Insurance for a house hack

[Jerome Morelos]

I plan on house-hacking a 2-4 unit property and the insurance aspect is very confusing to me. What type of insurance is best? I read that replacement cost policy is best because it gives full coverage of the property, is that true? Also, can you guys recommend any good insurance companies? Thanks. 

[BreAnn Stephenson]

Hi there... thought I'd add a little to the discussion here... 

I empathize with you both on the complexities of insurance. Which is why my first bit of advice is to find a great agent who insures investment properties on a daily basis. Happy to give a referral "offline" if you need... 

My second thought is that depending upon your investing strategy and the particular property, actual cash value or replacement cost could both be viable options. Perhaps for someone who purchased a property at a low price and is only concerned with insuring their purchase price. Meaning, they are looking to use their insurance only if they have a total loss and they are not concerned with rebuilding... ACV might be a way to go. However, for properties you would want to fully repair or replace if you have a loss, RC may be a better fit even with a slightly higher premium as John mentioned.

Lastly, I just wanted to talk about co-insurance. Co-insurance requires you to insure to a certain percentage of replacement value in order to not incur a penalty in a claims settlement. Common co-insurance requirements are typically 80% (though could be 90% or 100% so check your policy!), meaning your property would need to be insured to at least 80% of replacement value at the time of the loss to not incur a co-insurance penalty. It does not mean, however, that you are responsible for insuring that last 20% on top of your deductible. Whatever percentage you were "under-insured" is what they would subtract from the claims settlement in addition to your deductible and any depreciation, if applicable.

Example A:

A property is insured to $80,000.

RC is $100,000 at the time of the loss.

Co-insurance requirement is 80%.

80,000/100,000 = 80%, so you have met the co-insurance requirement, no co-insurance penalty. They would only subtract your deductible and any applicable depreciation from the settlement.

Example B:

A property is insured to $70,000.

RC is $100,000 at the time of the loss.

Co-insurance requirement is 80%.

70,000/100,000 = 70% so you are 10% "under-insured," reducing your settlement by 10%. So, on top of your deductible and any applicable depreciation, your settlement will be 10% less.

Hopefully that helps... co-insurance can be one of the more confusing aspects of insurance for sure!

Best,

BreAnn