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If you're among the 65% of Americans who own a home, you understand the immense financial investment that is homeownership. It is often the end result of years of saving, work, and sacrifice. After all this effort, you need to make sure your investment and your personal property are thoroughly protected. That's where homeowners insurance comes in.
Let's get into the finer details of home insurance to help you protect your investment.
A homeowners insurance policy is typically broken down into six parts:
The kind of coverage you will have with a home insurance policy will depend on the type of policy. There are two main ways you can have coverage in your homeowner's insurance: open and named peril. A peril is an action that causes damage to you, your home, or your belongings. Below are the definitions for the two.
An HO-2 policy is a very bare-bones form of homeowner's insurance. It only covers your personal property and your dwelling structures for named perils. A named peril HO-2 policy will cover:
The next policy is an HO-3 policy - this is the most common policy in the US. It will cover your dwelling and other structures on an open-peril home insurance policy but your contents on a named peril coverage.
The next tier of home insurance coverage is HO-5. This coverage level includes coverage of both dwellings and personal property on an open-peril basis. Most insurance companies won’t insure against flooding, earthquake, landslides, mold, infestations, wear and tear, nuclear hazards, or government actions, regardless of homeowners insurance policy type.
|Name||Property Coverage||Personal Property Coverage|
|HO-2 Broad Form||Named Perils||Named Perils|
|HO-3 Special Form||Open Perils||Named Perils|
|HO-5 Comprehensive Form||Open Perils||Open Perils|
It may surprise you to discover that homeowners insurance can cover some seemingly unexpected things in addition to the above perils. Your home insurance follows you even while you're not at home — so if you lose your luggage while traveling, your personal property coverage can help replace your lost items. It can even cover your kid's stuff while they're away at college — typically only while they're living in on-campus housing — and your parents' belongings if they're dependent on you while living in a nursing home or assisted living facility.
Other things your homeowners insurance may cover — depending on your policy — include property and liability coverage for tombstones or cemetery plots of loved ones and coverage for trees, plants, and shrubs in your garden.
Insurance customers pay premiums to a home insurance company in return for the assurance that the insurance company will provide compensation — up to coverage limits — in the event of a total loss. As long as the homeowner — or their escrow — continues to pay and the cause of loss is a covered peril, the insurance company will honor repayment for damages.
The amount you spend on home insurance coverage depends on the replacement cost of your home, which your insurance company will usually help you determine. Consider that replacement cost and market value are not synonymous. Replacement value is how much it would cost an insurance company to rebuild your home and replace your belongings, whereas market value depends on the real estate market and other variables.
Because the purpose of insurance is to restore the insured asset — your home and property, in this case — to its original state, insurance companies use replacement cost rather than market value to determine the actual dollar value of coverage.
Outside of this, there are typical limits of coverage you can expect from many insurance providers. However, this can be flexible. Many insurance companies have their own tiers of coverage and home insurance coverage options you can explore.
|Coverage Type||Typical Limit of Coverage|
|Other structures||10% of Dwelling Coverage|
|Personal Property||50% of Dwelling Coverage Limit|
|Loss of Use||20% of Dwelling Coverage Limit|
There are some major differences between car insurance deductibles and home insurance deductibles. With home insurance, your deductible is deducted from your claim payout. If your kitchen catches on fire and sustains $5,000 worth of property damages and your deductible is $1,000, you would receive $4,000 and be responsible for covering the remaining amount.
Car and home deductibles are inversely related to the cost of premium — if you raise your deductible, your monthly costs should decrease.
Homeowners insurance deductibles can be dollar- or percentage-based. The above example of a kitchen fire would be considered a dollar-based deductible. For a percentage-based deductible, however, the monetary value is derived from a percentage of your dwelling coverage. For example, if your dwelling is valued at $367,000 and your wind and hail deductible is 1%, your deductible would be $3,670.
Most insurance companies will reimburse you for personal property claims via the actual cash value (ACV). ACV is the amount of money it would cost to replace an item, accounting for depreciation. This valuation process is usually handled by an insurance company's claims department, through its claims adjusters.
You can change your policy to reimburse you based on a replacement cost value of your personal belongings with an endorsement. We'll explain homeowners endorsements below.
Like mortgage insurance (also known as private mortgage insurance, or PMI), hazard insurance is usually required by your lender when you buy a home. But unlike PMI, hazard insurance is not a separate insurance policy — to put it simply, it refers to the part of your homeowners policy that protects the structure of your home from certain perils like fire, lightning, and wind. Because of the financial stake the financial lender has in your new home, it is in their interest to safeguard the property against potential damage or destruction.
Coverage for the dwelling and structure of your home is a cornerstone of a typical homeowners policy. So if you have home insurance, you've already fulfilled your lender's requirement of having hazard insurance.
Homeowners insurance companies offer products called “floaters,” “riders,” or “endorsements.” An endorsement is any change to your insurance policy — whether that be adding something or removing it. A big example of the use of endorsement relates to your personal property. Most insurance companies will place special limitations on valuable personal property. If you want to increase your coverage level for these items, you would need to add an endorsement. Below are the items that are typically subject to specific insurance limits.
If you have anything in the list above that exceeds the policy limit, you should consider adding an endorsement to your home policy. If you own expensive personal items, consider a scheduled endorsement. A scheduled endorsement requires the item to be appraised but gives you substantially more coverage. This is common practice for engagement and wedding rings.
Although basic home policies don't guard against identity theft, most companies offer endorsements to cover these circumstances. While details of these endorsements may vary substantially from company to company, coverage ranges from $15,000 to $30,000 at a cost of $25 to $65 per year. Learn more about how homeowners insurance covers identity theft.
Flood damage is not covered in any standard homeowner’s policy. Typically, flood insurance is provided separately through FEMA or a private flood insurance company. Depending on your location, your mortgage company may require you to purchase flood insurance.
Earthquake damage is not covered by a typical insurance policy. Unlike flood insurance, some insurance companies offer separate policies or endorsement for earthquake protection. If you live in an earthquake-prone area, consult your insurance company about homeowners insurance earthquake coverage.
Some insurance companies assign additional deductibles for wind and hail damage, plus a deductible for other covered perils. This additional flexibility is designed to keep your homeowners policy affordable.
Unlike auto insurance, having home insurance is not legally mandated or required. If your home is financed through a lender, they may require homeowners insurance at their discretion as a stipulation for the mortgage. It's in both the homeowner's and mortgage company's interest to have this coverage — until the home is paid off, your lender maintains a financial interest in the wellbeing of the home you purchased. Having homeowners insurance protects your investment from unforeseen damage or accidents and the lender's interest in maintaining the value of the home.
If you’re shopping for home insurance, or if you have it but want to make the most of your policy, consider some simple steps to ensure you’re properly covered and not overpaying.
Go through all of your belongings, big and small, to determine your coverage needs before getting a home insurance quote. In the event of a claim, you'll be able to quickly determine what is missing and calculate its value.
Pay attention to coverage limits for specific items. If you purchase a new item that exceeds your policy’s limit, you run the risk of having insufficient coverage. Consider additional endorsements and floaters with any newly purchased high-value item.
While discounts vary per insurance company, typical home insurance discounts include multi-policy (home and auto), new roof, claims free, non-smoker, and new home discounts. Look closely at your policy to see if you qualify for any possible discounts. Learn more about common homeowners insurance discounts.
Insurance companies see things like old roofs, mold, and general disrepair as liabilities and will charge you accordingly for them. It is important to maintain the structural integrity of your home to ensure your premiums don’t increase unnecessarily.
Using methodology outlined here, we discovered average rates for homeowners insurance.
|Insurance Provider||Average Annual Premium|
Homeowners insurance is complicated. Below are a few answers to frequently asked questions about how much home insurance is necessary, what homeowners insurance covers, and some other common terminology.
Home insurance covers your family members who live in your household. Depending on your insurer, they may prefer that you explicitly name every household member on the policy. So if your spouse, children, relatives, or even the family pet causes damage to someone else's property, the liability portion of your homeowners insurance would extend to the liable family member. Typically, it also extends to cover family members who may be away from home — like your child who's heading off to college. Some insurance companies may only provide coverage if your student is living in on-campus housing — the rules may vary slightly from insurer to insurer. If your child is living in off-campus housing, they should look into getting their own renters insurance.
A home warranty protects your appliances and systems a number of damages that are usually excluded from a homeowners insurance policy. If you want your HVAC or kitchen appliances covered from wear and tear, consider a home warranty.
Most homeowners policies will not cover mold unless it can be proved it was caused by a covered loss. If your policy provides no mold protection, you can add it back with a mold/fungi endorsement. This coverage is relatively limited.
The coverage for your dwelling (i.e., the physical structure of your home) needs to be equal to the rebuild cost of your home. For your liability coverage, you should have enough coverage to protect your personal assets.
You can only deduct your homeowner’s insurance paid on a rental property, i.e., a home you own and rent out to a tenant. Aside from this circumstance, you may deduct premium payments to your private mortgage insurance. It’s important to note this isn’t your actual homeowner’s insurance but your mortgage insurance. If you’re unable to make the 20% required downpayment on your mortgage and thus have private mortgage insurance, you can deduct this (additional restrictions apply).
|Mississippi||Montana||North Carolina||North Dakota||Nebraska|
|New Hampshire||New Jersey||New Mexico||Nevada||New York|
|South Carolina||South Dakota||Tennessee||Texas||Utah|