Your homeowners insurance policy should include these 3 items, according to financial experts

The purpose of insurance of any kind is to transfer the risk of financial loss from you to a 3rd party — the insurance company.

Homeowner’s insurance is a vital part of safeguarding your home and family, and a blessing in disguise if tragedy strikes. If you're paying for homeowner's insurance, you're going to want to make sure your money is well spent (and that it covers you if an unfortunate incident occurs).

What should be included in home insurance?

In case of fire, flood, vandalism, or another event, these three policies are absolutely necessary to ensure extra protection and to get the most out of your insurance.

1. Replacement cost
2. Special personal property endorsement
3. Umbrella policy

1. Replacement cost

In case of a loss, insurance companies typically calculate the amount it will pay out as either actual cash value (ACV) or replacement cost. Replacement cost pays out the dollar amount you would expect to receive if you were to rebuild your home on the same property with comparable materials or replace a damaged or stolen item.

For instance, "If a hail storm pummels your roof on your home and it costs $30,000 to replace, the insurance company will give you $30,000 minus your deductible," explained Brandon Tritten, an agent at JBLB Insurance Group. "The alternative is actual cash value insurance, which takes the replacement cost of your roof, minus depreciation minus your deductible. So, let’s say your roof has a 30-year life expectancy, and it is 15 years old at the time of the hail storm. If it cost $30,000 to replace your roof, with ACV insurance, your loss settlement would look like this: $30,000 to replace your roof – 50% (your roof is halfway through its life expectancy) – your deductible."

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2. Special personal property endorsement

A special personal property endorsement is an optional coverage that allows for certain property to be covered that may not be covered on your standard homeowner’s policy. However, the personal property must be listed in the schedule, or list, for coverage. Personal belongings like paintings, firearms, jewelry, antiques, and musical instruments are all common items that may be included in a special personal property endorsement.

"Higher-end property having unique value are generally limited to a fixed amount, regardless of how expensive the property may be to replace. These limits are often in the $2,500-$5,000 range and are specified in the policy," Kevin Gahagan CFP, CIMA, advisor, and principal at Private Ocean in San Rafael, CA, confirmed. "A scheduled property rider or endorsement will increase the premium associated with the homeowner policy. However, without it, this type of property may be significantly under-insured."

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3. Umbrella policy

An umbrella insurance policy goes beyond the limits of a standard homeowner’s insurance policy. It provides an additional layer of coverage against the risk of being sued for damages from another person’s injuries or loss of property in an accident—like slipping on ice on your front steps. It also protects against vandalism, invasion of privacy, libel, slander, and legal costs.

According to Gahagan, "One of the greatest financial risks an individual can incur is the risk of being found responsible for the serious injury or death of another person. While these events may be uncommon, if they arise, the financial liability associated with such claims can be substantial."

Gahagan adds, "Typically, adding an umbrella policy is more cost-effective than simply increasing the liability limits under the home and auto policies. Moreover, basic home policies have maximum liability coverage caps that are likely to be insufficient for many homeowners. Adding an umbrella policy enables homeowners to customize the amount of liability coverage they carry against the degree of risk they may have."

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