If you own a home, you probably have home insurance. Home insurance is baked into the homebuying process for most new homeowners (though not all). In the flurry of activity, spending, and decisions that accompany buying a home, it’s easy to buy home insurance without thinking carefully about what it does and does not do. Home insurance is great, but there are limits to what it can do. Here are some things that home insurance doesn’t do as well as some common misperceptions about home insurance in general.
First of all, most people think that home insurance should provide coverage for the purchase price of the home. That makes sense at first glance. You bought a home for $X, you’ll need up to $X if something happens to it. But this isn’t necessarily the case. A home should be insured for what it would cost to rebuild that home. Your insurer will be able to calculate this with accuracy based on information you provide about your home. Make sure that you have coverage in this amount. If there’s an earthquake or a fire, you’ll definitely want to be able to rebuild your home.
Another common misperception is that home insurance includes floor insurance. This is usually not the case (though congratulations to people in those parts of the world where flood insurance is included). A flood insurance policy must be purchased separately from the main home insurance policy. It may or may not be offered through your primary insurer. If you live in a flood prone area, this insurance may not be available, or it may be very expensive. This is an important consideration, because if you are unable to obtain flood insurance, this is a significant risk for a homeowner.
It’s important to make sure that all of your property is insured if that’s something that is important to you. This is because your basic home insurance policy probably isn’t going to cover expensive items like your rare guitar collection. Collectibles and precious possessions need to be separately insured to make sure you can have them replaced or be reimbursed if they are stolen or destroyed.
Another common myth about home insurance is that everyone is required to have it. This may be true of your car, but it’s not the case with home insurance. Only people buying homes through traditional lenders will be required to buy it (most banks force you to get it before they’ll give you a mortgage). People buying a house with cash won’t have to get home insurance, though this doesn’t mean that it wouldn’t be a good idea as a method of protecting against theft or disaster.
There are many details in your home insurance policy. Even if you read the fine print, you’ve got to make sure you understand exactly what your policy entitles you to. If there are important points that are not covered with your standard policy, you should either pay for more coverage or find someone who will insure as you see fit.