Home Insurance For Seniors

Seniors’ number one concern is housing. Protecting this asset requires insurance. Therefore, seniors need to know a little about home insurance. How does home insurance work? What does it cover?

In other words, what do homeowning seniors need to know about home insurance? A mistake in insurance coverage can result in losing your home.

Why Is Home Insurance Important?

Home insurance for seniors is important because seniors consider their homes sacrosanct. Almost all seniors want to age in place. Here are some of the reasons home insurance is critical.

Origins Of Home Insurance

Insurance is a historical outgrowth of commercial transactions. Merchants would travel to faraway places, acquire goods, and bring those goods back to markets for sale. The travel, purchase of goods, time, and transportation represented risks. Risks the goods are lost, destroyed, or damaged. But this happened randomly and on rare occasions.

The merchants and their backers (collectively “Merchant Team”) realized they had a couple of choices to deal with these risks. The easy solution was to price the goods at a price that compensated the Merchant Team for their periodic losses.

This immediately raised the costs of already costly goods. And it didn’t help move more goods. The neighborhood markets (“Stores”) had to plan and do some forecasting in what they wanted to sell and for how much. Their interest in costly goods that might or might not arrive, was a hard sell. The Merchant Team recognized this and came up with another solution.

Merchant Teams Guaranteed Prices For Local Sellers

The Merchant Team realized they could sell a guarantee that the goods would arrive in good condition and in a timely manner: for a price. The guarantee is “insurance.” At least an early form of insurance. How insurance is priced and conditioned gets complicated. As does who pays for it. But for simplicity’s sake, the Stores could purchase it for a small price. The Stores could buy the “insurance,” and it would guarantee them a price and a time.

The Store would then pay for the goods at the guaranteed prices when they arrived. If the goods are lost in transit, the Stores lose their small payment. The more common buyers were the members of the Merchant Team that wanted some guarantee that their investment would result in the ship and goods returning home. In these cases, the insurance sold would offer to repay the investor some portion of their investment if the goods and ships did not return.

Early Insurance Priced Uncommon Risks By Selling To Potentially Affected Communities

Here’s the point. Private insurance is created to cover random and uncommon losses to similar groups of people. The insurers identify similar groups of people subject to similar but uncommon risks. This allows insurers to lower the cost of the risk. It is spread among the group. This makes the costs of insuring the risk relatively low.

Auto Insurance Pricing Example

Automobile insurance is an example of this process. Auto insurers break up drivers into good and bad drivers. Auto insurance costs for drivers with a poor record (drivers getting lots of speeding tickets or having multiple accidents every year) is a lot different than for someone with a good record (a driver that hasn’t had an accident or ticket in twenty years).

Insurance for bad drivers costs more. However, it’s sold to many bad drivers. They will not all get in an accident the same year. By distributing risk among many people, the costs of the insurance remain relatively low.

The Basics Of Home Insurance

Home insurance basics require an understanding of groups, perils, and frequency of the perils. If you understand the basics, you’ll know when perils are covered. For example, if you live in California in certain places you’ll want earthquake coverage. On the other hand, if you live in the midwest in certain places, you’ll likely want tornado damage coverage and bot earthquake damage coverage. You’ll likely want flood damage coverage if you live near the water. Carmen and I want you to ensure that your home insurance covers the perils that threaten your home.

The big picture concept below will help you understand how insurance underwriters develop home insurance policies.

Common Groups

Home insurance underwriters look for common groups to insure. For example, underwriters price life insurance very differently for people in their twenties versus those in their eighties. Likewise, underwriters price home insurance differently for homeowners in high-risk fire areas versus those in low-risk areas. Underwriters put homeowners into groups. These groups are based on common risks.

Random Harms

Another critical insurance variable is randomness. Random is important because if the loss occurs to everyone in the group, the underwriter can account for the loss differently. In other words, they can just charge that group for the known damages. A known risk cannot be properly spread. In fact, it’s not insurance. The underwriter would spread the risk differently.

Uncommon Harms

Uncommon refers to the notion that the loss does not happen often. Think of this in terms of how frequently the loss might happen to the group that would purchase the coverage. Fires, for example, affect less than .3% of all housing units in the US each year. Even in areas where fires are common the risk is relatively low. But the devastating effect of fire encourages most homeowners to get fire insurance.

Definable Risk

The peril or perils are the risks covered by the insurance. Home insurance will only cover a definable risk. A risk that has a known amount. In cases where risk is unknown, the insurer places a cap on the maximum coverage. For example, if your home insurance includes coverage for injuries, the coverage will have a cap. In other words, if a visiting neighbor is injured in your home and sues, your insurance will cover liabilities up to a specified amount.

How Does Home Insurance Work?

Here’s how traditional home insurance works. An insurer (the company that underwrites the insurance) agrees to take on the loss (or liability) of an insured (the person or entity purchasing the coverage) via an insurance policy (a legal contract specifying the terms, conditions, and coverage).

A standard home insurance policy covers (1) damage to a home (property) and (2) liability (legal responsibility) for any injuries or property damage policyholders (i.e., policy owner, their families, etc.) cause others. Because the perils involve both property damage and liability coverage, the policy is called a “package policy.” A non-package policy is a policy covers a single peril like an earthquake, fire, or flood.

What Does Home Insurance Cover?

Homeowners know home insurance covers home damages. But most don’t know the details. If your home is totally destroyed, will the insurance pay the current replacement cost, or something else? Will it pay your living expense while your home is rebuilt? What are the perils to a senior’s home? How do you address the perils? What does the insurance cover? What doesn’t it cover?

Coverages In A Standard Home Insurance Policy

Standard home insurance policies include:

Dwelling: Sometimes called Coverage A

Coverage against the main dwelling (house). This coverage pays for damages to your home. Usually, payment is for the replacement cost of that damage.

Appurtenant Structures: Sometimes called Coverage B

Coverage for other structures on the property like sheds, barns, swimming pools, and detached garages. When these structures are damaged, this coverage is what pays for the damage. How much of the damage this coverage pays for can vary. Usually, a certain amount of coverage comes with standard pricing (i.e., usually 10% of the dwelling coverage). Additional or more coverage can be separately negotiated and paid for.

Personal Property: Sometimes called Coverage C

Coverage for personal property. This includes things like electronics, furniture, clothing, and appliances. Most standard home insurance covers the actual cash value of your personal property. But you can get replacement costs for your personal property for higher premiums. There are a few permutations of personal property. The first is what happens to personal property not in your home? Situations when it’s in your car or you carry it on a trip. Insurers call this off-premises loss. Off-premises loss is usually part of standard home insurance.

Coverage is usually capped (i.e., often at 10% of the home coverage). Another category is called special items. Special items include things like costly computers, jewelry, furs, and cash, These are not covered by standard insurance. For these items, insurance companies ask that they be specifically identifies and that coverage for these items is purchased for an additional premium.

Additional Living Expenses: Sometimes called Coverage D

If you can’t live in your home you need to live somewhere else. When you live somewhere else you may incur costs that you wouldn’t incur while living at home like hotel costs, apartment costs, rent costs, meal costs, and transportation costs. If the reason why you can’t live in your house was part of your coverage, the additional living expense coverage pays for these expenses. Insurance companies cover different things and many cap the reimbursements.

Liability: Sometimes called Coverage E

This covers someone getting hurt in your home. Also, it covers when someone else’s property is damaged. If you’re are the legal target for liability, this coverage steps in and defends any suits and pays for your liability. This coverage has limits.

Medical Payments: Sometimes called Coverage F

This covers emergency costs associated with someone hurt on your property. These are things like ambulances, first aid, and other types of immediate care. In other words, think first responders. Also, keep in mind that this coverage has limits.

Property of Others: Sometimes called Coverage G

This covers situations when someone else’s property is damaged on your property. For example, a friend parks his boat in front of your garage while he waits for you to load your gear. A tree falls onto the boat. This coverage would cover that type of damage. This coverage has limits.

What’s Covered?

The home insurance policy details included coverages. These are called types of coverage. Coverage addresses (1) what is covered and (2) reimbursement. There are two types of reimbursement coverage: actual cash value (ACV) and replacement cost coverage (RCV).

Actual Cash Value Versus Replacement Cost Coverage

The basic notion of ACV is coverage based on the market value of your home and personal property minus depreciation. Depreciation accounts for the use or age of the product in question. Often its calculated by taking the average life of products and then dividing the acquisition cost of the product by that average life. If a refrigerator lasts 10 years and you’re paid 1,000 if it gets destroyed in the fifth year, the ACV would be 1,000 divided by 10 ($100), times 5 (years you had it) or $500. Insurance companies can calculate depreciation in lots of ways; this is just one method.

The basic notion of RCV is coverage based on what it costs to fix your damaged home or replace your home if it was destroyed. The simplest way to understand this coverage is to ask what it would cost me to build or buy my home today, even though I acquired it twenty years ago. Insurance companies have various ways of assessing these costs. But they must tell you how they make these assessments.

Most standard home insurance covers the actual cash value of your personal property and the replacement cost of your home. Standard pricing reflects this. However, if you want replacement costs for your personal property, there are ways to pay for that higher level of coverage.

Other Key Policy Areas

Type of Home Insurance Policies

Home insurance policies are based on the types of property and perils they cover. For example, a policy might cover your house (not your barn or shed) for earthquakes (nor for anything else). If an earthquake damages your house, the policy is relevant; otherwise it’s not.

Policies come in a number of flavors: named peril policies name the perils they cover; open perils policies cover all perils except those excluded; and combination policies that may cover some perils, but cover them on different terms and conditions.

Limits

Limits are the maximum amount a policy will cover for a loss. A limit is applied to a category like per occurrence or per person.

Perils

Perils are the core of insurance policies because they identify what your policy covers. A peril is a cause or event contributing to a loss such as fire or theft. It’s an umbrella term. But there are things covered, that the peril creates. For example, the need to cover living expenses while you can’t live in your home. . In other words, perils are often used in policies to identify all the things your policy pays for or covers.

Below are examples of perils. The ones commonly covered, named, or excluded in home insurance policies.

Perils that cause damage:

Covered areas caused by perils

In addition to knowing what causes damage, it’s important to know covered areas. Below are examples of services and things covered in most home insurance policies.

Miscellaneous Insurance Policies

Open Peril or All Risk Policy

This type of policy covers “all” perils and risks, except those specifically excluded. These policies are expensive. They cover many perils.

Named Peril Policy

Unlike open peril policies, named peril policies name the specific perils the policy covers. In these policies, there is a list of perils. For coverage, the peril must be named. It’s important to use an expert when insuring using these policies.

Combined Open Peril or All Risk Policy and Named Peril Policy

Some policies combine open and named perils. For example, an all peril policy might specifically exclude floods and earthquakes as covered but then add those perils in a named peril policy.

Deductibles

A deductible is an amount that an insurer requires you to pay before they pay. In other words, if you have a deductible of $1,000, you agree to pay $1,000 out of your own pocket to repair damage to your home or personal property. In other words, before you get insurance money, you pay the deductible. If the damage is less than the deductible, the insurance company won’t pay you. The advantage of choosing a higher deductible is that your annual premium will be less.

Other Resources On Home Insurance Costs

Great information on home insurance here.

Tips for seniors when it comes to home insurance here.

Also, see our Finance Section here.