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The Complete Guide to Homeowners Insurance
Anyone who has bought a house or has shopped for one knows that home insurance is a fact of life – some might call it a necessary evil; for others, it gives peace of mind in times of crisis. And while most people are persuaded by banks to purchase home insurance, few people understand exactly who to trust, what their policy does, when to make policy changes, where to shop for it, why it is priced the way it is or how they can take control of the process. This home insurance guide will help you navigate the ins and outs of choosing the best home insurance.
What is homeowners insurance
Homeowners insurance, sometimes referred to as “hazard insurance” or simply “home insurance,” is property insurance designed to cover private homes and their contents.
How does homeowners insurance work?
Homeowners insurance is a multi-line policy, meaning that the premiums, or regularly scheduled payments made to the insurer, cover both property and liability insurance. The premium is usually determined by the replacement cost of the home and its contents.
There are three major reasons to buy home insurance:
- To provide property coverage: Homeowners insurance covers the physical structure of your home and your personal property if it gets damaged or destroyed.
- To provide liability coverage: If someone who isn’t covered under your policy is injured or killed, or their property is damaged or destroyed while they’re on your property, your homeowners policy will cover your personal legal responsibility. This coverage extends to cases where damage or injury happens adjacent to your property, such as when the limb of a tree on your property falls on a parked car on the street.
- To satisfy your mortgage lender: To get a mortgage from a bank, most lenders insist you have insurance as long as you have a mortgage; you also have to list the lender as the mortgage lender on the policy.
Additionally, your policy generally covers such expenses as staying in a hotel or renting an apartment during the period when your home is being repaired following a disaster. In most cases, it requires that at least one of the individuals named on the policy actually live on the premises.
The types of homeowners insurance
The best homeowners insurance will cover all perils except for those that are specifically excluded in the policy language. Here’s a home insurance guide to the types of policies offered:
- Basic Homeowners Policy, HO-1: This is a basic policy that protects the homeowner against 10 basic perils such as fire or smoke, explosions, lightning, volcanic eruptions and damage from aircraft.
- Broad Form Policy, HO-2: The Broad Form policy covers all the 10 perils in the basic policy, plus a few more, like accidents from electric currents. Your structure, your personal belongings and your personal liability are covered.
- Special Form Policy, HO-3: This policy covers everything in the Broad Form policy, plus more. This policy covers you if you damage someone’s property or injure them.
- Tenant’s Form, HO-4: Tenant’s form is for renters and is commonly known as renters insurance. It covers your personal belongings and personal liability.
- Comprehensive Form, HO-5: This policy is comprehensive because it covers more perils than other policies. This policy is similar to the Special Form policy in that it can financially protect you from all perils except for ones specifically stated as not covered in your policy.
- Condominium Unit Owners Form, HO-6: This is for owners and/or occupants of condominium units. It insures your personal property and your walls, floors and ceiling against all of the perils and also extends coverage for damage to additions and/or alterations that the unit owner may have made, up to specified limits. Usually, this coverage for alterations kicks in only after any insurance limits are reached by policies (if any) that are purchased by the condominium association.
- Mobile Home Form, HO-7: This is similar to the Special Form policy, but it is specifically for mobile homes. Mobile homes don’t have the same coverage as regular homeowners insurance.
- Older Home Form, HO-8: This is for older homes where the cost to rebuild is greater than the market value. It covers the same set of perils as the Basic Homeowners policy.
- Dwelling Fire Form: This policy only covers your dwelling and only for a few specific perils. It does not cover your personal property, personal liability or medical payments. This coverage is a popular option for vacation homes. It’s also the kind of limited policy your mortgage lender will purchase for you if you let your homeowners policy lapse.
If you own a townhouse, you may insure it through an individual homeowners policy or an association policy – sometimes referred to as a group policy.
The different parts of a home insurance
Home insurance comes in sections. All homeowners insurance policies include two main sections — property coverage and liability. Here’s a closer look:
Section I — Property coverage
When you read your policy, the property coverage section is labeled as Section I. It covers all the details about your personal property including your home, its upgrades and your contents. The property coverage is broken down further into sections:
Section A — Dwelling:
Includes the structure of your home and any home improvements and upgrades you made to your property. This section factors in construction costs, labor and materials to rebuild your house if it’s burned down, for example.
Section B — Personal property:
This section includes all your possessions and valuables. Most policies automatically set an amount for personal property based on your dwelling or structural value. It’s advisable to do an inventory of your belongings, especially if you have collectibles, expensive jewelry or other valuables that may exceed the amount of standard personal property coverage your home insurance policy comes with. If your personal property amount exceeds your standard coverage, you can buy additional coverage for the higher-valuable goods.
Section C — Loss of use:
This section of your policy covers your expenses if you’re unable to live in the home while it’s being repaired or rebuilt. If you have to rent an apartment while your home is being rebuilt, this section will cover the rental expense.
Section II — Liability
The second section in your home insurance policy financially protects you against lawsuits you or your family members may cause to other property or individuals. For example, if your dog bites a visitor or a guest slips and falls, the liability portion of your coverage will pay for medical bills, repairs to their property, legal fees and legal damages awarded to the injured party by a court.
Besides the standard coverage mentioned, insurance companies have add-ons you can pay for to increase the amount of your coverage or protect you against hazards not included in your basic policy, such as earthquakes or flooding.
Homeowners insurance coverage guide
What is covered in homeowners insurance?
Your home insurance coverage will not kick in unless you experience a loss that is caused by a specific peril, or reason for loss, that your policy covers. For most policies, the list of covered perils includes:
- Fire, smoke, wind, hail, lightning, explosions.
- Theft or vandalism.
- Trees and other falling objects.
- Weight of ice, snow and sleet.
- Damage from an aircraft, car or vehicle.
- Water damage caused by a ruptured pipe.
What isn’t covered in homeowners insurance?
Some common perils occur with such frequency and predictability in certain areas that they are subject to exclusion from basic coverage. The most notable excluded perils include:
- Floods or sewers that back up into the home.
- Land movement, including earthquakes, landslides and mudflows.
- Damage from pets, birds, rodents or insects.
- Pollution damage.
- Deliberate damage to the home.
- Normal wear and tear.
Most of these are fairly clear-cut perils, but many people get confused by the types of water damage perils, as defined by insurance companies. They make a clear distinction between sudden water damage caused by a ruptured pipe (covered) and gradual water damage caused by rising floodwaters that seep into a home (not covered).
How much coverage do you need?
To decide how much home insurance coverage and policy limits you need, you’ll need to understand the importance of replacement costs versus actual costs:
- Actual cash value (ACV): This method would reimburse you for your lost or damaged possessions only after accounting for the age of each item and discounting for the wear and tear – or the depreciation – that has occurred over the years to lessen its value. Usually, the ACV is lower than the market value, but premiums tend to be cheaper.
- Replacement cost value (RCV): This would replace your possessions with similar items at their current market value, so it does not factor into depreciation. The downside is that the annual premiums for RCV policies tend to be about 10% higher than ACV ones. To make sure you get enough for reimbursement, your coverage should equal the full RCV of your home.
The market value, which includes the price of your land, depends on the real estate market. If your dwelling coverage drops below 80% of the RCV of your home, your insurance company may reduce the amount it will pay on a claim.
As you shop for a quote, the agent or online app will ask for some basic information about your house, such as:
- Where it’s located.
- The square footage.
- When it was built.
- The type of construction.
- Roof type and age.
- Number of bedrooms, bathrooms and stories.
- Garage type (if any).
- Foundation type.
- Whether it has security systems, such as burglar alarms and smoke detectors.
- Type of heating and air-conditioning systems.
Be consistent during your search, making sure to get rate quotes and key information in writing. When you get quotes, it’s crucial that you ask for the same coverages and limits and give the same information to each agent or company. That way, you can get a much better apples-to-apples comparison of rates.
While you shop for bargains, this is also a good time to assess the insurer’s customer service skills and ability to handle problems. Go to your state insurance department and see if they have a “complaint index.” A complaint index measures how many complaints your state insurance department receives, relative to the size of the company, and then gives you an idea of how well each insurer responds.
What is a home insurance hazard?
A “hazard” is a natural disaster that can cause damage to your home. Some examples of home insurance hazards include floods, earthquakes, tornados, hurricanes and landslides. Not all insurance policies include every type of hazard or natural disaster coverage. If you live in an area that’s high-risk for a hazard or natural disasters such as hurricanes or flooding, you may have to add insurance for the specific type of hazard. Hazard insurance typically covers your home’s structure and roof. Not all include coverage for your contents, so make sure you check on the depth of the coverage before you buy.
Homeowners insurance cost explained
How much is home insurance, and what is the average cost of homeowners insurance? There is no one specific answer as insurance policies come in many different shapes and sizes. The same is true for insurance companies and agents, which can charge wildly different rates for essentially the same coverage. It’s always in your best interest to shop around for the best deals and to ask the right questions in an effort to know what you’re actually getting.
The NAIC came up with a list of good questions to ask an agent while you’re shopping around for quotes. Use this handy checklist the next time you chat with an agent about shopping for a homeowners policy:
- What is the claims history of the home I am considering?
- If I submit a claim, how will it affect my premium when I renew the policy? Could it end up costing me overall?
- How will my credit history affect my premium?
- What does the policy cover? What doesn’t it cover? What are the limits to the coverages?
- How much coverage do I need for my personal property?
- How much liability coverage should I buy?
- Should I buy flood insurance or earthquake coverage? Can an agent help me determine how much risk my home is at?
- What types of water damage are not covered? Is mold damage covered?
Check with your state insurance department or consumer agency to see if it publishes premium comparison guides for homeowners insurance. To make sure all prospective insurance companies are financially sound, check their health by using evaluations from independent ratings agencies such as Standard & Poor’s, A.M. Best and Moody’s.
How insurers determine your premium
Many factors affect the underwriting process, which determines the premiums you pay. Different insurance companies charge different premiums for similar coverage. Decisions you make about how much insurance coverage to buy also affect your premium. Some of the other things that are likely to affect your premium include:
- The cost to rebuild your home: this is not the same as the purchase price, which includes the cost of the land. Your insurance agent might help you estimate replacement cost using information about your home and its contents
- Whether your home is made of brick or wood: the premium is usually lower for homes that are primarily brick or masonry than for wood frame homes
- The proximity of your home to resources and services, such as a water source or fire department and the quality of your community’s fire protection services
- The age and condition of your home; the premium is often higher for older homes and homes in poor condition than for newer homes and homes in good condition
- The claims history of your neighborhood and community, particularly the homes immediately next to your address
- A wood furnace or wood stove in the home
- Owning high-risk outdoor amenities, such as a swimming pool, a trampoline or playground equipment that could cause injuries
- The types of pets you have. Some insurers won’t insure you if you own certain breeds of dogs that are known to be aggressive, such as, but not exclusive to:
- Alaskan malamutes
- Presa Canarios
- Chow chows
- Doberman pinschers
- German shepherds
- Pit bull terriers
- Siberian huskies
Other companies do not exclude specific breeds, choosing instead to consider individual animals on a case-by-case basis. In some cases, the presence of exotic pets in the home, such as snakes, lizards, birds and horses, may also drive up rates.
How to get a premium quote
Our home insurance guide wouldn’t be complete without sharing ideas on how to find the best premium quotes. Today, new apps have made quote-gathering online faster and easier than ever before. Rather than calling each insurance company individually or searching endless web pages for quote information, these online services allow you to quickly pull up a broad comparison of different companies’ prices. Many companies also offer online homeowners insurance calculators.
Insurance companies such as Esurance (offered by Allstate), Progressive, Liberty Mutual and many others have sophisticated search algorithms that allow you to plug in some basic information about your home’s location and size, plus the type and amount of coverage you want. Once you’ve plugged in this information, you receive an instant preliminary quote.
Also, most state insurance departments are now providing services that show you average premium price ranges (though not specific premium quotes) based on a property’s value, type of construction, mitigation features, various deductible levels and other criteria. For instance, check out the CHOICES page on the Florida Office of Insurance Regulation site or the Homeowners Premium Survey page from the California Department of Insurance.
[Related: Home Insurance Quotes, Explained]
Is homeowners insurance worth it
For far too many homeowners, insurance is just another piece of paper that is signed and filed away, rarely to be thought of again. That is, until the worst happens. People who wait until they experience a loss before analyzing their own policies are not getting the full value — and possibly very little value — out of their countless premium payments.
Homeowners insurance is a financial covenant, but it should also be treated as a living, breathing entity to be nurtured over time. Only by reading the policy carefully, shopping around for the right agent, knowing your coverage limits and updating the property inventory can you ensure that your hard-earned dollars will keep that roof over your head — and another, stronger one after that.
Homeowners insurance vs. renters insurance
Homeowners insurance protects the individual that owns the home. It covers the homeowner’s personal property, the home’s structure and any liability if a third party is injured in the home.
Renters insurance provides coverage to renters who don’t own the property. The policy protects the renter’s contents and personal property from theft or damage and doesn’t cover the rental property’s structure. If a renter’s apartment burns down, the renters insurance will cover the renter’s content losses. The homeowner renting the apartment out will have to turn to their homeowners insurance policy to repair the damaged apartment.
Regardless of whether you rent or own, having the right insurance policy is critical to financially protect you from the unforeseen.
Tips to lower your premium
There are several ways you can lower your annual home insurance premium. Consider the following tips when you’re shopping around for home insurance:
- Insure your home with the same insurer you have other policies with. You’ll likely be eligible for a multi-policy insurance discount.
- Install a home security system. It may reduce your risk of burglary and your insurer will reward you by giving you a policy discount.
- Raise the deductible. If the chances of filing a home insurance claim are low, why pay higher monthly premiums for a lower deductible? To make sure you don’t end up short in the event you need to pay a deductible, set aside some money in a savings account you can use in case of emergency to cover the higher deductible.
- Prepay your home insurance. Most insurers will give you a discount if you pay your annual premium upfront. If you can’t afford to prepay it, elect autopay. Most insurers offer autopay discounts as well.
- Stay with the same insurer. You may find other insurers offer enticing discounts to switch, but the longer you’re with the same insurer, the better your discount may be as an established home insurance policy holder.
- Don’t file claims frivolously. It may be cheaper to pay for a guest’s medical bill out of pocket than to file a homeowners insurance claim to cover the costs. Your home insurance could increase each time you file a claim.
Last updated July 27, 2020 – Updated editorial guide and fact-checked resources.
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