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LOUISE FAIRSAVE: Necessary insurance IV

Louise Fairsave

LOUISE FAIRSAVE: Necessary insurance IV

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MOST OF US FEEL SECURE in the fact that we hold home insurance. Yet it is quite a complex topic and this article will point to some of the more detailed considerations in purchasing this coverage.

Home insurance typically has four specific elements to be assessed in choosing suitable coverage. First, there is the coverage of the building, the home; this protects the home from losses due to fire, theft, vandalism or other perils. Then there is similar coverage for the personal possessions which are in the building, such as the appliances, furniture, food, crockery, flatware, clothing, shoes, books and so on.

There is the element of protection for the cost of living expense if you are displaced from your home during the repairs or rebuilding after a disaster. During the period of displacement, the insurance will provide funds to meet the cost of comparable alternate accommodation.

The fourth element of home insurance is that of liability cover which protects you if there is a claim or lawsuit for injury or property damage caused negligently on your property. For example, should a visitor to your home slip, fall and injure himself on a partially wet floor which you failed to warn him about, then your liability coverage will meet related medical expenses, the cost of any litigation and any award by the court up to the limit of your coverage.

It is important to check exactly which perils are included in the coverage for the building element of the home insurance. For example, flood and earthquake damage is typically not included, yet you may specifically have to assess the merit of such coverage depending on the probability of such occurrences. You can reduce the cost of the building insurance element by having protective devices like deadbolt locks on the door, a burglar alarm system and a smoke detector. Insurers also look more favourably on a newly renovated or new home.

With respect to coverage of personal belongings in the building, you may need a separate policy (usually called a rider) for expensive jewellery or art and certain special equipment or fittings. For example, elaborate computer or communication systems may require such a rider in order to be protected specifically.

The element of living expenses protection can add significant cost to the premium if you seek a high rate of compensation for the period for which living expenses will be provided. So some policyholders minimise or reject this element of the policy in order to contain costs. Insurers, in turn, typically limit the amount of coverage to say 20 per cent of the value of the home. This element of insurance may also provide compensation for lost rents during the displacement period if part of your home was being rented.

Liability coverage will usually be for amounts like $100 000 to $500 000 depending on the homeowner’s risk assessment as well as his ability to pay. This is one element of your home insurance policy that you should check in order to be satisfied that you are adequately covered.

As always with insurance, you may accept all or a significant part of the risks of home ownership through self-insuring. The task is to examine each of these four elements of home insurance and to be satisfied with your choices. There are complex choices and under insurance or self-insurance can represent a bold, yet dangerous approach to your finances.

An independent insurance broker can be useful in such circumstances in guiding you through the available options. An insurance broker can usually keep you informed of the changing market of possible insurers, their claim management efficiency and the implications of your specific choices.

Next article will consider retirement plans.

Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.