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Home insurance basics

When shopping for home insurance, remember this: Insure your house for the cost to replace it (meaning reconstruction costs), not its real estate "market value, and don't factor in the value of your land.

Also know that a home insurance policy covers much more than damage to your house. There are additional coverages within a home insurance policy, with limits often set as a percentage of the dwelling’s coverage amount. (Check your own policy for limits.)

  • Your belongings. (Often 50 percent of the dwelling amount.)
  • Certain structures outside your house, such as your garage or fence. (Often 10 percent of the dwelling amount.)
  • Loss of use, meaning additional living expenses you incur if you can’t live at home due to damage. This could include hotel bills, restaurant meals and laundry costs. (Often 20 percent of the dwelling amount.)
  • Liability, for cases where you are sued for damages or injuries to someone else.
  • Medical bills for people injured on your property or by your pet.

home insurance explainedOther items may be covered under your home insurance, with specific limits for each, so check your policy or ask your agent:

  • Downed trees.
  • Replacement of lawn, trees and shrubs.
  • Debris removal.
  • Power outages, including food spoilage.
  • Grave markers.
  • Unauthorized charges to your credit cards.

You may also need special add-ons for valuables such as jewelry, your computer equipment, antiques and other pricey possessions, where their value exceeds the coverage limit of your policy.

Home insurance does not cover earthquakes or floods – you’ll need to buy separate policies for those if you want coverage for those disasters. And in some areas of the country you need to buy windstorm coverage separately.

Lending institutions usually require mortgage customers to purchase home insurance.  Don’t rely on the coverage levels mandated by your bank or mortgage company.  Those levels are designed to protect the house itself, but not necessarily your possessions.  That’s why it’s important to check with your agent or insurance company to make sure you have adequate coverage.

Types of home insurance policies

You may hear the term “standard home insurance policy.” Home insurance policies are often similar because there are two organizations that supply policy forms to insurers: ISO and the American Association of Insurance Services (AAIS). Some home insurance companies choose to use their own policies. Whichever type your insurer is using, it has to be approved by your state insurance department.

Perils covered in HO-2, HO-4 and HO-6 policies

1.    Fire or lightning

2.    Windstorm or hail

3.    Explosion

4.    Riot or civil commotion

5.    Damage caused by aircraft

6.    Damage caused by vehicles

7.    Smoke

8.    Vandalism or malicious mischief

9.    Theft

10. Volcanic eruption

11. Falling objects

12. Weight of ice, snow, or sleet

13. Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning, or automatic fire-protective sprinkler system, or from a household appliance.

14. Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water heating system, an air conditioning or automatic fire-protective system.

15. Freezing of a plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, or of a household appliance.

16. Sudden and accidental damage from artificially generated electrical current (does not include loss to a tube, transistor or similar electronic component).

Source: Insurance Information Institute, sample HO-3 insurance policy.

What will vary will be premiums. You can find a wide range of rates among insurance companies for the exact same level of coverage. That’s why it’s important to shop around.

Each homeowners insurance policy provides a combination of property and liability coverage and covers loss of use resulting from damage. There are several basic types of home insurance policies:

HO-1

  • Basic homeowners policy.
  • Covers your house and possessions against 10 different perils.
  • HO-1 policies have been discontinued in most states.

HO-2

  • Broad homeowners policy.
  • Covers house and contents against 16 perils, which are named in the policy.

HO-3

  • Special form homeowners policy.
  • Covers the structure for all perils except those specifically excluded by the policy.
  • Contents are covered against perils named in the policy.

HO-4

  • Renters insurance policy.
  • Covers contents for 16 named perils and includes liability coverage. It does not insure the dwelling itself.
  • Also includes liability coverage for the renter.

HO-5

  • Premier homeowners policy, generally offered to newer, high-end homes that are well-maintained.
  • Much like the HO-3 policy but contents are covered against all perils except those specifically excluded.
  • According to the Insurance Information Institute, in some cases, depending the year of construction, the area where you live, your claims history, and other rating factors, you can buy an HO-5 for about the same cost as a traditional HO-3.

HO-6

  • Insurance for owners of co-ops or condominiums.
  • Provides personal property coverage, liability coverage and specific coverage of improvements to the owner’s unit. Insurance provided by the owner’s association normally covers most of the actual structure.

HO-8

  • Policy for older homes.
  • Covers the same perils as HO-2 but pays only for repair costs or actual cash value, since replacement cost could make the policy costly.
  • Well-suited for older homes whose market value is considerably less than the cost to rebuild them.

Texas defines home insurance policies differently. The Texas department of insurance offers HelpInsure.com to assist Texans in finding coverage.

Home insurance rates

Many factors go into determining the premiums for a homeowners policy.  The age of your home, the materials used to build it, where it’s located, the square footage and its distance from a fire hydrant all generally play a role in rates.

The insurer should be able to give you an estimate for rebuilding your house in the event of a total loss. That estimate should be your dwelling coverage amount.

Ask about home insurance discounts for:

Multiple policies (home, car or other policies with the same company)

Smoke detectors

Fire extinguishers

Sprinkler systems

Burglar and fire alarms that alert an outside service

Deadbolt locks and fire-safe window grates

55 years old and retired

Long-time policyholder

Upgrades to plumbing, heating and electrical systems

Earthquake retrofitting to make the home safer

Wind-resistant shutters

Replacing personal property

The extent of coverage for your belongings depends on the loss settlement clause. This clause identifies property that will be valued at actual cash value, and property that will be valued at replacement cost.

Before buying home insurance, understand the differences among "actual cash value,” "replacement cost."

A cash value policy pays for an item´s replacement cost, minus depreciation.

Replacement cost policies give you more protection than actual cash value coverage. For example, what happens if a burglar steals your six-year-old television set? With actual cash value coverage, you get only what you would expect to pay for a six-year-old television set. With replacement cost coverage, the insurance company pays to replace your TV with a new set similar to the stolen one.

Extended replacement cost for your house

In another twist to your policy choices, some companies offer coverage for your dwelling that goes beyond its insured value. In other words, your premium might be determined based on dwelling coverage for $200,000, but if your home is destroyed and it costs $215,000 to rebuild, you’re covered.

Guaranteed replacement cost coverage pays for the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit. You may have a tough time finding a policy with guaranteed replacement cost.

Extended replacement cost coverage pays a certain amount above the policy limit to replace a damaged home, generally 120 or 125 percent.

Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction.

Home inventories

Many people learn only after a fire or storm they didn´t have enough personal property coverage. Taking inventory will help you decide how much contents coverage you need. It also will simplify the claims process if you have a large loss; no one wants to reconstruct everything they owned from memory.

Your inventory should list each item, its value and serial number, where applicable. Photograph or videotape each room, including closets, open drawers, storage buildings and your garage. Keep receipts for major items in a fireproof place.

The Insurance Information Institute has helpful free software that will help you make a home inventory at KnowYourStuff.org.

Other insurance you may need

Additonal coverage available

  • Building code upgrades
  • Sewer and drain back-ups
  • Inflation-guard
  • Special riders for jewelry, collectibles and expensive items

Flood insurance

Homeowners policies do not cover flood damage. The National Flood Insurance Program (NFIP) offers flood insurance through home insurance companies nationwide.

If a mortgage lender determines your home is in a special flood hazard area, you might be required to purchase flood insurance.

Earthquake insurance

If you are concerned about earthquakes, you can get earthquake insurance with a separate policy.

Windstorm insurance

In much if the country, damage for wind is already included in your homeowners policy. But in hurricane-prone areas like Florida, homeowners who want to insure against wind damage needs to buy special windstorm coverage.

Endorsements & add-ons

Home insurance policies contain exclusions and limitations for some types of personal property that are particularly susceptible to loss. Some policies place a specific dollar limit on certain property such as jewelry or antiques.

You might want more coverage for certain items than your policy provides. For an extra premium, you can buy endorsements that expand or increase the coverage on these items. Some of the most common endorsements cover jewelry, fine arts, camera equipment, coin or stamp collections, computer equipment, and radio and television satellite dishes and antennas. To insure that these types of items are properly covered, look into a "scheduled personal property endorsement."

Personal umbrella liability insurance

If you want more liability coverage than your home and car insurance policies provide, you can buy a separate umbrella insurance policy.

Why you should read your policy

You may renew your home insurance policy each year and never bother to read the new paperwork your insurer sends. But renewal time is when insurers have the opportunity to make changes to your policy. You won’t know your policy has changes unless you read your declarations page each year.

For example, insurers that use forms from AAIS might be sneaking in a new exclusion for roof damage that’s cosmetic. So if hail has pock-marked your roof, repairs may not be covered.

Also pervasive in recent years has been the spread of percentage-based deductibles for certain perils, such as windstorms. These policies make you liable for 1 to 5 percent of your home’s insured value before the insurance company pays. So, if you have a 2 percent deductible and your home’s insured value is $250,000, you’re on the hook for $5,000.

Saving money

The best ways to save money on home insurance are to shop around for rates and to make sure you get all the discounts to which you're entitled. Here are 15 ways to save on home insurance.

 

More from Amy Danise here

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