What to know about your home insurance

A home insurance policy is one of those financial documents that can have intimidating fine print. Once you sign off on it, it’s tempting to put it away somewhere deep in the filing cabinet and rejoice that you can check it off your to-do list.

But your home insurance policy isn’t something you want to set and forget. If you experience theft or a natural disaster, the last thing you want to do is dust off that policy and find out you don’t have adequate coverage. We talked to a home insurance expert who told us what you should know about your policy and make sure you’re protected.

A basic home insurance policy usually doesn’t cover floods and earthquakes

The terms of home insurance coverage can vary from company to company. In general, a basic home insurance policy pays to repair or replace your home and belongings if there’s damage caused by such perils as fire, wind, tornadoes, hail or lightning.

Floods and earthquakes are typically not included as a covered peril; instead, you must purchase a separate policy for these events. Michael Gulla, director of underwriting at Hippo, a property insurance company based in California, says to assess risk based on where you live.

If you live in Los Angeles, earthquake insurance may be a no brainer. If you live on a mountain top, flood insurance may not be a priority. If you live in high-risk coastal areas in Florida, Texas, or Louisiana, however, flood insurance isn’t just a necessity — lenders might actually require that you have it.

The Federal Emergency Management Agency (FEMA) also warns that flooding can happen anywhere, even if you live in a low-risk area, so you may want to speak with your insurance agent about what additional coverage is available. According to FEMA, just one inch of water can cause $23,635 in damage to a one-story, 2,500-square-foot home, and $3,172 in damage to personal property.

While the government may step in with aid, this aid may not be enough to cover the damage. FEMA reports that grants offered for disaster relief are $5,000 on average per household. Another relief option is disaster assistance loans, but you must repay these loans with interest.

Your coverage should be enough for a complete rebuild, but often isn’t

As with, well, life insurance, part of having home insurance is thinking about the worst-case scenario. In this case, that would mean losing your home completely during a natural disaster. If this happens, your dwelling coverage is the part of the policy that would pay to rebuild the house as long as the damage happens because of a covered event. Unfortunately, this is where many homeowners are underinsured.

“Most homeowners in the United States end up being underinsured, at some point, on the value of their home,” according to Gulla. That’s because the cost of building materials can go up every year, and most insurance companies don’t increase your reconstruction cost to meet that demand. Instead, they might add an inflation rate of 1% or 2%, but natural disasters in recent years have driven building costs way up, says Gulla.

Also, consider that you may have upgraded the finishes in your home, which could mean your coverage is no longer enough to protect your investment. A good rule of thumb is to calculate the cost to rebuild and speak to your agent whenever you make big changes to ensure you have enough coverage.

Of course, now you’re probably wondering: How can I calculate the cost to rebuild?

Good question.

An insurance company can help you determine your home’s reconstruction cost, or you can hire an independent appraiser. Bear in mind that the cost it will take to rebuild your home may not be the same as the market price for your home, so getting insured for the estimated market value you see on, say, Zillow or Trulia might not get you the right amount of coverage.

Insurance may only offer limited coverage for some valuables

We’ve talked about your home structure, but we can’t forget about what you have in the home. Home insurance protects personal effects — such as your furniture, clothing, etc. — from theft or disaster as well.

Still, there’s a good chance you’ve accumulated stuff as you’ve made your house a home. If you’ve bought brand new laptops, TVs, or bedroom furniture since you last updated your policy, you may not have enough coverage to replace your new belongings.

In the case of valuables like gold, artwork, jewelry, antiques, you may need to set up an additional endorsement to cover the potential loss. Coverage for these valuables may be limited in your existing policy, and you don’t want to find out too late that coverage is capped on a family heirloom or an engagement ring that gets damaged in a fire.

To make sure your belongings are properly covered, take an inventory of what you have in the house, check the market value of your items, and speak with an insurance agent. Keep your inventory (with receipts if you have them) somewhere safe because you may need to use them as back up when you file a claim.

Choose your deductible carefully, and look beyond the price when comparing providers

If you go shopping for home insurance online, you’ll see that adjusting the deductible — the amount you pay before insurance kicks in — can change the premium.

Increase the deductible, and the premium typically goes down; decrease the deductible, and the premium generally goes up. But this deductible isn’t something you should choose on a whim.

Think about the financial hit you can take if your roof gets damaged, and it’s a $40,000 claim, says Gulla. Do you want to pay either $1,000 or 1% of your home’s value for repairs, or are you willing to pay $5,000 to $10,000 to drive down your premium?

Choosing a high deductible policy might work if you have a sizable savings account, you’re looking for premium savings, and you’re willing to shoulder some of the risk. If you don’t want to cover a five-figure lump sum to repair your roof after a hail storm, passing on the risk and financial burden to the insurer with a low deductible policy may be the better plan.

It’s also worth mentioning that price is important to consider when shopping between providers, but price shouldn’t be the only deal breaker or maker. If you make a decision solely based on who’s offering the cheapest insurance without digging into the fine print, you could find out you’re underinsured at the worst possible time…when you actually need to file a claim.

Finally, don’t be scared to ask for a discount

You’ve probably seen car insurance commercials that tell you about the different discounts you can get for being a safe driver or good student.

Guess what? According to Gulla, if you haven’t made any updates to your policy in a while, your insurance company may have new discounts available.

For example, Hippo offers a Smart Home discount if you install systems that help prevent loss. Bundling your car insurance with your auto policy could also offer you some savings.

Ultimately, a home is one of the largest purchases we make in a lifetime, and having adequate coverage can protect your castle and the belongings you have in it. Skimping on insurance or setting down and forgetting your policy could put you at risk for not having enough coverage. Every so often, pull out your policy to review the terms and make updates as necessary.