is for homes where some historic or architectural aspects make the home's replacement cost significantly higher than its market value.

Most homes are covered by HO-2 and HO-3 type policies.

Starting an application

Home insurance companies research a wide range of personal information including your current occupation and employment history, marital status, previous addresses, date of birth, and Social Security number. Armed with that information, they will check your criminal, credit, and insurance history to see if you are a "good risk." They also will look at your loss history to see what kinds of home insurance claims you've made in the past. They'll look into any previous home insurance coverage you may have had, as well as why you or your insurer canceled that coverage (if it was canceled involuntarily).

They'll also want you to pick a type and level of home insurance coverage. They'll want you to decide what dollar amount or percentage deductibles you'd like to have, and the sort of payment schedule to which you'd be agreeable.

Analyzing your home

Your house also plays a role in determining how much you'll pay for homeowners insurance. Typically, insurance companies want to know everything, from when your home was built, to where it is located, to what your house and roof are made of. They'll want to know the square footage and number of rooms, and they will calculate the cost to rebuild it.

They'll also want to know the type of heat, the location on any fuel oil storage tank, and the condition of the home, inside and out, as well as the condition of the foundation. Other home-related statistics include the number of residents, distance from a fire station and fire hydrant, and the area's fire safety rating.

Protection devices such as deadbolt locks and smoke detectors can lower your rates. Extra features, such as the existence of an in-ground pool or a trampoline, can raise rates. You can also expect to pay more if you are located in a higher risk area, such as a coastline, or if you have a pet that could increase your liability risk, such as certain breeds of dogs. For instance, some insurers refuse to offer homeowners insurance to persons with American Pit Bull Terriers. Your insurance company will also want to know if you plan to use the home for any business purposes, of if you plan to rent all or part of the house, both of which can increase liability.

Armed with all that information, insurance companies can determine how much to charge you for insurance, sometimes in a matter of minutes. Then the ball is back in your court to decide whether to accept their offer, make changes to lower your premium, or go off in search of a different company.

Common questions

There are many special coverage provisions offered by insurers, but here are some basic questions that you should answer as part of the home insurance process:

In the event of a serious loss — let's say a fire destroys the house — how would I fare?

In most cases, you want to insure your dwelling and its contents for their replacement values, which will likely differ from the dwelling's market value and your personal property's depreciated cash value. You also should probably get a policy with automatic inflation adjustments so that the replacement cost keeps pace with the general level of price increases. (Homes insured under HO-8 policies are covered only for repair costs or actual cash values, since replacing them would be so costly. Owners of such homes could always get replacement insurance under another type of policy, but they'd probably pay pricey annual premiums.)

Standard coverage normally insures your possessions at 50 percent of the value of your dwelling. Many people boost this coverage to 70 or 75 percent with additional protection. But there are still individual limits on certain types of personal property (see below).

Free-standing structures on your property (garages, gazebos, tool sheds) are also covered, with standard protection equal to 10 percent of your dwelling. Trees and shrubbery normally can be replaced up to a limit of 5 percent of your dwelling coverage. As is the case with your personal property, you should assess your needs to determine if you want to pay extra amounts to increase these levels of protection.

Also, pay attention to what might happen if you were to lose the use of your home for an extended period. Loss-of-use provisions are important elements of homeowners policies, and coverage levels equal to 30 percent or more of your dwelling's insurance aren't unusual.

If someone who is not covered on my health insurance were to suffer a serious injury in my home, and I was found liable, how would I fare?

The standard level of liability protection in homeowners policies has been $100,000 but it's rising all the time. Today, $300,000 is not an uncommon amount, and even higher levels are recommended for affluent homeowners with lots of assets to protect. In this situation, "umbrella" policies have become popular. These policies provide excess liability coverage on both your homeowners and automobile policies, and are not that expensive (you normally need to carry both underlying policies with the same insurer).

What if I have certain possessions — computer equipment, cameras, jewelry — whose replacement values far surpass normal coverage limits in my policy?

Standard policies may not come near covering the replacement costs of even moderate amounts of home electronics hardware or expensive possessions. For relatively small amounts, you can purchase "floaters" that will add protection to certain items of personal property.

In addition, equipment related to a home-based business will not be satisfactorily covered unless you obtain a separate commercial policy.

Can I get a high deductible, say $1,000, in order to save money on the policy?

The differences in annual premiums between policies with deductibles of $250 (you pay the first $250 of damage, the insurer pays the rest), $500, and $1,000 may easily be worth 20 to 30 percent of the annual premium. So, if you can afford the expenditure, and want to place a small bet that you won't face a home-related loss, consider a larger deductible.

What other protections does my policy provide?

Homeowners policies regularly provide other types of coverage, including off-premises theft protection and unauthorized use of your credit cards. Make sure you understand which provisions are included in the standard coverage you elect to purchase and which may require supplemental premiums.

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