The Reason Financial Guide To Home Insurance

For many Americans, their home is their single biggest asset. So, one of the best ways to manage financial risk is to protect that asset. Unfortunately, home insurance isn’t as straight forward as it used to be, particularly if you’re a California resident. To help you better understand how you may, and may not, be protected we’ll look at the different parts of home insurance coverage, how these components impact your premiums, and important policy loopholes to be aware of.

Anatomy of a home insurance policy

Most home insurance policies are made up of six different parts, loosely labeled A-F.

• Part A covers the dwelling. This is the building you live in, what we classically think of as a home. It includes your walls, roof, and built-in appliances. If a car crashes into the side of your home, your dwelling coverage is what matters when it comes to repairing the structural damage. Just keep in mind: Normal wear and tear isn’t covered. If your roof needs to be replaced because of hail, you may be able to use your home insurance. If your roof is simply old, you’ll likely need to pay for that out of pocket.
• Part B covers any additional structures on your property. This might be a shed, a detached garage, or non-building structure like a fence.
• Part C covers your personal property, or the things in your house. This covers a wide range of things, from property we tend to think of as home related, like furniture to more personal items like jewelry or your laptop. If these items are stolen or damaged, you can file a claim with your insurer. Usually, this coverage applies even if the item wasn’t stolen from your home—so you may still be able to file a claim for jewelry stolen on vacation, for example. For truly comprehensive personal property coverage, you may need to get items formally appraised.
• Part D coverage kicks in if your home becomes uninhabitable. Otherwise known as loss of use or additional living expense coverage, this part of your policy pays for hotel stays while your home is being repaired or damage is being assessed.
• Part E is about personal liability—it covers you if someone else is injured on your property and you are deemed liable. If you’ve ever wondered why home insurance questionnaires ask so many questions about your pets and their breeds, they may be trying to assess how risky it is that you could be liable for your pet injuring someone.
• Part F covers medical expenses for anyone injured on your property regardless of fault. If a windstorm knocks shingles off your roof, and they hit and injure a neighbor, medical payment coverage might cover any resultant hospital bills without any legal assignment of blame.

What isn’t covered by home insurance

Many home insurance policies come with notable exceptions or fine print. For instance, flood damage is very rarely covered by a traditional home insurance policy. This comes up frequently in the wake of natural disasters, as wind damage is sometimes covered as part of a standard policy while water (or flood) damage is not. If you live somewhere with any risk of flooding, you may want to purchase a separate flood insurance rider.

Floods are only one consideration. Many natural disasters aren’t fully covered by home insurance. Consider an earthquake or a landslide: These are both forms of “earth movement” that may require separate riders if you want to be protected. In California this is typically done through obtaining CEA insurance. CEA stands for California Earthquake Authority. You can obtain this additional coverage by obtaining a CEA policy through your existing home insurer.

While wind damage is covered in most locations, this isn’t always the case, and the way insurers treat severe wind damage is evolving. If your home is in an area at high-risk for hurricanes, you may want to purchase additional coverage, usually called a windstorm rider.

Similarly, wildfires were historically covered by standard home insurance, but this has shifted dramatically in the past decade. Starting around roughly 2017, insurers determined they might not be able to withstand the cost of paying out for wildfire damage. What followed was a wave of non-renewals and a full-on exit of some insurers from high-risk areas like Southern California.

This situation is evolving as regulators test different rules, policies, and incentives to try and help homeowners access coverage.

California FAIR Plan and alternatives

More than 50 years ago, fair access to insurance requirements (FAIR) plans were created largely as a last resort for homeowners who couldn’t find coverage any other way.

These days, however, the FAIR plan is more of an only resort for homeowners who live in neighborhoods at risk of wildfires. These policies usually cost significantly more than a similar policy for a similar home in a low-risk area—premiums might be 30-300% more expensive. Coverage is also capped at $3 million for residential properties.

Politicians in California are working to entice private insurers back into these high-risk areas by permitting them to use updated risk models when determining premiums and coverage costs. While this may lead to renewed competition from private issuers, it may not solve the problem of high premiums.

Ideas to lower your insurance premiums

A variety of factors impact home insurance premiums. In high-risk areas like southern California, simple geography may be the biggest one. If this is the case, you may be able to “fire proof” your home in certain ways to potentially make it more insurable and bring down the cost of coverage. These initiatives, sometimes called home hardening, can include replacing your current building materials with fire-resistant materials, including clay tiles, brick, and stucco. You might also be able to leverage fire-resistant landscaping, as well as sprinkler systems or backup water supplies.

While these improvements can be expensive, there may be state or local government programs offering some assistance. A financial advisor can help you determine the real cost, and how this type of expenditure may (or may not) pay off in terms of insurability and potentially lower premiums.

Your home insurance premiums are also determined by coverage amounts. While you want to make sure you have enough coverage to replace your possessions, make sure you review your policy each year to ensure it’s still accurate. For instance, if you got divorced and sold your engagement ring, you may be able to reduce part C of your coverage, depending on how the ring was insured.

Higher deductibles can also lower your premiums, as with other types of insurance policies.

How an advisor can help

The rules and regulations around how insurers calculate premiums and restrict coverage are evolving, particularly in Southern California. It’s important to stay on top of the latest available options, and when possible, to work with a financial professional to make sure you fully understand the multifaceted costs and benefits often associated with new approaches to coverage.

You may also want to consider a home specific emergency fund. Products like catastrophic savings accounts are designed for this type of scenario, though they may not be right for everyone. Finally, a good financial and tax advisor can go beyond helping you prepare for a potential home emergency—they can also help you navigate which steps to take if you’re impacted. For instance, you may be able to access retirement savings without paying an early withdrawal penalty to help repair damage, but you’ll want to understand the rules. You may also qualify for government assistance, but the application process can be complicated.

If you want help preparing (or repairing) your finances when it comes to your home and the many risks involved, a Reason Financial advisor may be able to help. Set up a call to discuss.