Homeowners Guide to Property InsuranceUpdated November 1, 2022 Insurance
Property insurance is an umbrella term that’s used to describe several different types of insurance coverage available to homeowners, renters, and landlords. For each type of coverage, the policyholder pays a premium in exchange for financial reimbursement in cases of damage or theft of their property or personal belongings. There’s no single policy that covers all forms of damage and the options available to you will differ based on the insurance company you work with and the plans offered in your area.
7 Types of Property Insurance
- Homeowners Insurance
- Flood Insurance
- Earthquake Insurance
- Renters Insurance
- Condo Insurance
- Mobile Home Insurance
- Landlord Insurance
By gaining a clear understanding of the types of property insurance available, you can decide which options fit your specific needs and budget. You may be required to hold certain policies per the terms of your mortgage or rental agreement, while others you may choose to add on because of geographical risks in your area (such as flooding or earthquakes) or because of the type of property you own (like a rental property or manufactured home).
What Is Property Insurance?
Property insurance is a broad term used by providers to cover a number of plans including homeowners, flood, earthquake, renters, condo, mobile home, and landlord insurance. These plans provide financial reimbursement for a covered cause and damage due to one peril or another such as theft, vandalism, wind, rain, lighting, fire, smoke, snow, or ice.
For each policy, there will be a coverage limit as well as a deductible you’ll have to meet before the plan starts to pay out. Some homeowners who are considered “high risk” because of where their home is located or the condition of the home may have trouble obtaining property insurance from a traditional provider. If this is the case for you, you may be able to find a plan through your state’s Fair Access to Insurance Requirements Plan (FAIR plan).
How Does Property Insurance Work?
Like all forms of insurance, when you purchase property insurance coverage, you pay a premium in exchange for future reimbursement should anything happen to your real property or personal property. Property insurance doesn’t simply provide blanket coverage for all forms of damage, and you may have to purchase separate policies to guard against certain types of risks. Keep in mind that property insurance does not cover appliance repairs – for that you’d need a home warranty plan.
For example, a typical homeowners insurance policy will exclude coverage for property damage caused by earthquakes or floods, and these policies must be purchased separately by the homeowner. On the other hand, you typically wouldn’t need to purchase a separate fire insurance plan since this is usually covered in a standard homeowner policy. It’s also important to understand that the reimbursement process will vary depending on your policy, and there are three main ways this works: replacement cash value, actual cash value, and extended replacement cost.
Replacement Cost Coverage
Replacement cost coverage is based on the cost to replace or repair damaged property. This coverage does not take into account depreciation, meaning you’ll be reimbursed for the current cost to replace your dwelling structure up to your coverage limits. Replacement cost can be used to pay for both structures and personal property, but for the latter category, you may need to keep an itemized list of your possessions such as furniture, electronics, appliances, or art to ensure you’re reimbursed enough to replace the item with one of similar quality.
Because this only reimburses up to your coverage limit, it’s worth it to periodically revisit the terms of your policy with your insurance agent to ensure it’s keeping up with rising costs. For example, if you set your coverage limit at $200,000 ten years ago to replace your home, that same amount likely won’t be enough to cover the rebuilding expenses now.
Actual Cash Value
If your policy covers the actual cash value (ACV) of your belongings, it will reimburse the cost to repair or replace minus depreciation. This means that you’ll be paid the amount that the item could be sold for today, rather than the cost to replace it new. For example, if you had a TV that was covered under your policy that you paid $2,000 for five years ago, you may only receive $1,200 for it today since it’s gone down in value. Actual cash value is most often used for personal belongings and vehicles rather than your home which will almost always be reimbursed at replacement cost.
Extended Replacement Cost
Extended replacement cost is a rider you can purchase in addition to your regular property coverage that increases the dwelling coverage limit for rebuilding your home. This can be anywhere from 10% to 50% depending on the options offered by your provider, with the highest amount of coverage costing the most in additional premiums. This is a good option if you know construction costs have increased in your area and you’re afraid your current dwelling coverage may not fully cover your costs to rebuild.
Homeowners who have a higher property risk, such as those living in flood or earthquake zones or hurricane-prone areas, may see higher-than-average estimates from contractors after a natural disaster because the demand for services will be so great.
7 Types of Property Insurance
Homeowners insurance is the most common type of property insurance because all the best mortgage lenders require it as a term of their loans. Although there will be slight variations in plans, a homeowners insurance policy will generally cover your home and your belongings from theft, damage from certain disasters, and accidents. It may also cover additional structures on your property such as sheds or garages, as well as additional living expenses should you be displaced from your home due to a covered loss.
Importantly, almost all standard homeowner plans exclude coverage for natural disasters like floods and earthquakes, and you’ll have to purchase this coverage separately. Flooding from accidents like burst pipes or leaking water heaters may be covered, but floods caused by natural events are not. You should always work closely with your agent to ensure you understand everything that’s covered as well as what’s not covered in your policy. Aside from being a requirement for lenders, this is possibly the most important insurance policy to have since your home is likely your single largest financial investment.
Because standard home insurance doesn’t include damage caused by floods, you may choose to purchase flood insurance if you live in a high-risk zone and couldn’t afford the costs to rebuild should you experience extensive damage. This type of insurance provides replacement and repair costs for damage caused by heavy rains, storms, hurricanes, melting snow, or levee failure.
Flood insurance may be required per the terms of your loan if you’re in a high-risk flood area, and you can always check your own risk by consulting the Flood Insurance Rate Map (FIRM). Many flood policies are purchased from private insurance providers who’ve partnered with the federal government’s National Flood Insurance Program (NFIC). The NFIC was designed to make more flood policies available around the country as it became clear that many homeowners weren’t adequately prepared to cover the costs of flood damage on their own.
Like flood insurance, earthquake insurance is not included in a standard homeowner policy and must be purchased separately. These plans cover damage to dwelling units and personal property, as well as additional living expenses if you’ve experienced a loss that makes your home temporarily uninhabitable. Nearly every state in the country is at some risk of earthquake damage, but certain parts of the U.S. are at a significantly higher risk. Although earthquake insurance is not required by lenders, it’s likely a good idea to purchase a policy if you’re in a high-risk area. In California, lenders are required to offer earthquake policies and these plans are often administered by the California Earthquake Authority (CEA).
Renters insurance can only be purchased by someone renting a home or apartment and not by the homeowner or property owner themselves. These policies typically only apply to personal property coverage due to damage or theft of belongings that are kept in the home, and not the structure itself. It can also include liability coverage for injuries sustained in the home. If you’re a homeowner who rents or sublets a room in your house or an accessory dwelling unit, you may want to include a requirement in your lease that your renter purchases one of these policies to reduce the likelihood of a lawsuit and help with unforeseen expenses.
Condo insurance is a type of homeowners insurance with specific provisions that are unique to condominiums. Almost all condo owners are required to join a homeowner association (HOA), which means you’ll be paying a monthly fee for certain services and amenities that are available in your complex. While these fees will cover some of your repair and replacement costs, they won’t cover everything and you’ll need additional coverage for your unit. These plans cover structural damage, repair, or replacement value for personal belongings, and they can also include personal liability that covers medical payments if someone is injured while in your condo.
Mobile Home Insurance
Many people live in a mobile or manufactured home, and therefore need a homeowner policy that’s tailored to their specific needs. A mobile home plan covers damages to your structure and personal belongings, but most policies will calculate your home’s worth based on its actual cash value, not the replacement cost. These plans are typically cheaper than a standard homeowner plan and won’t usually cover any additional structures like garages.
If you’re a homeowner who decides to rent out part or all of your home, you’ll need a specific type of coverage known as landlord insurance. This will provide you with essential legal protection for injuries or property damage, can shield you from lawsuits, and help you recoup lost rental income. Importantly, your landlord policy won’t reimburse your tenant's lost or damaged property, which is why you may want to require them to buy renters insurance.
How To Save on Property Insurance
Like all forms of insurance, there are certain policies that you need to have like homeowners and health insurance, and some that are simply good to have like flood or earthquake insurance. Of course, you must pay a premium for all of these policies and these costs can add up quickly. Fortunately, there are ways to save on property insurance so you still get the coverage you need while staying within your budget.
One of the best ways to save money is by getting multiple quotes any time you’re in the market for a new insurance policy. Every provider will have a slightly different coverage option, and you may be able to bundle policies together for even further savings.
If you’ve already shopped around and found a plan you like, but are still looking for ways to cut down on costs, consider increasing your deductible. Typically, the higher the deductible the lower your monthly premium. True, if disaster does strike, you’ll be left with a slightly larger out-of-pocket expense, but this is one of the quickest ways to lower your current expenses.
Insurance providers usually offer the lowest rates to those with the highest credit scores because these people are less likely to file a claim. This is a long-term solution, but if you have a 30-year mortgage on your home, it can’t hurt to start chipping away at your credit card payments and other revolving debt.