Gaps in your insurance & Gap Insurance.
The modern homeowners policy is very comprehensive and covers *most* of the things the typical homeowner needs, however, few of us us are truly “typical” and there are some common coverage gaps that we always talk to our clients about. Here is just a few homeowners insurance coverage gaps. Home Based Businesses. Did you know that over 12% of all U.S. households operate a full or part-time home based business? Between 34 and 36 million households have an active home office. Homeowners policies generally don’t offer you much coverage for your business and figuring out coverage gaps can be confusing. If you operate a business out of your home you should be aware:
- The property coverage for your home won’t be affected by running a business out of your home, but this is strictly limited to property coverage. Many other coverages included in a homeowners policy exclude losses resulting from your business.
- Coverage for “other structures” is included in your homeowners policy. This is important because a homeowners policy won’t offer coverage for a detached structure if you run a business or have business property inside the additional building. You should have a separate policy that covers the building, your business personal property, and premises liability your business. Basically, if have a home-based business you need proper business insurance to cover your business liability, workers compensation, commercial auto, etc.
- Storing gasoline or liquid fuel in your garage whether it be attached or detached that is used for your business may void coverage for that structure under your homeowners policy especially if it is the cause of the damage.
Named Insureds. Who is covered under a homeowners policy? The homeowners policy will cover the “named insureds”, resident relatives, and resident relative minors for liability and property losses. The “named insureds” must be occupying the home on a primary basis. If the named insured is residing at another location and using it as their primary residence and they let someone else live in their home, there may not be any coverage offered if there is a loss. In certain circumstances you can add a family member as an “additional named insured” onto the policy to make sure there is coverage, provided there is a loss while residing in the home. If you are going to have someone who is not a family member live in the home, it is important to have the policy re-written as a dwelling fire policy and have the renter get a renters policy to cover their liability and property exposure.
Umbrella Policies. Umbrella policies are an inexpensive way to ensure you have enough liability coverage in any situation. In many cases you can add umbrella coverage onto your homeowners policy. If your homeowner’s insurer doesn’t offer umbrella coverage there are many companies that will write a separate policy to cover your home and auto policies. Umbrella policies require certain underlying limits on primary policies. If you carry limits that are less than the requirement, you will be responsible for paying the difference if there is a claim. For example, if the requirement on a homeowners policy is $500,000 in liability and you carry $100,000 and there is a claim for $2,000,000 against your liability coverage you will be responsible for paying $400,000 out of pocket for that claim.
Gap Protection for Auto Insurance
Auto and home insurance are not exactly two peas in a pod when it comes to shopping for policies. Auto insurance is needed just to keep your driver's license. Home insurance is needed for protection against financial ruin. Of course, there is also a fair amount of overlap between auto and home insurance. Lending institutions, for example, usually require additional insurance coverage to protect their own financial interests. But one of the most interesting things that auto and home insurance share in common is "gap insurance."
Gap insurance is not really insurance at all, whether you're talking about auto or home insurance. Rather, gap insurance is a way of making up the difference between what an item is worth and the money needed to protect the policyholder against financial hardship. What's this difference and how is it created? Well, that, too, depends on whether you're talking about auto or home insurance.
If your car is totaled, your insurance company is only going to pay you what the car is worth. And, unfortunately, many people owe more on their cars than their vehicles are worth.
Gap protection will make up this difference. How exactly is it that you can owe more on a car than the car is actually worth? There are, in fact, many ways this can happen. Everybody has heard that a car loses value the moment you drive it off the lot. If you put no money down on the car, you may have financed the tax, license, registration, and extended warranties, all but guaranteeing you owe more to the bank than the car is worth. Moreover, many cars will depreciate more in their first year or two than borrowers will pay on their loan term. Thus, the gap between what you owe and what the car is worth may actually get bigger before it gets smaller.
Things to Consider for Auto Insurance Gap Protection
- Most dealers offer their own gap protection, but it's usually cheaper to buy this protection from your car insurance company.
- Make sure you know about exclusions that apply to your gap protection. Some gap protection covers accidents, but not natural disasters or theft.
- Try to minimize this gap as much as possible when you're buying a car and keep track of this gap so you can cancel when it's no longer needed.
Gap Protection for Home Insurance
People looking for the cheapest home insurance they can find, frequently opt for market value home insurance without fully understanding the consequences. Should you lose your home to a fire, your insurance will only pay you the market value of your home, minus the value of the land, no less. Worse yet, since the housing crisis has pummeled property values, the difference between market value and replacement costs are at historical highs in many areas. If you're one of the 25% of homeowners who owes more to the bank than the house is worth not only will you not be able to rebuild your home, but you may have to make up the difference to the bank--despite no longer having a home to live in.
Things to Consider for Home Insurance Gap Protection
- Research how big this gap may be. In today's housing market, the market value may be less than half of the replacement costs.
- How much sentimental value is attached to your home? There will be headaches involved, but it might be possible to take the market value settlement and relocate.
- Again, be cognizant of exclusions. Most home insurance policies don't cover floods or natural disasters, unless you purchase supplemental coverage.
- For home insurance, companies may offer a gap protection compromise, known as actual cash value. This value is determined by taking the replacement costs of your home and subtracting the years of structural wear and tear.
- Home insurance companies may offer a gap protection compromise, known as Actual Cash Value. This is determined by taking the replacement costs of your home and subtracting the years of structural wear and tear.