Installing Smoke Detectors and Salting Your Sidewalk is not Enough. You Need Homeowner’s Insurance.

 

Owning a home is a big accomplishment and provides you with a degree of freedom.   However, home ownership also exposes you to risk.  There are two main reasons that owning a home is risky:

1. You have a large chunk of your assets tied up in your home.  If you were to lose your home from a fire or other disaster, that would be a huge hit to your net worth.
2. Our society has dismissed the concept of personal responsibility.  Therefore, if someone is injured on your property, they may take legal action against you.

You need to protect yourself against these risky aspects of homeownership.  The best way to do this is with homeowner’s insurance.

Is Homeowner’s Insurance Required?

If you carry a mortgage on your home, your lender will likely require you to have homeowner’s insurance.  After all, they are a part owner of the home and don’t want to lose their investment.  Once you own your home outright,  you are not required to have homeowner’s insurance.  However, you should have it anyway.

What Homeowner’s Insurance Covers

There are four main components of homeowner’s insurance:

1. Dwelling Protection: this covers damage to or loss of the physical structure of your home.
2. Personal Property Protection: this covers damage to or loss of personal belongings inside your home.
3. Living Expenses Protection: this provides coverage for living expenses if you are displaced from your home after a disaster.
4. Liability Protection: this pays for your legal defense if someone is injured on your property and files a lawsuit against you.

Dwelling Protection

Dwelling protection covers damage to the structure of your home from disasters such as theft, explosions, fires, lightning strikes, windstorms, tornados or hail.  You should purchase enough dwelling protection to cover the cost to rebuild your entire home.

Note that homeowner’s insurance does NOT typically cover damage from floods or  earthquakes.  If you live in an area which is prone to these types of disasters, you will need to purchase separate insurance to cover those possibilities.

Personal Property Protection

In addition to coverage for the physical structure of your home, you can also purchase coverage for your personal belongings inside your home, such as TVs, computers, furniture, or bikes.  Many people have >$25,000 worth of belongings inside their home, so unless you’re prepared to replace everything inside your home with your emergency fund, you may want to add on this additional coverage.

If you do opt for personal property protection, I would recommend taking pictures of the valuable items in your home, so that you can prove ownership in the event of a loss.

Living Expenses Protection

This covers living expenses if you are unable to live in your home for a period of time after a disaster. Living expenses would include hotel bills, restaurant meals, and potentially rent.  If you have a robust emergency fund, you may choose to forego this component of homeowner’s insurance.

Liability Protection

Suppose you have a trampoline in your back yard and someone injures themselves on your trampoline.  Or suppose they fall while walking on your driveway.  Yes, even though it was their choice to use the trampoline and your driveway, they can sue you.  You need liability protection to protect against this possibility. How much?  Probably similar to your auto liability limits, around $300,000 to $500,000.  If you have a high net worth, you will also need umbrella insurance.  Your umbrella insurance may require certain minimum liability limits on both your auto and homeowner’s policies.

If you Don’t Own a Home, You Still Need Renter’s Insurance

If you are renting, you obviously won’t need the dwelling protection because this will be provided by your landlord/property owner.  However, you may want to have the personal property protection depending upon the total worth of your belongings and your ability to replace everything in a total loss.  Like homeowner’s insurance, you also need liability protection.

Thankfully, renter’s insurance is quite cheap.  We pay $175 per year for $25,000 in personal property coverage with a $500 deductible.  This also includes $300,000 in liability coverage.

Note that renter’s and homeowner’s insurance may place a limit on coverage of items that are usually located in your house, but are stolen outside your home (such as a bike that is stolen out of your car). For example, our renter’s insurance only covers 10% of $25,000 (or $2,500) worth of items stolen off premises.

Summary

It doesn’t matter if you shovel and salt your sidewalks, install smoke detectors, and forego a swimming pool and a trampoline.  It also doesn’t matter if you have a very high net worth.  Unless you are prepared to self-insure against the loss of your entire property AND any legal fees and liability if someone is injured on your property, you need homeowner’s insurance.  If you rent, you may forego dwelling protection and personal property protection, but you will still need liability protection.

Remember, It’s Not About the Money; It’s About the Freedom