Home, Renters and Auto Insurance

Home and auto policies are the ones people renew without reading, and they hide the two most common insurance mistakes: a home insured for what it would sell for instead of what it would cost to rebuild, and a car insured for the legal minimum of liability while the household's savings sit exposed. This chapter walks through what home, renters and auto policies cover, the choices that matter most in each, how to set deductibles, and when a claim is worth filing.

What a homeowners policy covers

A standard homeowners policy bundles several coverages, each with its own limit on the declarations page:

• Dwelling: the house itself.
• Other structures: a detached garage, a shed, a fence. Often set at about 10% of the dwelling limit.
• Personal property: furniture, clothes, electronics. Often 50% to 70% of the dwelling limit.
• Loss of use: extra living costs, such as a rental and meals, while the home is being repaired.
• Personal liability: injuries to others or damage to their property that you are legally responsible for, at home or elsewhere, including the cost of defending a lawsuit.
• Medical payments to others: small medical bills for a guest hurt on your property, regardless of fault.

Insure the rebuild cost, not the market value

The dwelling limit should equal what it would cost to rebuild the house today with similar materials, not the price you paid or what it would sell for. Market value includes the land, which does not burn, and reflects the neighbourhood rather than the cost of labour and materials. Rebuild cost can be higher or lower than market value, and it tends to jump after a regional disaster when builders are scarce.

Ask your insurer for its replacement cost estimate and check that it reflects the home's square footage, finishes and any renovations. Two endorsements give a margin: extended replacement cost pays a set percentage above the dwelling limit if rebuilding costs more, and an inflation guard raises the limit automatically each year. Many policies also exclude the extra cost of bringing an older home up to current building codes unless you add ordinance or law coverage.

Replacement cost or actual cash value

Policies pay for damaged property in one of two ways. Replacement cost pays what it takes to buy or build a new equivalent. Actual cash value pays replacement cost minus depreciation, which is often far less. A roof that is 40% of the way through its expected life might be paid at roughly 60% of the cost of a new one under actual cash value, leaving you to find the rest. The same applies to belongings: a five-year-old laptop is worth little on an actual cash value basis.

Replacement cost coverage costs more, but it is what restores you after a large loss. Some insurers now apply actual cash value to roofs in particular, so check the roof terms specifically if you live where hail and wind are common.

What home policies leave out

Standard policies exclude several large risks. Each needs its own coverage if it applies to you:

• Flood, including storm surge and water that rises from outside. Flood coverage comes through the National Flood Insurance Program (see FloodSmart) or private insurers, and NFIP policies usually take 30 days to start, so it cannot be bought as a storm approaches. Many floods happen outside designated high-risk zones.
• Earthquake, through a separate policy or endorsement.
• Sewer and drain backup, through an inexpensive endorsement.
• Wear, neglect and slow leaks, which no policy covers; maintenance is your job.
• Valuables above low built-in limits (jewellery, art, collections), which need to be listed, or scheduled, on the policy.
• Business activity at home, including equipment and liability, which may need a business policy or endorsement.

Renters insurance

A landlord's policy covers the building, not your belongings and not your liability. Renters insurance covers both, plus extra living costs if the unit becomes unlivable, and it is usually one of the least expensive policies a household buys. Most people underestimate what they own; a quick video walk-through of each room, saved somewhere other than your home, doubles as the inventory you would need for a claim. Choose replacement cost for contents, and remember that roommates are generally not covered by your policy unless named on it.

Auto insurance: liability first

An auto policy has several parts. Liability pays for injuries and property damage you cause to others, and is required in almost every state. It is written as three numbers in thousands of dollars: per person for injuries, per accident for injuries, and for property damage. Uninsured and underinsured motorist coverage pays for your injuries when the at-fault driver has no insurance or too little. Medical payments or personal injury protection cover your own medical costs regardless of fault, and are required in some states. Collision pays to repair your car after a crash, and comprehensive covers theft, hail, fire and animal strikes; both are optional unless you have a loan or lease.

State minimum liability limits are low, often far below the cost of a serious injury. If you cause damage above your limit, you are personally responsible for the rest, and a court judgment can reach savings and future wages. Raising liability limits usually costs relatively little because the insurer already covers the first, most frequent part of each claim. A common approach is to carry liability limits at least as high as what you could lose, and to add an umbrella policy (chapter 8) once the gap is large. Matching uninsured motorist limits to your liability limits protects you from other drivers' low limits.

Collision and comprehensive cover only your own car, so their value shrinks as the car ages. A common guide: once their combined yearly premium exceeds about 10% of the car's value, and you could replace the car from savings, dropping them may make sense. If you have a loan, the lender requires them, and gap coverage pays the difference between the car's value and the loan balance if the car is totalled. The true cost of a car calculator puts insurance next to depreciation, fuel and interest.

Deductibles, discounts and claims

A higher deductible lowers the premium because you keep more of the small losses. It is a good trade if your cash reserve can cover the deductible without strain, and if the money saved is set aside rather than spent.

If raising your home and auto deductibles lowers premiums by $25 a month, and that saving goes into a savings account at 4.0%, it builds $3,667 over 10 years. If you have no claim in that time, the full amount is yours. If you have one, the account pays the higher deductible, ideally with room to spare.

Other ways to lower premiums without cutting coverage: ask about bundling home and auto with one insurer (and check that the bundle is actually cheaper), safe-driver, low-mileage, security-device and pay-in-full discounts, and compare quotes every two or three years, because renewal prices for long-standing customers can drift up. In most states insurers may also use a credit-based insurance score in pricing, so improving credit can lower premiums; some states restrict this.

On claims, file when the loss is well above your deductible, when someone was injured, or when someone else's property was damaged; liability claims must always be reported promptly. For a small loss close to your deductible, weigh the payout against the risk of a higher premium at renewal, since insurers keep a shared record of past claims. Whatever you decide, report injuries and third-party damage, document everything with photos and receipts, keep a log of calls, and remember that you can get your own repair estimates and question a settlement that looks low.