By Molly A. Thomas, FPQP™
Many people dream of a second home—a place to go for some rest and relaxation, a place to call your own, a place for family and friends—or an investment property for you and renters. Once that dream comes true, and you have found your new home, how to best insure your property will be of utmost importance. Knowing the ins and outs of insuring a second home can help as you make your dreams a reality.
How is a second home’s insurance different?
There is no such thing as one-size-fits all homeowners insurance. You may find that insurance for your second home is a little more difficult to acquire. This insurance policy, like your primary homeowners policy, will offer coverage for the home known as dwelling coverage for the physical structure of your home, personal property coverage for your personal belongings, liability protection coverage to protect you in case of an injured party, and other necessary coverage exposures. The type of insurance policy should reflect the type of structure you purchase: Do you need a policy that covers a condo/townhouse, or do you want a guaranteed replacement dwelling homeowners policy?
Insurance carriers view second homes as riskier to insure than primary homes. The risks that determine your insurance rates are slightly different for second homes. Second homes are often vacant, making them more susceptible to break-ins and increased damages from leaks and fires. Moreover, second homes are often located in an area where the home may be more prone to risks such as floods, named storms, wind and hail, earthquakes, mudslides, fires and the like. Location also increases insurance risks, which increase premiums.
Beside the homeowners policy, you may need to purchase additional coverage in the form of riders or additional policies for flood risk, wind and hail, named storm risk, or earthquake. These risks are not typically covered under a homeowners policy and will require a separate policy, which carries its own limits and a separate deductible for each policy.
Rental: What are the risks?
Renting your second home can bring additional income as an investment property. Renting can help offset costs of maintaining a second home, but know that renting your home makes the property subject to more “wear and tear” and increased liability exposure. If you are going to rent out the home, you may need a more comprehensive insurance policy that will cover the full cost of replacing the home, and the insurance carrier will likely increase your rates. You will most likely need additional coverage, like landlord insurance and increased liability protection. We have all heard horror stories about how abusive renters can be of others property, or the tragic story of a renter falling off a balcony when sitting on a weakened balcony railing or falling down the stairs! A higher liability limit will protect you and your assets if you are found responsible for an injury to someone on your property who doesn’t live in either of your homes. This coverage will also cover medical costs and court costs.
If you decide to rent your second home, talk with your insurance agent to be sure that you are fully protected. Many policies offer $500,000 liability protection limits, and some go as high as $1,000,000. If you need higher limits than offered by the homeowners policy, ask whether you can add your second home to your existing personal umbrella policy, add a personal umbrella policy, or an excess liability policy. If your second home is owned within a LLC (Limited Liability Corporation), a commercial excess liability policy may be required. When a property is personally owned, a personal liability umbrella will offer this additional coverage.
To make the most of insuring a second home:
- Insure your home with a trusted and knowledgeable insurance agent.
- Insure your home with a financially strong insurance carrier.
- Insure your second home with your current homeowners insurance carrier. Bundling your policies under one agency offers discounts and ease at claim time.
- Do not make numerous or small claims. Your insurance premiums will increase, and your insurance carrier may cancel your policies.
- If you can afford it, go with the higher deductibles.
- Install an alarm system to detect both fire and break-ins to lower insurance costs.
- Place the second home into a LLC. This will add a layer of liability protection. (The LLC will be the named insured on the homeowners policy and may require a commercial rather than a personal policy.)
- Have high enough liability protection limits to cover your exposed risk or net worth.
Owning a second home has been a lifetime goal and can be a dream come true. Proper insurance and management of a second home is paramount to having your dream come true and not turn into a financial nightmare! The Benjamin Franklin axiom that “an ounce of prevention is worth a pound of cure” is as true today as it was in Franklin’s time.
Molly A. Thomas, FPQP™ attended Erskine College and graduated from the College of Charleston with a B.S. in Education in 1981. She joined Abacus in February 2004. In April 2008, Molly received her certificate of completion from Florida State University in Insurance Planning and Risk Management and she was awarded the Financial Paraplanner Qualified Professional Designation from The College of Financial Planning in 2012. Molly’s main focus is advising on each client’s insurance including life, health, disability, long-term care, and property and casualty.
Abacus is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.5 billion on behalf of its 240 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.