Real Estate Insurance – What does it all mean?

Question: “I’m not sure if home insurance is discussed in real estate financial matters, but what should a home owner look for when purchasing home owner insurance?”

I was asked this question and thought it was a good topic for an article.

1. Contact your agent. One of the first things we do in our real estate classes is create our “team.” An insurance agent is a very important part of your team either as a real estate investor or individual home owner. When looking for an agent shop for value, not necessarily rock-bottom price. Since you’ll mainly deal with an insurance agent at times of disaster, make sure you choose a company and agent that has great customer service reviews.

2. Ask if you can Escrow your insurance payments with your mortgage payments. The lender will pay your insurance premiums (usually your property taxes too) out of your escrow account. Lenders prefer this option because it lets them know your insurance premiums are being paid and their investment is well protected. Most likely you’ll need to pay for one year of insurance at closing.

3. Make sure you’re getting adequate coverage. The most important part of homeowners insurance is the level of coverage. Avoid paying for more than you need but be fully covered. Ask your agent to go through the full policy with you. Ask about additional insurance that relates to your area, for example, in California we have optional earthquake insurance. Also understand these different parts of your policy:

Premium – This is the price you pay for insurance, usually annually or monthly. Deductible – This refers to the amount you must pay out of pocket before your insurance takes effect. Usually, the higher the deductible, the lower the annual premium.

Personal Property – This is tangible property such as furniture, electronics, jewelry and clothing. Anything that is not attached to the home.

Liability Coverage – This is coverage that will pay medical or legal bills if someone is hurt on your property, usually due to negligence. For real estate investors this is crucial.

Replacement Cost – This is the kind of insurance that pays the full cost of replacing your dwelling and/or personal property, up to a maximum dollar amount. Most standard policies offer replacement cost but you want to be sure the maximum amount is high enough.

Actual Cash Value – This type of policy gives you the current cash value (with depreciation) for personal property or your dwelling. It’s possible to have actual cash value dwelling coverage but to get replacement cost coverage for your contents.

Riders – These are policies you can include on your overall insurance policy to cover specific items. For instance, expensive antiques, jewelry and artworks are often covered under their own rider because they’re too valuable to be covered as regular personal property. Some HO-8 policyholders also may get additional riders for things like heating, ventilation and air-conditioning systems, which are part of the home and expensive to replace.

If you own more than one property, I would always recommend also asking about an umbrella policy.

I hope this gives you a few guidelines to follow as you insure your first or your hundredth property.

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