 Personal Finance PowerPoint Presentation Homeowners Insurance Prepare to get financially fit by practicing personal finance. Most of this can be found at Investopedia Homeowners Insurance Guide, a beginner's overview you can find online. Take a look at the references, resources, continue your research from there. This is by the Investopedia team updated June 10th, 2021. Homeowners Insurance, also known as Home Insurance, isn't a luxury, it's a necessity. And not just because it protects your home and possessions against damage or theft, virtually all mortgage companies require borrowers to have insurance coverage for the full or fair value of a property, usually the purchase price, and won't make a loan or finance a residence, a residential real estate transaction without proof of it. So when you're purchasing a home, most of the time, people don't have the money to just put the cash down, therefore they need some kind of financing, some kind of loan, and they're going to usually go to a financial institution. In that case, the financial institution is going to want to have the homeowners insurance. But why do they care? Well, they care, of course, because they're going to have the home as security on the loan. And if the lender does not pay back the loan, then the recourse is the home. They can foreclose on the home in order to pay the loan off. But what happens if the home has been destroyed or something like that? That's going to be bad for the lender because they won't be able to get the recourse on the loan in that event. Therefore, the homeowners insurance will lower the risk to the lender because the home is collateral, and with that lowered risk, they're going to be more likely to finance. So you don't even have to own your home to need insurance. Many landlords require their tenants to maintain renters insurance coverage. So it's another kind of variant on renters insurance that's usually for the personal items in the home, and then the person that is renting that owns the property might have other insurance that would safeguard the property itself. But whether it's required or not, it's smart to have this kind of protection. So we'll walk you through the basics of a homeowner's insurance policies. So note, when you think about this insurance, more and more, a lot of times it might be a legal situation where you're required to. Why do you have insurance? Because I was required to. But we also want to think of it in terms of, you know, a market decisions, why insurance would be a beneficial decision even if you didn't have a lawful reason that you were required to have the insurance. What a homeowner's policy provides. Although they are infinitely customizable, a homeowner's insurance policy has certain standard elements that provide what costs the insurer will cover. So clearly when you're talking about a contract, this is the kind of contract for an insurance contract. You can have all kinds of different variables that will be involved, but there's generally going to be some standards to it as well. Damage to the interior or exterior of your house and the event of damage due to fire, hurricanes, lightning, vandalism or other covered disasters. Your insurer will compensate you so your house can be repaired or even completely rebuilt. So clearly this is what we're trying to do here. We're being insured against a big event to something that could cost us a lot such as our home because our home is going to be a substantial asset on the books. And if it was to be destroyed in some way suddenly that would be a big financial event for most people. Destruction or mutilation from floods, earthquakes and poor home maintenance is generally not covered and you may be required separate riders if you want that type of protection. So then you can have to look into what is covered, what is not covered and see if you can then purchase more coverage possibly. Freestanding garages, sheds or other structures on the property may also need to be covered separately using some guidelines as for the main house. So clothing, furniture, appliances and most of the other contents of your home are covered if they're destroyed in an insured disaster. You can even get quote off premises in quote coverage so you could file a claim for lost jewelry say no matter where in the world you lost it. So there may be a limit on the amount your insurer will reimburse you however. So then of course the question is one how much is my premium how much does it cost and two in the event that a problem happens what's going to be the reimbursement that we will be receiving. According to the insurance information Institute most insurance companies will provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home. For example, if your house is insured for 200,000, there would be up to about 140,000 worth of coverage for possessions. So once again, if your house is insured for 200,000, there will be up to about $140,000 worth of coverage for your possessions. If you own a lot of high priced possessions so you're going to say well yeah but my house is full of really like Van Gogh paintings and stuff and like jewelry every my house isn't I don't have any stuff. But if it was if I did have really good stuff like art or antiques find jewelry designer clothes you might want to pay extra to put them on an itemized schedule purchase a writer to cover them or even by a separate policy. So personal liability for damage or injuries liability coverage protects you from lawsuits filed by others. This clause even includes your pets. So if your dog bites your neighbor, Doris, no matter if the bite occurs at your place or hers, your insurer will pay her medical expenses. So we talked about liability insurance and prior presentations, and that would be another type of coverage, of course, to safeguard against that type of event. So or if your kid breaks breaks your boss, you can file a claim to reimburse her and if Doris slips on the broken vase pieces and successfully sues for pain and suffering or lost wages, you'll be covered for that to just as if someone had been injured on your property. While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage according to the insurance information Institute. So these kind of lawsuits can be expensive. And so so you know you want to have enough to cover any kind of problems that could occur for express protection, a few hundred dollars more in premium can buy you an extra $1 million or more through an umbrella policy. Hotel or house rental while your home is being rebuilt or repaired. It's unlikely, but if you do find yourself forced out of your home for a time, it will undoubtedly be the best coverage you ever purchase. So obviously if there's some problem with the home and you're repairing the home, then you're going to have costs for living costs outside of the home. This part of insurance coverage known as additional living expenses would reimburse you for the rent, hotel room, restaurant meals and other incidental costs you incur while waiting for your home to become habitable again. Before you book a suite at the Ritz Carlton and order caviar from room service, however, keep in mind that policies impose strict daily and total limits. So in other words, anytime you're basically saying they're going to cover living costs, then you immediately would be thinking, oh, I'm going to live it up on that kind of thing. But they will be possibly putting limits on that as you would generally expect. So of course you can expand those daily limits if you're willing to pay more in coverage. So you can balance this stuff out by having the higher premiums would allow for the higher coverage in the event that there was a circumstance that would trigger the insurance payments. So different types of homeowners coverage. All insurance is definitely not created equal. The least costly homeowners insurance will likely give you the least amount of coverage and vice versa. So clearly when we're making basically any kind of insurance calculations, we got to think about, you know, what's going to be, what are they going to reimburse in the event that this something happens in the future versus the payments that are going out now with regards to the premiums. So in the US, there are several forms of homeowners insurance that have become standardized in the industry. They are designed H01 or designated H01 through H08 and offer various levels of protection depending on the needs of the homeowner and the type of residents being covered. There are essentially three levels of coverage. We've got the actual cash value, actual cash value covers the cost of the house plus the value of your belongings after deducting depreciation, i.e. how much the items are currently worth, not how much you paid for them. And when we're talking about the cash value, we're not saying that you're going to be able to, that wasn't what you actually paid for them because most stuff goes down in value, although something like jewelry or something like that could go up in value. So it's going to be the cash value and therefore you would think that you might not get like the amount that would be replacing something like if it was a structure that has been up for some time, then the replacement cost would make it new again. Even if you use the same materials and that would think would be worth more than what you lost because it was depreciated over time. So replacement cost, replacement value policies cover the actual cash value of your home and possessions without the deduction for depreciation so you would be able to repair or rebuild your home up to the original value. So when you're talking about like a structure, then you might say, well, that's great that you gave me the cash value for what you think my home is worth, but or whatever. But I need to rebuild the home and I can't rebuild it. I can't rebuild an eight year old home. Right. Even if I use the same materials, it's going to be a new home. So the replacement costs would generally be better because you would like to be able to replace the item that you lost if it was some form of property, for example. But of course, you would expect the premiums to be higher, whereas the the actual might be it might be more moderate on the premiums. But you then have would have to pay more to get the actual rebuild to happen because you would think the actual value compensation would be less than the replacement costs. So guaranteed or extended replacement cost value, the most comprehensive this inflation buffer policy pays for whatever it costs to repair or rebuild your home, even if it's more than your policy limit. So certain insurers offer an extended replacement, meaning it offers more coverage than you purchased. But there is a ceiling typically it is 20% to 25% higher than the limit. Some advisors feel all homeowners should buy guaranteed replacement value policies because you don't need just enough insurance to cover the value of your home. You need enough insurance to rebuild your own preferably at current prices, which probably will have risen since you purchased or built. So clearly, you know, you might be thinking, okay, well, if there was a disaster, I need to get the home back in in up and running, not just get the value of what they think the value of the home is, which might be less than I need to get up and running. So you could also you could also kind of self insure to some degree, saving up, you know, in your own, your own kind of savings to cover some kind of issues as well, and then get, and then get coverage. And that way, so you could like mix and match different methods as well. Often shoppers make the mistake of ensuring a house just enough to cover the mortgage, but that usually equates to 90% of your home's value, says Adam Johnson, a home insurance product manager for policy comparison site. So I quote, due to fluctuating markets, it's always a good idea to get coverage for more than your home is worth. Guaranteed replacement value policies will absorb the increased replacement costs and provide the homeowner with a cushion if construction prices increase. What isn't covered by homeowners insurance, you might ask, while homeowners insurance covers most senior most scenarios where I lost could occur. Some events are typically excluded from policies such as natural disasters or other quote acts of God in quote, and acts of war. So these are going to be things when you think about the insurance policies and how they calculated clearly. What they're going to do is they're going to they're going to take a bunch of different people and put them into one pool so that they can get a prediction of how likely certain events are going to be happening. And some events are going to be easier to calculate, you know, than other types of events. And so they may or may not be included would be my kind of rationale of what the insurance companies kind of thinking on their side. So what if you live in a flood or hurricane area? You've got these kind of events that might not be in other areas. They might be more difficult to predict. They might not be in the standard coverage because if they were, then it would affect the whole pool of the whole coverage that would be involved would be harder harder for them to calculate the general kind of homeowners insurance. And therefore you might have special insurance that might be geared just specifically to these kind of areas which would be more specific to a location and have different kind of kind of risk factors involved. Or an area with a history of earthquakes. So earthquakes are notoriously unpredictable, even if you're in an area that has earthquakes. And therefore the insurance, if you were to add earthquake insurance into other kind of normal conditions, it would skew the whole kind of calculation you would think. And therefore you might have to buy your own kind of earthquake insurance policy. So you want writers for those for these or extra policy for earthquake insurance or flood insurance. There's also sewer and drain backup coverage. You can add on and even identify recovery coverage that reimburses you for expenses related to being a victim of identity theft. How are homeowners insurance rates determined, you might ask. So what's the driving force behind the rates? According to Noah J. Bank, a vice president and insurance advisor at HUB International, it's a likelihood of homeowner will file a claim the insurance perceives. So in other words they're going to try to estimate how likely it is that you will file a claim. Now when you're talking about one individual filing a claim, hopefully it's pretty unlikely. But when you put the whole people into a group, when you put all these people into a group and have the similar things involved, you can try to then, from a big numbers perspective, think about how likely it is for that entire group to have a claim. And then you can start to calculate the insurance premiums based on that kind of thing. So and to determine risk, home insurance companies give significant consideration to past home insurance claims submitted by the homeowner as well as claims related to that property and the homeowner's credit. Quote, claim frequency and severity of the claim play a considerable role in determining rates, especially if there's more than one claim relating to the same issue like water damage, wind storms, etc. So while insurers are there to pay claims, they're also in it to make money. So clearly when you're dealing with an insurance company, the insurance company is setting the rates based on whether they can make money based on this group analysis, which could be a good thing because they're going to be competing with other companies that hopefully are doing the same thing, driving down the rates in a competitive way, whereas if the government was to do it, for example, they would probably have no idea what they're doing and there'd be a bubble and some catastrophe would probably happen, right? So it's probably better, but it is a for-profit thing. So ensuring a home that has had multiple claims in the past three to seven years, even if a previous owner filed the claim, can bump your home insurance premium into a higher pricing tier. So you may not even be eligible for home insurance based on the number of recent past claims filed, said banks. Notes bake. So the neighborhood crime rate and building material availability will all play a part in determining rates to and of course coverage options such as deductibles or added or added riders, art, wine, jewelry, etc. and the coverage amount desired also factor into the size of an annual premium. Quote, pricing and eligibility for home insurance can also vary depending on an insurance appetite for certain building construction, roof type, condition or age of the home, heating type. If an oil tank is on premise or underground, the proximity to the coast, swimming pool, trampoline, security system and more that good old trampoline says bank. It's always a danger system right there. So what else affects your rates? You might ask quote, the condition of your home could also reduce a home insurance company's interest in providing coverage. In quote says Bill Van Jure and insurance planning consultant. Even the presence of a pup residing at your home can raise your home insurance rates. Some dogs can do a lot of damage depending on the breed. I saw a vicious Chihuahua one time practically demolish a home.