By Susan Doktor
You’ve put a lot of thought into purchasing a lakeside getaway. Maybe years and years of thought! Owning a waterfront retreat is a dream that inspires people of all ages and from all walks of life.
Like everything we cherish, a cabin, Cape, or Colonial at the water’s edge deserves protection. Have you owned a home before? Then you may know a fair bit about homeowner’s insurance. But waterfront homes—especially when they’re purchased as second homes—are separate animals. That’s why we’ve put together this guide to homeowner’s insurance. We’ll explain how your insurance needs may differ if you’re buying a waterfront property, how first-home and second-home policies compare, and, while we’re at it, start out by covering the basics of homeowner’s insurance. Let’s call it Homeowners’ Insurance 101. All told, you’ll have the information you need to select the best homeowners policy for your waterfront property.
The First Thing You Need to Know
If you have a mortgage on your lakeside home, carrying homeowners insurance isn’t optional. Your mortgage lender will insist you have a policy in place before agreeing to loan you money. Technically, even with a mortgage, you do own your home, so long as you keep up with your payments. You’re free to install a pool in your yard, paint your home purple, or rent it if you please. But your lender has a financial interest in your property because it serves as collateral for the loan they extend to you. So unless you own your home outright, you must carry an insurance policy that’s at least equal to the amount of money you borrow. But most people insure their property for far more than they borrow. They insure it for what their home is actually worth and then some, for reasons we’ll discuss in a moment.
Of course, even if you own your cabin free and clear, it’s important to have homeowners’ insurance. Chances are that your home is one of your largest financial assets and losing it to a fire or other calamity would represent financial disaster. That’s the second thing you need to know. Not carrying homeowners’ insurance is reckless—as you’ll see, for a number of reasons.
Homeowners’ Insurance Doesn’t Just Protect You and Your Bank
One standard part of every homeowners’ policy is liability insurance. Liability insurance protects people. More specifically, it protects people who may be injured on your property. If your neighbor trips and breaks an ankle on some icy stairs you neglected to shovel and salt, your liability policy will cover his or her medical bills. It also protects other people’s property—for example when the camper your brother parks in your driveway is crushed by a fallen tree limb. Other accidents can be much more serious and some result in death. That’s why you should carry liability insurance with high coverage limits—higher than your mortgage company typically requires. Juries routinely award million-dollar verdicts in death cases. Without adequate insurance, you could be liable for a tremendous amount of money. In the event you’re sued, your legal fees alone can amount to tens of thousands of dollars. Liability insurance will cover the cost of hiring an attorney to represent you. We should note that liability won’t cover your medical bills if you’re hurt on your property or the cost of repairing damage to your camper. That’s what your health and auto insurance policies are meant for.
The Ins and Outs of Property Insurance
Property insurance is designed to protect the property you own. It protects the structure of your home, the garage and other outbuildings that may surround it, and the belongings you keep inside your home. If lightning strikes your home, property insurance will cover the cost of repairing it or even rebuilding it, depending on your policy limits. That’s another reason you should insure your home for more than your lender requires. If you only owe $20,000 on your house and take out a policy to match, your insurance company will reimburse you $20,000—hardly enough to rebuild the home you love and replace the treasures inside it.
Property insurance covers your home under other circumstances, too, including fire, wind damage, the cost of replacing your carpeting if it’s ruined by a burst pipe, and more. But even policies with identical coverage limits won’t pay you the same amount. When you purchase property damage insurance, you have a choice to make. You can select actual cash value (ACV) or replacement cost value (RCV) insurance. Here’s the difference. If your 5-year-old leather sofa is damaged in a fire, an ACV policy will reimburse you for the cost of buying a 5-year-old sofa—essentially what your couch would fetch at a thrift or consignment store. RCV coverage, on the other hand, would pay you the cost of buying a brand-new sofa of similar quality. RCV coverage is more expensive, but it makes sense for many people. Those who own historic homes that feature old-world craftsmanship or modern homes with custom upgrades, for example, should consider RCV coverage.
Personal property insurance is a sub-feature of overall property insurance. It protects your prized vinyl collection, your custom window furnishings, and your designer-label clothing, among other things. Here again, it’s important to select coverage limits that match the value of your belongings. However, even if you select high coverage limits, certain items will likely not be covered. Jewelry, antiques, and similar high-value items typically are covered under separate riders at an additional cost. This item must be appraised and scheduled when your purchase a rider.
Special Considerations for Second Homes and Waterfront Properties
Insurers are in the business of managing risk. Most insurance carriers consider waterfront and vacation homes riskier than other properties. Waterfront properties are more prone to flooding, for example. Flood insurance is not part of standard property insurance but can be purchased separately. Depending on your home’s proximity to the shore, climate concerns, and other factors, carrying flood insurance may be a smart decision.
Since second homes are frequently vacant for extended periods, they are subject to a greater risk of theft and vandalism. Compared to coverage on your primary residence, your vacation home insurance costs may be higher. Certain vacation home features—pools and hot tubs among them—though lovely to enjoy, can increase your cost of coverage, too.
If you plan on renting your second home when you’re not using it, you must report that to your insurance company. Most will require you to purchase business insurance that’s specifically designed for rental properties. It’s not a good idea to try to skirt this extra expense. If you carry a standard homeowners’ policy on a rental home, your insurance company can deny your claims, even if there are no renters on the premises when a covered event happens.
The Importance of Proper Insurance Planning
No matter what type of home you’re purchasing, it’s critical to go in with your eyes wide open. Just as you’ll want to consider how much it will cost to heat and maintain your home, you should also be aware of what your insurance will cost you each year. Your lender will consider all these costs, plus such factors as your credit score and your debt-to-income ratio when deciding whether to lend to you and at what interest rate. They—and of course, you—want to be sure you can manage all of the expenses associated with it. You may also want to keep all of these costs in mind when you make an offer on a home and adjust your bid to account for them. A licensed insurance agent can help you estimate coverage costs before you purchase. And an experienced realtor is in a great position to recommend a reputable agent to you.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of subjects, including real estate, mortgage financing, insurance, and legal affairs. Follow her on Twitter @branddoktor.