As already explained earlier; Homeowners Insurance typically has the following components:
- Dwelling coverage:
You must make the estimate for sufficient dwelling coverage which covers the full replacement cost of the house. Replacement cost is the cost at current prices which you will have to incur to rebuild the house in case of total loss.
If you have the cost and expenses that you incurred while making the house, then these can be indexed for inflation to arrive at the present cost of the house. Alternatively, you can take the services of the professional insurance appraisers.
- Deductible amount
Deductible means the amount you share when making a claim for the repair cost or replacement of house in case of total loss. Having a higher deductible will considerably lower the insurance cost as the insurance companies have a lower amount to pay. For example, if you have a higher deductible of $5,000 then you will be paying a lesser insurance than when you have a lesser deductible of $2,000.
Thus you need to weigh carefully how much deductible amount you wish to forego when making claims. This is important because having a higher deductible which you may or may not be able to claim; will immediately reduce your homeowner’s insurance rates.
- Liability coverage
Liability coverage is required in case of injuries caused to others or damage of property of others. This means it covers the legal fees, the cost of medical expenses to the injured person including the cost of any damages or compensation that a court may award. This liability coverage is only up to the policy limits. In case the damage s higher, you have to pay it. Many suggest that this coverage needs to be extended as the damages in case of any grievous injuries always exceed this amount. However, it will also raise the insurance costs. So you need to be prudent while ascertaining the liability coverage. Having liability coverage in the range of $300,000 to $500,000 may be more judicious.
A thumb rule for arriving at the annual premium for homeowners insurance is to arrive at the value of the home and then dividing it by 1,000 and then multiplying the result by $3.50. this will bring you close to the annual premium that you may be expected to pay.