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Key Takeaways
- Homeowners insurance protects your property from damages caused by a covered peril, like fire, wind, and hail.
- It covers your dwelling, other structures, personal property, loss of use, personal liability, and guests’ medical payments.
- A standard policy doesn’t cover everything, so purchase additional coverage where needed.
Homeowners insurance helps pay to repair or rebuild your home after a covered loss, known as a peril, such as fire, smoke, theft, storm damage, lightning, wind or hail. Standard homeowners insurance policies also cover personal belongings within your home. While not legally mandated, your mortgage lender will likely require you to purchase a policy.
Coverage can vary by insurer, but most standard homeowners policies typically include protection for your dwelling, other structures, personal property, loss of use, personal liability, and guest medical payments.
It’s important to note that standard policies don’t always cover high-value items like jewelry, artwork, or collectibles. This is because they are usually worth more than basic coverage limits. That said, it’s essential to understand your policy to ensure all your belongings are protected and purchase additional coverage if not.
Homeowners insurance policies can vary. Here are some of the most common types:
- HO-1: Basic Named Perils Coverage – This policy is the most basic homeowners insurance on the market and only covers named perils, like fire, lightning, hail, theft, and vandalism. It doesn’t cover liability, medical payments, or loss of use.
- HO-2: Broad Form Coverage – This offers more protection than the HO-1 policy, including coverage for perils like falling objects, water damage from plumbing, and electrical damage. However, coverage is still limited.
- HO-3: Most Common Policy – It covers your dwelling, detached structures, personal property, liability, medical payments, and loss of use. This all-risk coverage protects your home from everything except named exclusions, like earthquakes and floods.
- HO-4: Renters Insurance – This is renters insurance designed for tenants, which covers your personal items within a rented dwelling, liability, and loss of use. It covers perils like fire, water damage, and theft.
- HO-5: Most Comprehensive Coverage – This policy is the most comprehensive coverage option for single-family homes. It provides the same coverage as an HO-3 policy but also covers open perils, which are events not listed in your policy. Keep in mind that it still excludes flooding and mold.
- HO-6: Condominium Insurance –This coverage is tailored for condominium owners. It covers personal property, liability coverage, and condo-specific items.
- HO-7: Mobile/Manufactured Home Coverage – This policy covers the home’s structured, personal property, liability, additional living expenses and medical payments.
- HO-8: Historic Home Coverage – This policy covers older homes that cost more to rebuild than they are worth. It covers named perils only.
Actual Cash Value vs. Replacement Cost Value
Actual cash value and replacement cost value policies, commonly referred to as ACV and RCV, respectively, are the two basic types of homeowners insurance payouts.
Actual Cash Value
These policies account for depreciation and wear and tear of your belongings when settling a claim. Since these factors are considered, payouts typically don’t cover the full replacement cost of the item.
For example, if your five-year-old $2,000 couch is destroyed in a house fire, you won’t be reimbursed for the original amount – you’ll likely get the couch’s current estimated value. However, your deductible will be subtracted from your payout as well. So, if your couch was valued at $1,000 and your deductible is $500, you will only receive $500.
Replacement Cost Value
These policies don’t consider depreciation or wear and tear when settling a claim. It pays to repair, replace, or rebuild your property at today’s costs.
Let’s use the same example as above: your five-year-old $2,000 couch was destroyed in a house fire. RCV would reimburse you for a similar couch, make and model, which could cost $2,500 now. If you have a $500 deductible, your total payout would be $2,000.
A standard homeowners insurance policy protects your home from covered perils such as fire, smoke, theft, vandalism, lightning, wind, and hail. Here are the coverages it provides:
Dwelling
This coverage helps pay to repair or rebuild the structure of your home in the event of a covered peril. It may also cover heating and cooling systems.
Other Structures
This coverage protects detached structures on your property, such as a shed, detached garage, or fence. Swimming pools and trampolines likely won’t be covered.
Personal Property
This includes property inside your home, like clothes, electronics, and furniture. Keep in mind that high-value items like jewelry and artwork require additional coverage.
Loss of Use
Also called additional living expenses coverage, it reimburses your additional expenses from being unable to live in your home after a covered loss. These may include a hotel stay, parking and restaurant meals.
Personal Liability
This helps pay medical bills or legal fees if someone is injured on your property or you accidentally damage someone else’s property.
Guest Medical Payments
This helps pay medical expenses if a guest has a minor injury on your property.
Optional Coverage Endorsements
Insurers usually offer optional coverages or endorsements if you need more comprehensive protection. Here are some of the most common options:
- Scheduled personal property: This can provide more coverage for high-value items like jewelry, artwork, antiques, and collectibles, which have limited protection in a standard homeowners insurance policy.
- Flood insurance: A standard homeowners insurance policy doesn’t cover damages caused by floods. If you live in a flood-prone area, consider purchasing flood insurance as a separate policy or add-on. If your insurer doesn’t offer flood insurance, you may qualify for a policy from the National Flood Insurance Program (NFIP), managed by FEMA.
- Equipment breakdown: This covers your appliances or built-in systems if they malfunction or are damaged outside a named peril. It can provide coverage of up to $100,000.
- Service line: This coverage can help pay to repair or replace buried utility lines, like water, sewer, gas, and electricity lines.
- Water backup: This can reimburse you for damages caused by water backup from a sewer, drain, or sump pump.
Homeowners should consider adding water backup and sump overflow coverage and a service line endorsement to their standard homeowners insurance policy. I add both to every policy I write.
Chad Hannon, CLCS, Client Advisor for Owens Insurance and Financial Services
Homeowners insurance doesn’t cover all situations, including everyday wear and tear. Here are some of the most common exclusions:
Pest Damage
Damage from pests, like termites, rodents and insects, isn’t covered.
Insufficient Maintenance or Neglect
Property damage due to neglect won’t be covered.
Warfare
The government should replace or repair your property if it’s damaged or destroyed due to warfare.
Construction
When renovating your home, your homeowners insurance won’t cover property damage or worker injury.
Intentional Damage
If you purposefully damage your home, it won’t be covered.
Mold
Homeowners insurance won’t cover damage caused by mold unless it’s due to a covered peril.
Purchasing a homeowners insurance policy can be overwhelming with the variety of options available. Here’s what you can expect from the process:
Insurance professionals recommend getting a quote from at least three insurers to ensure you get the best price and coverage. You can purchase a policy online, via phone, or in person. Consider working with an independent insurance agent because they represent multiple insurers and can provide you with various quotes.
Review your state insurance department’s website for helpful information like requirements, licensing regulations, and advice. The National Association of Insurance Commissioners also provides advice, state-specific regulations, contact info for local insurance agents, and consumer complaint ratings.
It’s essential to understand your policy’s coverage limits so you can purchase optional coverages if needed.
Pay your premium on time and review your coverage annually to ensure it’s relevant to your home’s needs. You may need to adjust coverage limits or inform your insurer of a change to your home, like renovations or getting a new pet.
Ensure you file a claim immediately. You can do so online, via phone, or in person. It’s essential to take pictures and document everything when filing a claim. Respond to your insurer’s request promptly to have your claim settled quickly.
The cost of homeowners insurance depends on various factors, and insurers typically have different rates.
Factors That Affect Your Homeowners Insurance Costs
Insurance companies consider the following factors when determining your homeowners insurance rate:
Age of Your Home
Older homes typically cost more to insure than newer ones because new homes generally have fewer issues.
Size of Your Home
The larger your home is, the more it will cost to insure because it requires more labor and materials if it needs to be rebuilt.
Location
If your home is located in an area prone to natural disasters or high crime rates, you’ll likely have a higher premium. However, homes near a fire station or hydrant may have lower rates because your risk is lower.
Claims History
Insurance companies review the number of past claims at your address, even from previous owners. Local weather trends and claims filed in the surrounding areas are also considered.
Security Features
Homes with deadbolt locks, security systems, and burglar and fire alarms will have lower premiums. Keep in mind that homes with high-risk items like swimming pools or trampolines can increase your rate.
Credit-Based Insurance Score
Insurers review your credit-based insurance score. A good score can reduce your rate, and a bad score can do the opposite.
You need enough homeowners insurance to rebuild your house and replace your belongings after a total covered loss. Consider current prices for labor and materials when determining this.
Here are some steps to help you estimate the replacement cost of your home:
- Multiply the square footage by local building costs per square foot: Speak with an appraiser, insurance agent, or real estate agent to help determine your local building costs. For example, if building costs are $150 per square foot and you have a 2,400 square foot home, it will cost $360,000 to rebuild your house.
- Take inventory of your personal property: Take pictures and videos of your belongings in every room and save all your receipts. This will allow for an easier claims process. Also, consider what it would take to replace your items at today’s cost.
- Take note of expensive items: Document and pay close attention to high-value items, as most standard homeowners insurance policies won’t cover them entirely. To protect them, consider purchasing additional coverage, like a scheduled property endorsement.
- Hire a professional appraiser: Consider hiring an appraiser to ensure you get the necessary coverage. Most insurance companies also provide a construction cost estimator to help you determine coverage needs.
When shopping for homeowners insurance, choose an insurer with a strong AM Best financial rating and that operates in your area. Consider working with an insurance agent to help you choose the best coverage at the right price.
Ensure your policy provides enough coverage for your home. Review your belongings, such as high-value items, that may not be fully covered under a standard policy to determine if you want to purchase additional coverage. Inventory your belongings and keep them updated with pictures and documentation. Also, be sure to review your coverage annually.
Homeowners insurance protects your home against covered perils, while private mortgage insurance (PMI) protects your lender. PMI doesn’t help if your home is damaged due to a covered peril. If you have less than 20% equity in your property, PMI is required to protect your lender if you default on your loan.
Homeowners insurance isn’t legally mandated. However, if you finance your home, your lender will likely require you to purchase a policy. Keep in mind that homeowners insurance is a wise investment to protect your assets in case disaster strikes.
In most cases, homeowners insurance isn’t tax-deductible. However, self-employed and small business owners operating out of their homes may receive a deduction. Check with your accountant to determine if you qualify for deductions.
Homeowners insurance protects your home from damage from covered perils but doesn’t cover damage from everyday use. A home warranty is a service contract that covers normal wear and tear damages to home systems and appliances.
