What Is Property Insurance?
The primary objective of purchasing insurance is to make you financially whole after a loss.
You agree to pay a little charge to an insurance company today in exchange for the firm’s promise to bear the weight of a huge but unpredictable loss in the future.
According to this logic, property insurance protects you against damage to or loss of valuable personal property, such as a home or a car.
Auto insurance, homeowners insurance, renter’s insurance, and flood insurance are all examples of property insurance.
Assume you own your home outright and have a sizable nest egg. As long as you continue to pay your property taxes, you have the legal right to live in that residence for as long as you like.
You can live in it, rent it out, leave it empty, or sell it. You’re wealthy, so you might wonder, “Why do I need property insurance?”
Then, all of a sudden, the massive tree in your backyard falls on your house, causing extensive damage.
You now have to cover the full expense of repairing the house, which significantly reduces your nest egg.
If you had property insurance, it would have paid—in part or in full—for your home to be repaired or replaced, saving you a considerable sum of money.
Also read: How to Prepare for a Home Insurance Inspection
Who Needs Property Insurance?
Basically, somebody who owns costly real estate. Indeed, you are required to have property insurance in many circumstances, either by law or by a mortgage deal.
For example, all 50 states in the United States require drivers to have auto insurance, usually in the form of liability insurance.
Liability insurance pays for repairs and financial restitution to people other than the person at fault in an accident.
For example, the individual at fault’s liability insurance pays for the other driver’s and any passengers’ car repairs and medical expenditures.
Fortunately, when you get the required liability coverage, you also have the option of purchasing property insurance (in the form of comprehensive insurance and collision insurance in the case of auto insurance), which can save you money if your own car is damaged in the accident.
Coverage
According to a poll published in the Journal of Financial Planning, many homeowners have significantly erroneous ideas about what their homeowners’ insurance covers.
According to a 2007 poll done by the National Association of Insurance Commissioners, 33% of homeowners felt flood damage would be covered, 51% thought damage from a main water line break would be covered, and 34% thought mould damage would be covered.
In actuality, the perils (causes of property destruction) that are typically not covered are:
- Flood damage (this is a separate policy)
- Earthquake (this is also a separate policy)
- Mold
- Maintenance damage (e.g. worn-out plumbing, electrical wiring, air conditioners, heating units, roofing etc., as well as mold and pest infestation)
- Sewer backup
Policies are frequently written so that something must be “sudden and unintentional” in order to be covered, implying that it was not a steady leak that created damage over time.
This is frequently not covered by insurance. If your roof caves in due to age rather than storm damage, it is unlikely to be covered.
The perils that typically are covered include:
- Fire or lightning
- Windstorm or hail
- Explosion
- Smoke
- Theft
- Vandalism or malicious mischief
- Riot or civil commotion
- Damage caused by aircraft or vehicles
- Volcanic eruption
Liability Coverage
Many insurance policies include an important provision for liability coverage in addition to covering the value of your home or other property.
You might not think this is significant. However, there are scores of eager lawyers in every city looking for lawsuits against people like you.
Liability coverage is generally recognised by car owners, but it may be less well-known to homeowners.
If your neighbor’s house burns down because you left your charcoal barbecue unattended, you will be liable for the resulting damage.
You have paid your premiums to the insurance company in order for it to pay for larger claims when they occur.
The same is true if someone is injured and needs medical assistance while on your property.
If you are on vacation and your property, such as a diamond ring, is stolen, you may be entitled to compensation.
Make sure to document the theft with evidence that you owned it, and you should be able to furnish the insurance company with a police report.
You should be aware of what your policy covers and, more importantly, does not cover.
Insurance companies do not stay in business by charging a low fee to cover everything that might possibly happen to your property.
Additional (Non) Coverage
Typically, home-based enterprises are not insured. This does not include a home study, but rather a facility where clients come into your home, such as a workshop where you fix furniture.
To effectively insure this area and its associated liability, you will need a separate business (commercial) policy. These rules, once again, differ from state to state and country to country.
In addition, if your property, particularly your house, is left vacant for more than a specific amount of time, usually 30 days, the insurance company may cancel your homeowners’ policy immediately.
It is assumed that an unoccupied house is far more vulnerable to risks such as fire or theft, and so affects the risk profile sufficiently to necessitate a different insurance.
If you have a second home or vacation property, you may want to acquire a separate policy to protect it.
Pitfalls to Avoid
Check your policy to discover if repairs are covered at actual cash value (ACV) or replacement cost. The latter is frequently far superior.
For example, if your roof has been damaged and must be totally replaced, the replacement cost will pay for the repairs less your deductible, whereas ACV will pay you what your roof was estimated to be worth at the time of the incident.
The cost of ACV is less than that of replacement cost coverage.
Premium Factors
Do you live in a tornado, hurricane, or flood-prone area? Do you have a huge dog or a pool? Are you a cigarette smoker? How is your credit rating?
Based on your responses to these questions, you may be at higher-than-average risk, and an insurance company would charge you accordingly.
These are the elements that it considers while determining your insurance premiums. The greater the extent to which these and other risks apply to you, the higher your rates will be.
