Property Insurance Basics

There are so many types of insurance out there but I want to look more closely at the one we all know of the most.  Dwelling or property insurance is very simple in principle.  If you encounter damage to your property from fire, water, wind, etc. your property insurance will pay to repair or replace the damaged property.  While this is true, it only scratches the surface and does not look into any of the factors that can vary dramatically.

Let’s start with the most basic factor, coverage amount.  Depending on your strategy, property, and situation your coverage amount can vary quite a bit.  Generally speaking we suggest a coverage amount that is at least $65 per square foot.  This means that a 1,000 sq ft house will have a coverage amount of $65,000.  In many cases this is more than the owner has in the property and can be more than the property is worth.

You can insure your property for less than the $65/foot but you may be sacrificing coverage if you do so.  We talk about this more in another article (Replacement Cost vs Actual Cash Value) so we won’t get into it here.  Just know that replacement cost is better protection and what we generally recommend.

You can insure the property for more than the $65 per square foot if the value of the property is higher.  Properties in mid-higher income areas generally are worth more than $65/foot so this issue doesn’t really come into play.

Often times it’s best to have your coverage amount high enough to not only pay for a total loss if one occurs but that will also cover your deductible.  Let’s say you have a total loss on a property insured for $150,000 with a $5,000 deductible.  As a real estate investor, you have contractors that will work for less than retail who will do the work for $145,000.  Insurance will pay you the loss amount minus the deductible so you get $145,000.  This pays for the rebuild and you don’t have to come out of pocket at all.  The added premium for an extra $5,000 in coverage is so minimal it doesn’t make sense to go for the lower coverage amount.

Speaking of deductible, this is actually a very important factor in any dwelling coverage.  Simply stated, the higher the deductible the lower the premium is.  If you own multiple properties and they’re each under separate policies your deductible will apply per location.  If your properties are on a master, package, or blanket policy your deductible usually applies per occurrence.  This could be a big difference in terms of out of pocket expense in the event of a local catastrophe.

For instance, you have 5 properties that get hit by a tornado and all five properties are on separate policies.  You will have to pay your deductible ($2,500) five different times ($12,500).  However, if those five properties are on one policy with a $5,000 deductible you only have to pay $5,000 once.  This is a cost savings of $7,500 in this instance.

You must also consider coverage on other structures such as a detached garage or shed.  Often times these structures are not included in the basic dwelling coverage so you better look closely and make sure you have coverage.  A shed isn’t a big deal but a detached 2 car garage can easily cost $10,000+ to rebuild.  You may also want personal property protection which covers items such as appliances, window A/C units, and any furniture you own.

As a rental property owner, loss of rents coverage can be very important.  This provides coverage for your lack of rental income due to a covered loss.  Some policies have built-in coverage to a certain time limit, such as 12 months.  Other policies may have an endorsement you must purchase at specific levels of coverage.  Either way, this is protection all rental property owners should have.

This is just a few factors that need to be considered when looking at the insurance needs for your portfolio.  This is meant to give you a look into what an experienced insurance advisor will help you sift through.  Remember this piece of advice over everything else in this article, work with an insurance advisor that owns properties himself so he can better understand your needs.