Home insurance protects what’s typically the biggest investment you’ll make: Your house. Yet this investment can disappear in a matter of minutes or seconds if there’s a fire or natural disaster. Insurance is meant to come to the rescue in these times of calamity.
A home insurance policy covers much more than damage. Additional coverage types within a policy can save you from financial disaster, with limits often set as a percentage of the dwelling’s coverage amount. (Check your own policy for limits.)
- Home insurance covers your belongings, structure outside your home, liability and medical bills for guests injured on your property.
- When you shop for home insurance, make sure to insure your house of the cost to replace or rebuild it.
- You may need to get extra coverage for your valuables, such as jewelry and expensive computers if the coverage limits on your existing insurance plan is not enough.
- If you need additional coverage, check with your agent or insurer for details on the coverage limit of your policy.
Here’s what a policy covers:
- Your belongings. (Often 50% of the dwelling amount.)
- Certain structures outside your house, such as your garage or fence. (Often 10% 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% of the dwelling amount.)
- Liability, for cases where you are sued for damages or injuries to someone else. Policies also go up to $500,000.
- Medical bills for people injured on your property or by your pet.
Other 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 need extra coverage for valuables, such as jewelry, computer equipment, antiques and other pricey possessions, where their value exceeds the coverage limits in your policy.
Home insurance doesn’t 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.
Mortgage lenders usually require customers to purchase home insurance. Don’t rely on the coverage levels mandated by your 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 homeowners insurance
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. Some home insurance companies choose to use their own policies. Whichever type your insurer is using, the policy has to be approved by your state insurance department.
Your premiums will vary. 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.
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.
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.
If you raise your deductible, you will be able to lower your premium. You may be used to a flat-dollar amount deductible, such as $1,000. But recent years have seen the spread of percentage-based deductibles — for either all property-damage claims or for claims for certain perils, like windstorms.
These policies make you liable for 1 to 5% of your home’s insured value (not a percent of the amount of the claim) before the insurance company pays. So, if you have a 2% deductible and your home’s insured value is $250,000, you’re on the hook for $5,000.
Check your homeowners policy’s declarations page to make sure you know your current deductible.
So, how does home insurance cost? The average U.S. premium for $200,000 dwelling and $100,000 liability coverage with a $1,000 deductible is $1,128. However, the average premium by state varies from Hawaii ($337) to Florida ($3,575).
As with other forms of insurance, you can expect to find a wide range of rates among insurance companies for the exact same level of coverage. For instance, insurance experts recommend homeowners get at least $300,000 liability coverage. That increases rates.
Here are the 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.
Perils covered in HO-2, HO-4 and HO-6 policies
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles
- Vandalism or malicious mischief
- Volcanic eruption
- Falling objects
- Weight of ice, snow, or sleet
- 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.
- 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.
- Freezing of a plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, or of a household appliance.
- 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.
Actual cost value Vs replacement Cost
The extent of coverage for your belongings depends on the policy’s 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 between “actual cash value” and “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 Vs guaranteed replacement cost
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.
Extended replacement cost
coverage pays a certain amount above the policy limit to replace a damaged home, generally 120 or 125 percent.
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.
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.
Other insurance you may need for your home
There are many potential extras, such as coverage for sewer back-ups and building-code upgrades. Below are some important additional coverage types.
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.
If you are concerned about earthquakes, you can buy earthquake insurance with a separate policy.
In much if the country, damage for wind is already included in a homeowners policy. But in hurricane-prone areas like Florida, homeowners who want to insure against wind damage need to buy special windstorm coverage.
If you want more liability coverage than your home and car insurance policies provide, you can buy a separate umbrella insurance policy. This is a good idea if you have a lot of assets and would be open to a big lawsuit if you cause a lot of damage.The liability coverage gained through an umbrella policy is also relatively cheap.