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5 Basic Components of Homeowners’ Insurance
A lender will generally require homeowners to have insurance so that they can pay off the mortgage if the house is damaged or destroyed.
A standard policy typically includes:
1. Dwelling (often called Coverage A)—Pays for repairs or rebuilding if the home is damaged or destroyed by the events—fire, for instance—listed in the policy.
TIP: Warn buyers to be careful of underinsuring their homes to lower premiums. In some cases, the insurance company may consider the property self-insured and refuse to pay the entire claim if the amount of the policy is too much below the actual value of the home.
2. Other structures (Coverage B)—Pays for repairs or rebuilding if the other structures on the property, but not attached to the home, such as a garage, are damaged or destroyed.
3. Personal property (Coverage C)—Covers loss or damage to furniture, clothing, appliances, and other non-fixture items. Depending on the policy, it replaces a percentage of the cost of the item or the full cost of replacement
TIP: High-ticket items like furs and jewelry should be appraised, and a special floater policy should be bought to cover the full value if the item is stolen.
4. Additional living expenses (Coverage D)—Covers costs of living away from home—hotel bills and meals, for instance—if a homeowner needs a place to stay while the home is being repaired or rebuilt after a disaster.
5. Liability—Covers homeowners against bodily injury or property damage lawsuits brought because of incidents that occurred on the property. Pays to defend homeowner in court and awards granted by the court up to the policy limits.
TIP: The sale price is a good indicator of how much homeowners’ insurance to buy. Or use a calculator, such as this one from Travelers Insurance, to estimate replacement costs.
6 Disasters Your Policy May Not Cover
1. Flood damage or sewer backups
2. Loss due to earthquake or mudslide
3. Loss due to power interruption
4. Damage from falling objects
5. Damage from the weight of snow or ice
6. Damage from wind or hurricanes
Courtesy of Travelers Insurance Center
TIP: The National Flood Insurance Reform Act of 1994 provides that, to protect their investments, lenders can purchase flood insurance on behalf of borrowers/owners of properties in a special flood-hazard areas and charge the cost back to the borrowers. It is administered by the Federal Emergency Management Agency. |
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