Homeowners Insurance
When you insure your home, you should insure your home
for the total amount it would cost to rebuild your home if it were destroyed. If you don't
have sufficient insurance, your insurance company may only pay a portion of the cost of
replacing or repairing damaged items.
There are three ways to insure the structure of your
home:
Replacement Cost: Insurance that pays the policyholder
the cost of replacing the damaged property without deduction for depreciation, but limited
to a maximum dollar amount.
Guaranteed Replacement Cost: Insurance that pays the full
cost of replacing damaged property, without a deduction for depreciation and without a
dollar limit. This coverage is not available in all states and some companies limit the
coverage to 120 percent of the cost of rebuilding your home. This gives you protection
against such things as a sudden increase in construction costs due to a shortage of
building materials.
Actual Cash Value: Insurance under which the policyholder
receives an amount equal to the replacement value of damaged property minus an allowance
for depreciation. Unless a homeowners policy specifies that property is covered for its
replacement value, the coverage is for actual cash value.
For a quick estimate of the amount to rebuild your home,
multiply the local building costs per square foot by the total square footage of your
house. To find out the building rates in your area, consult your local builders
association or real estate appraiser.
Factors that will determine the cost to rebuild your
home:
- local construction costs
- the square footage of the structure
- the type of exterior wall construction -- frame, masonry
(brick or stone) or veneer
- the style of the house (ranch, colonial)
- the number of bathrooms and other rooms
- the type of roof
- attached garages, fireplaces, exterior trim and other
special features like arched windows.
Also be sure to check the value of your insurance policy
against rising local building costs each year. Ask your insurance agent or company
representative about adding an "INFLATION GUARD CLAUSE" to your policy. This
automatically adjusts the dwelling limit when you renew your policy to reflect current
construction costs in your area. Also, be sure to increase the limit of your policy if you
make improvements or additions to your house.
12 Ways to
Save Money on Homeowners Insurance
SHOP AROUND
Friends, family, the phone book and Internet are some of the sources you can use to find
homeowners insurers. Get a wide range of prices from several companies. But don't consider
price alone. The insurer you select should offer both a fair price and excellent service.
Quality service may cost a bit more, but you buy insurance in case you need to make a
claim, so it's important to get a company with a good reputation. Talk to a number of
insurers to get a feeling for the type of service they give. Ask them what they would do
to lower your costs. Check the financial ratings of the companies with AM Best or Standard
and Poor's.
RAISE YOUR DEDUCTIBLE
Deductibles are the amount of money you have to pay toward a loss before your insurance
company starts to pay. Deductibles on homeowners policies typically start at $250.
Increase your deductible to
$ 500 -- save up to 12 percent
$1,000 -- save up to 24 percent
$2,500 -- save up to 30 percent
$5,000 -- save up to 37 percent
BUY YOUR HOME AND AUTO POLICIES FROM THE SAME INSURER
Some companies that sell homeowners, auto and liability coverage will take 5 to 15 percent
off your premium if you buy two or more policies from them.
WHEN YOU BUY A HOME...
Consider how much insuring it will cost. A new home's electrical, heating and plumbing
systems and overall structure are likely to be in better shape than those of an older
house. Insurers may offer you a discount of 8 to 15 percent if your house is new. Check
the home's construction: In the East brick is better, because of its resistance to wind
damage, and in the West frame is better, because of its resistance to earthquake damage.
Choosing wisely could cut your premium by 5 to 15 percent. Avoiding areas that are prone
to floods can save you about $400 a year for flood insurance. Homeowners insurance does
not cover flood-related damage. The closer your house is to firefighters and their
equipment, the lower your premium will be.
INSURE YOUR HOUSE, NOT THE LAND
The land under your house isn't at risk from theft, windstorm, fire and the other perils
covered in your homeowners policy. So don't include its value in deciding how much
homeowners insurance to buy. If you do, you'll pay a higher premium than you should.
IMPROVE YOUR HOME SECURITY AND SAFETY.
You can usually get discounts of at least 5 percent for a smoke detector, burglar alarm,
or dead-bolt locks. Some companies offer to cut your premium by as much as 15 or 20
percent if you install a sophisticated sprinkler system and a fire and burglar alarm that
rings at the police station or other monitoring facility. These systems aren't cheap and
not every system qualifies for the discount. Before you buy such a system, find out what
kind your insurer recommends and how much the device would cost and how much you'd save on
premiums.
STOP SMOKING
Smoking accounts for more than 23,000 residential fires a year. That's why some insurers
offer to reduce premiums if all the residents in a house don't smoke.
SEEK OUT DISCOUNTS FOR SENIORS
Retired people stay at home more and spot fires sooner than working people and have more
time for maintaining their homes. If you're at least 55 years old and retired, you may
qualify for a discount of up to 10 percent at some companies.
SEE IF YOU CAN GET GROUP COVERAGE Alumni and business
associations often work out an insurance package with an insurance company, which includes
a discount for association members. Ask your association's director if an insurer is
offering a discount on homeowners insurance to you and your fellow graduates or
colleagues.
STAY WITH AN INSURER... If you've kept your coverage with
a company for several years, you may receive special consideration. Several insurers will
reduce their premiums by 5 percent if you stay with them for 3 to 5 years; by 10 percent
if you remain a policyholder for 6 years or more.
COMPARE THE LIMITS IN YOUR POLICY TO THE VALUE OF YOUR
POSSESSIONS AT LEAST ONCE A YEAR
You want your policy to cover any major purchases or additions to your home. But you don't
want to spend money for coverage you don't need.
LOOK FOR PRIVATE INSURANCE FIRST
If you live in a high-risk area, one that is especially vulnerable to coastal storms,
fires, or crime, and have been buying your homeowners insurance through a government plan,
you should check with an insurance agent or company representative. You may find that
there are steps you can take that would allow you to buy insurance at a lower price in the
private market.
Private Mortgage Insurance
Private mortgage insurance is a type of insurance that
helps protect the mortgage company against losses due to foreclosure. This protection is
provided by private mortgage insurance companies and allows mortgage companies to accept
lower down payments than would normally be allowed.
Private mortgage insurance also enables mortgage
companies to grant loans that would otherwise be considered too risky to be purchased by
third party investors like the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these
investors is critical to maintaining mortgage market liquidity, which in turn, allows
mortgage companies to continue originating new loans.
PMI
Cancellation
Mortgage insurance can usually be canceled by the home
buyer after he or she has at least 20 percent equity in the home. Borrowers should contact
their servicer to find out the procedure for canceling mortgage insurance when they think
they have achieved 20 percent equity. Guidelines for canceling private mortgage insurance
are set by investors. Typically, investors will require an appraisal on the property. The
servicer can recommend qualified local appraisers.
PMI Payment Options
Private mortgage
insurance can be paid on either an annual, monthly or single premium plan. Premiums are
based on the amount and terms of the mortgage and will vary according to loan-to-value
ratio, type of loan, and amount of coverage required by the mortgage company.
Under an annual
plan, an initial one year premium is collected up front at closing, with monthly payments
collected along with the mortgage payment each month thereafter. Monthly plans allow a
borrower to pay only 1 or 2 months worth of premium at closing, and then on a monthly
basis along with the regular mortgage payment. Under a single premium plan, the entire
premium covering several years is paid in a lump sum at closing. Typically, homebuyers
choose to add the amount of the mortgage insurance premium to the loan amount. By doing
this, homebuyers can reduce their closing costs and increase their interest deduction.
PMI vs FHA
MIP
Although the insurance protection concept is similar,
there are differences between private mortgage insurance and FHA mortgage insurance. FHA
insurance is a government-administered mortgage insurance program that does have certain
restrictions. FHA has maximum regional loan limits that are lower than those with private
mortgage insurance. FHA may be more expensive, take longer to receive approval, and have
fewer payment plan options. FHA insurance lasts for the life of the loan, unlike private
mortgage insurance which is cancelable in most circumstances. FHA is a good choice for
some borrowers with credit history problems that might need special assistance.
Title Insurance
A policy of title insurance is a contract of indemnity between
the insured and the insuring company relating to the title to the land described in the
policy, protecting the insured against loss of damage by reason of defects, liens or
encumbrances of the insured title existing at the date of the policy and not expressly
excepted from its coverage.
The policy is issued after a complete search and
examination of the public records and shows the condition of the record title, including
any money obligations outstanding against the property, easements and other matters which
may affect the rights of ownership, possession and use of the property.
Title insurance protects the "record" title,
insuring it is good subject only to the exceptions expressly set out in the policy. lt
also insures against certain matters which do not appear of record, such as forgery,
identity of parties, incompetence of former owners, interest of missing heirs, and status
of individuals not having the "right" to sell property.
There are different types of policies. Owners policies
are issued to real estate owners. Purchasers policies are issued to purchasers of real
estate under contract. Mortgage policies are issued to mortgage companies. In addition
there are several other special forms of policies. There is a type of policy to meet the
requirements of almost any form of real estate transaction.
Title
Insurance Protection
Title Insurance insures that the "record" title
is good subject only to the exceptions expressly set out in the policy. lt also insures
against certain matters which do not appear of record, such as forgery, identity of
parties, incompetence of former owners, interest of missing heirs, and status of
individuals not having the "right" to sell property.
The standard owners policy and standard mortgage policy
are based on public records of the recording district in which the land is located. It
does not insure against matters which would only be disclosed by actual inspection or
survey of the property. It does not insure against certain matters not shown by the public
records such as unrecorded easements, liens or money obligations; unrecorded utility
rights of way, public or private roads, community driveways and other types of
encumbrances, or against the rights or claims of persons in possession of the property
which are not shown by the public records.
Upon application, the issuing company may specially cover
matters which are disclosed by a physical inspection and/or a survey of the property,
subject to any exceptions which the inspection will determine to be proper. An additional
risk premium is charged for this type of coverage. Insurance of this kind is called
extended coverage.
Issuance of
Title Insurance Policy
An owner's policy protects only the owner while a
mortgage policy protects only the holder of the mortgage on the property. Separate
policies are required to protect both interests. Special rates are available when both
owner's and mortgage policies are applied at the same time.
The owners policy of title insurance usually is issued
after the deed to the buyer is delivered and recorded. A purchasers policy is usually
issued after the contract has been executed by both parties or after the signed contract
has been recorded. The mortgage policy of title insurance is usually issued after the
mortgage or deed of trust has been properly executed and recorded.
The coverage of your policy is against all matters that
appeared of record up to the date of issuance of your policy. Since that time many
documents may have been recorded, some of which may affect the title to your land. Taxes
and assessments may have accrued and be unpaid. There may have been actions in court
affecting your title. The purchaser is entitled to have full information and protection as
to the condition of the title right up to the date of his purchase. In addition, there may
be matters of record which would prevent either the seller or buyer from selling, buying,
or mortgaging land until such matters have been cleared. These items include such things
as federal tax liens, judgements, incompetencies, divorce actions and other conditions
which the title search may disclose.
Flood Insurance
Flooding is not covered by a standard homeowners
insurance policy.
To determine if you need flood insurance, ask your
insurance professional, mortgage company or neighbors about the flood history in your
area. If there is a potential for flooding, you should consider purchasing a policy that
covers the structure and your personal belongings.
Flood insurance can be purchased from an insurance agent
or company under contract with the Federal Insurance Administration (FIA), part of the
Federal Emergency Management Agency (FEMA). Flood insurance is only available where the
local government has adopted adequate flood plain management regulations under the
National Flood Insurance Program (NFIP).
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