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Homeowner's or Renter's Insurance

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Renter's or Homeowner's insurance protects your household in the event of fire, theft, or natural disaster. Luckily, there are not multiple types of renter's/homeowner's to choose from. There are only two types: coverage that insures the actual value or coverage that provides you with replacement cost. Actual cost coverage is cheaper because it provides you with a lower amount of coverage. In the event of a claim, your coverage would be for the actual value of your belongings, factoring in depreciation (the price of what you owned in a used state). So, that $500 television you purchased 3 years ago may only be valued at $250. And, that is what you would receive to replace it. A replacement cost policy, on the other hand, will give you enough coverage to replace any lost items with brand new ones.

Most policies will have deductibles. A deductible is the amount of money that you must pay whenever there is an insurance claim. A reasonable deductible can range from $50-$1,500 or more. So, if a tree falls on the roof of your home causing $5,000 in damage, the insurance company will pay $5,000 minus whatever your deductible is. You, of course, have to pay the difference. A higher deductible will result in a lower insurance premium as well as lower coverage. You need to find a balance between the two that you can live with. Above all, choose a deductible that you can reasonably meet in the event of an emergency.

In considering the amount of their deductible, some people will think of this as a form of Self-Insurance. You will be taking responsibility for the deductible amount yourself. In the example above, let's say you save $40 per month on your homeowner's insurance by choosing the $1,000 deductible coverage. After 25 months (just over two years), you will have saved enough to cover the deductible. In order for this to work, you need to have the self-discipline to pay yourself the extra $40 per month into a special savings account. If you don't, you will not have enough money to fix the house after the tree falls on it. The good news is that after 25 months, when your special savings account has the $1,000 deductible in it, you can start putting the extra $40 per month into your pocket!

Renter's/Homeowner's insurance will not cover everything. Anything not covered in the policy will be outlined in the exclusion section (the part of the policy document that specifies what is not covered by the policy). Of course, any damage caused by your own negligence or malicious intent would not be covered.

Although renter's and homeowner's insurance are similar there are some important distinctions. In a rental situation, the coverage on the building's structure is separate from the contents of each rental unit. A common misconception is that tenants' personal property will be covered by the landlord's insurance. This is not the case. Another popular misconception is that only one roommate needs to have renter's insurance. Your roommate's policy will not cover your possessions unless you are specifically listed in the coverage.

Similarly, homeowner's insurance imposes limits as a general practice. Homeowner's insurance covers the dwelling, other structures (garages, sheds, etc) on the property, personal property, and loss of use. Other items like your car or boat would not be covered in a standard policy. Any detached structure used for business purposes would also be excluded in a standard policy. Flood coverage is usually not a part of a typical homeowner's/renter's policy, unless the property lies in a flood plane. Even then, you may need to pay extra for special flood coverage as it may not be automatically included in the standard policy. Damage due to earthquakes is typically not covered either. Special earthquake coverage must be purchased separately.