Guide To Homeowners InsuranceUpdated July 5, 2022 Insurance
For most homeowners in the United States, their house is the most valuable asset. But this piece of property is more than an investment…it’s also their home. And since most Americans only own one piece of property, the loss of that home would impose some severe hardship. That’s why there is homeowners insurance.
What Does Homeowners Insurance Cover?
- Other Structures
- Personal Property
- Loss of Use
- Personal Liability
- Medical Payments
Insurance in general is a type of contractual arrangement between a policyholder and their insurer. The policyholder or subscriber (as they’re also called) will make a period payment to the insurance company for coverage.
What this coverage means is that if a specific event occurs, the insurance company will issue the policyholder a lump sum payment to rectify the damage done by that event. Most Americans are familiar with auto insurance and health insurance, for example. And it’s easy to see why these types of insurance can be necessary…everyone needs to visit a doctor at some point, and around 77% of drivers have some sort of car accident at some point.
What Is Homeowners Insurance?
Unfortunately, disasters can happen to your home that are beyond your control. A tree can fall through the roof. A pipe can burst. It could catch on fire and burn to the ground. Things can also happen on your property that could result in you facing financial damages – like if your dog bites someone in your yard. For all these unexpected events and others, there is homeowners insurance.
Just like health insurance and car insurance, homeowners insurance involves paying premiums to obtain coverage. The monthly payment is typically wrapped up into something called a PITI payment: principal, interest, taxes, and insurance. This way, the premium is bundled with your monthly mortgage payment.
In return, if any of the specified events that are listed on your insurance contract happen to your home, you will receive a lump sum payment meant to defray the property damage and inconvenience. It’s important to remember that insurance policies have a deductible. This is an amount of money that you, the policyholder, have to pay before the insurance company pays for the rest of the damage to be rectified.
Types of Homeowners Insurance
There are different types of homeowners insurance, and they are often labeled HO for short (an abbreviation of homeowner). An HO-3 policy, also called special form coverage, is by the far the most popular. HO-3 covers damage to your home from any type of peril that is not specifically excluded in the contract, and as such it provides very comprehensive coverage. However, regarding your movable property and valuables, it only covers damage from perils that are specifically named.
Another type of homeowners insurance is HO-5, which is also called premier coverage or comprehensive form coverage. This type of policy is more inclusive than HO-3 in that it also covers your movables and valuables from any peril aside from those specifically excluded. HO-5 policies are usually only available for well-maintained homes in low-risk areas.
Note that an HO-3 policy may also be called premier, so it’s important to specifically ask your agent regarding the type of coverage you’re getting and its details without making assumptions.
Lastly, there is HO-1 and HO-2 coverage, which only covers perils that are specifically listed. These are the least comprehensive forms of coverage.
Other policy types include HO-4 for renters, HO-6 for condominiums, HO-7 for mobile homes, and HO-8 for historic homes that wouldn’t qualify for a standard homeowners insurance policy.
What Does Homeowners Insurance Cover?
This aspect of the coverage includes the structure of your home and any attachments like a porch, deck, or garage. Built-in appliances may also be covered, such as a water heater. Typical perils that lead to a claim under this type of coverage include damages from wind, hail, freezing, fire, and lightning. Dwelling coverage is meant to provide the homeowner with enough money to repair their home. For instance, if a severe thunderstorm uproots a tree and it falls through your deck, the policy will provide enough coverage to repair the deck.
This aspect of the policy covers standalone structures on your property, such as a shed, fence, or detached garage. However, this amount is limited to 10% of your dwelling coverage. So, for example, if an Amazon delivery driver accidentally drove his truck through your fence, that would likely be completely covered. But if you’ve taken a detached garage and turned it into an Instagram-worthy pool cabana lounge, and that same Amazon driver plows through it by accident, that would very likely exceed 10% of your dwelling coverage. If you want to rebuild it the way it was, you’ll likely need to foot the rest of the bill.
Personal property includes anything that isn’t nailed down to your home but belongs to you. These are items like clothes, appliances, furniture, and valuables. Personal property coverage will generally only go up to 50% to 70% of your dwelling coverage, which is typically sufficient to defray the cost of replacing what was damaged or lost.
Personal property is usually covered against specified events like fire, explosions, riots, vandalism, theft, falling objects, power surges, or water damage. For instance, if a pipe burst in your kitchen, destroying the first floor of your home and all of your furniture and appliances, the personal property component of your insurance would cover that. One important thing to note about personal property coverage is that it covers your property anywhere (some exceptions may apply). So, for insurance, if someone steals your bike while you’re at the park, that would be covered even though the theft did not occur at your home.
Loss of Use
Loss of use is that part of the policy which will defray your living expenses if you can not live in your home while it’s being repaired. For this reason, it’s also often called additional living expenses. Examples of additional living expenses include hotel bookings or restaurant meals while your home is uninhabitable.
This aspect of coverage covers you, your family, and often even your pets. If anything happens in your home that inspires someone else to sue you for damaging them or their property, personal liability coverage will pay them off.
Certain aspects of personal liability are applicable outside your home. For example, if your dog bites someone at your local dog park, that would be covered. However, you cannot be covered for intentional or criminal acts. If you forgot to salt your driveway and a visitor slips and falls, you’ll be covered. But if you intentionally push them and they slip and fall, you would not.
If you, your family, or your pets cause medical damage to someone else and there is no lawsuit, instead of tapping into your liability coverage, the medical payments aspect of coverage could defray the cost of their medical bills. Let’s say a friend is over and gets injured. The friend is not interested in suing you but there are medical costs associated with treatment. These medical payments might be covered by your homeowners insurance plan.
How Much Does Homeowners Insurance Cost?
The cost of homeowners insurance depends on many factors, including coverage options, home location, and financial factors like your personal credit history.
Progressive is one of the largest insurance companies in America, and within its network, there are companies like ASI that charge an average of ranging from $676 annually to $2,044. That comes out to anywhere between $56 to $170 per month, which is a fairly low number when you think about everything that homeowners insurance covers.
If you are still paying off your home loan, most types of mortgage lenders will require you to have homeowners insurance. This is because as long as the home is not paid off, it’s still collateral for your loan. If you default on the loan, the lender will claim the home in foreclosure. They don’t want a property that is uninsured or that the homeowner has abandoned because of an unexpected destructive event. If you put down less than 20% on a home, your lender may also require something called mortgage insurance to protect the lender.
If you are renting, renters insurance is more affordable. You can often find policies that will provide you coverage for less than $30 every month. In fact, in most states, policies have a monthly premium that is below $20. You will often be required to conduct a home inventory to list your personal property and its value. While it’s tempting to skip this part, you should not, because unlisted items may not be a covered loss. In many places, if you are renting, this type of renters insurance is not optional coverage, but required by the leasing company, because it also reduces their potential liability.
As a last note, the typical deductible is $1,000, sometimes $2,000 or $500. Alternatively, it might be 1-2% of the home’s insurable value.
What Does Homeowners Insurance NOT Cover?
Home insurance policies don't cover everything. Whether a home insurance policy provides insurance coverage for everything not excluded, or only what is listed, certain things will not be covered.
One thing home insurance won’t cover is if you intentionally damage your home. For this reason, using your homeowner’s policy as a means to collect cash and do those renovations you’ve been hoping for is a BAD idea – and one that will most likely be caught.
Aside from this type of insurance fraud, a homeowners insurance policy will not cover flooding, whether that flooding occurs from a natural source like a river, lake, or ocean, or from a drain or sewer backup. One reason that standard homeowners insurance will not cover flooding is that it is considered a gradual and not accidental event. But perhaps the main reason is that flooding costs insurance companies too much money. That’s why the federal government offers flood insurance through the National Flood Insurance Program. However, the program is offered through the company that provides your policy, so speak to your insurance agent and make sure your home is covered if it is in one of the zones defined as prone to floods.
Many policies also do not cover earthquakes. If your home is in a region prone to earthquakes, there is a separate type of earthquake insurance you can get. Home insurance policies will also not cover acts of war or government action such as eminent domain (when the government seizes private property for public use). Lastly, home insurance will not cover wear and tear. For that, you might consider getting something called a home warranty.
If you have specific concerns about certain hazards, you can get additional coverage through something called endorsements. These coverage options will increase your deductible but they will protect you against particularly valuable personal belongings (art, jewelry), or pay to bring your home up to changes in the zoning code.
How To Choose the Right Homeowners Insurance
When shopping for a home, meet with your insurance agent to discuss exactly how the policy will pay out claims. For example, replacement cost coverage will pay to repair your home with materials of similar quality. Functional replacement cost coverage will only pay for similar materials that may be less expensive. Guaranteed replacement cost will cover the repairs even if they exceed your limits. Actual cash value coverage pays for repairs minus depreciation.
As you can see, the treatment of a covered loss will be very different based on whether the policy goes after a replacement cost of cash value. Speak to an insurance agent to go over your options and discuss what type of coverage works best for you.