While owning a home is sort of a contentious subject, those who choose to own a home need to be prepared.
Buying a home is no easy task. It may seem simple – shop for a house, put in an offer, sign the papers and move in – in actuality, it’s not quite that simple.
There are certain things that people need to take into consideration before buying a home.
Things like how much the homeowner’s insurance is going to cost them every year.
Whether or not they have to take out a mortgage.
How much insurance they’ll need for that mortgage, which can be different than the coverage you actually want.
Making sure the home is in good condition and doesn’t need thousand of dollars of expensive repairs.
Figuring out how much utilities are going to cost you over a year’s time.
And having to set aside money each month to pay for eventual repairs or emergencies.
Today, I’m talking about basic homeowner’s insurance. There’s some basic coverage, as well as insurance that covers hurricanes, tornadoes, floods, fires, avalanches and terrorist attacks. And where you move to can depend on what kind of coverage you need.
If you move to the mountains, you wouldn’t buy flood insurance, right? Just like if you move to the beach, you want to be sure to get hurricane coverage.
And if you have special items in your home, like antiques or expensive jewelry, your basic coverage isn’t going to cut it. Many homeowner policies have limits to how much the basic coverage will cover, making you purchase additional riders of coverage.
(In case you don’t know what a rider is, it’s an addition to the policy for extra coverage – so it ‘rides along’ with the main coverage.)
You’re also going to need some really good records of how much you purchased items for and when. You’ll need that for proof of purchase since credit card receipts probably aren’t going to cut it.
Your item receipts need to show the date, where you bought it from, and for how much. And if it’s worth a lot more than what you paid for it, your receipt should show the Retail Value of the item ON the receipt. Photos of the item showing it as a whole, special markings, etc., will also help to prove what the item looked like.
Let’s say you bought a necklace on clearance. It’s a beautiful ruby and diamond necklace that’s easily worth $1,000. But you bought it on clearance for $250. You’ll need to insure it for what it’s worth, not what you paid for it. What’s the replacement value? Not $250.
Replacement Value – $1,000. Because it’s doubtful you’d be able to find the same necklace, and if you did, you probably wouldn’t be able to replace it for $250. (Now, keep in mind that the insurance company will probably try to find you an exact replacement since it would probably cost less to them than to pay out the $1,000. But not everything is immediately replaceable, such as antiques.)
But you’d also need to be sure that the Retail or Replacement Value is ON the receipt for insurance purposes. Otherwise, you’ll get stuck with only the $250 you paid.
And this goes for a lot of different types of items that can be found in your home that you want to insure against loss. Computers, cameras, musical instruments, sports memorabilia, antiques, etc.
Most of these will fall under a Scheduled Personal Property rider, which is just a fancy way of saying these things are listed specifically for insurance, as opposed to being just lumped in together under the main policy for ‘personal items’ with a coverage limit of $10,000.
So here’s an example. Under my policy, I have 12 different musical instruments covered, as well as 5 specific pieces of jewelry and about 30 different antiques. Each of these are listed with the policy with specific replacement amounts. And every couple of years, I get them appraised to see if the value has gone up. If it has, I adjust my insurance coverage limits accordingly. (If it’s gone down, I just leave it as is…)
If I left it all lumped under the personal items portion of the general insurance category, I would be limited to $10,000 paid to me in the event of a disaster. And I can tell you that the $10,000 wouldn’t even cover ONE of those categories above!
And while some things are irreplaceable, like my 200-year old dining room table, having that money will allow me to get something to replace it.
And that’s why we have insurance.
Now, you don’t have to buy insurance – you can do what we call self-insure. If you have a mortgage on your new home, then you’ll be required to have SOME insurance on the building portion – but you’ll have to check your mortgage documents to see what sort of coverage your bank requires.
But if you feel like spending money on additional coverage is a waste of money, you can always self-insure by setting aside money each month to cover those items. (I would recommend at least a money market account so the money earns some interest at least.)
By self-insuring, you can have all your items covered without the headache of documents, receipts and deductibles, but you run the risk of not putting enough aside or spending the money when you think you ‘need’ it.
And insurance can cost you a lot less than setting aside the money to self-insure.
If I wanted to insure $50,000 of personal items – furniture, music instruments, etc. – I would need to set aside $50k in an account to self-insure. OR, I could pay a small amount every year to cover the items. $50k of coverage would probably run me around $500 a year, depending on the company and what’s specifically being covered. Some categories of items will be higher than others.
So it’s super important to make sure you’re getting the right coverage above the bare-bones that your bank wants to cover the mortgage. Remember, the bank doesn’t care about all your stuff. They just want to be sure that if something happens to your home, that the main building itself is covered for how much they’re lending you.
And if you’re not buying a home, you can still get insurance for all your stuff through a renter’s insurance policy. Same basic thing, just a different name. Many of those rates are comparable to homeowner’s policies, so don’t think you’re getting shafted by renting.
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