Home Insurance

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What is home insurance?

If you're one of 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 is thoroughly protected. And that's where we come in. Let's get into the finer details of home insurance to help you protect your investment.

In this article, we will discuss:

  1. What is covered by my policy?
  2. How much coverage do I need?
  3. What's a deductible and why does it matter?
  4. What's actual cash value?
  5. What are some additional coverage policies I can have?
  6. What's some advice for first-time owners?
  7. Okay, I think I understand. Where can I buy a policy?

What home insurance covers?

Firstly, a home insurance insurance is typically broken down into six parts:

Policies: HO-2 vs. HO-3

Looking further, let’s consider the different types of homeowners policies and how these types affect your coverage. Most standard homeo policies are what insurance companies call HO-2 or HO-3 policies. An HO-2 policy is considered a named peril policy,meaning all accidents that could be covered are named within your policy. Typically, this includes:

  • Fire
  • Lightning
  • Theft
  • Vandalism
  • Windstorms and hail
  • Damage caused by vehicles
  • Damage from aircraft
  • Weight of ice, snow, and sleet
  • Freezing of household systems
  • Riots
  • Explosions
  • Falling objects
  • Volcanic eruptions
  • Overflow or discharge of water
  • Damage from artificially-generated electrical current
  • Sudden tearing, cracking or bulging of home

If you want a broader home policy, consider an HO-3 open-peril policy. In this policy, open-peril refers to coverage from all risks except those losses specifically excluded within your policy—your personal property is still covered on a named-peril basis, however. The next tier up for coverage is an HO-5 policy type. Here, both dwelling and personal property are covered on an open-peril basis. You should consider that most insurance companies won’t cover damages against flooding, earthquake, landslides, mold, infestations, wear and tear, nuclear hazards, or government actions—regardless of your policy type.

Coverage Amounts

The amount you spend will depend on the replacement cost of your home. The amount of coverage you have depends on the replacement cost of your home, which your insurance company will usually help you to 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 is dependent 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.

Typical Coverage Limits

Coverage Type Typical Limit of Coverage
Dwelling Varies
Other structures 10% of Dwelling Coverage
Personal Property 50% of Dwelling Coverage Limit
Loss of Use 20% of Dwelling Coverage Limit
Medical Payments Varies
Personal Liability Varies

Deductibles and home insurance

It’s important to consider the differences between a car insurance deductible and a home insurance deductible. For your home insurance, the amount of your deductible is deducted from your claim payout. For example, if your kitchen catches on fire and incurs $5,000 worth of property damages and your deductible is $1,000, you would receive $4,000 and thus be responsible for the remaining amount. However, car and home deductibles are both inversely related to cost of premium—if you raise your deductible, you lower your premium.

Percentage versus dollar-based

Deductibles can also be dollar-based and percentage-based deductibles. The above example regarding the 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/hall deductible is 1%, your deductible would be $3,670.

Actual Cash Value v Replacement Cost

Unless your insurance policy specifies otherwise, any claims you are being reimbursed for will be paid out by what's called actual cash value or ACV. Basically, ACV is the amount of money it would cost you to replace your item minus any depreciation. This valuation process will usually be done by your insurance companies claim's department through the claims adjustors.

Additional Coverages

Endorsements and Floaters

Something you may want to consider is what insurance companies refer to as “floaters,” “riders” or “endorsements.” Essentially, a floater is an additional coverage for a high-priced category of an item that exceeds the normal limits on your policy. For example, someone on your home policy owns a very expensive ring that is valued at $10,000. Because most insurance companies cap their coverage for jewelry well below $10,000, you would need an endorsement or floater to help ensure your jewelry is properly covered. While it varies by company, floaters extend to other items as well as jewelry—such as works of art, musical equipment, and even guns.

Identity Theft Coverage

Although a basic home policy doesn’t offer any coverage against identity theft, most companies offer an endorsement to ensure you are financially protected. While it varies per company, coverage ranges from $15,000 to $30,000 per occurrence and typically cost between $25 to $65 per year.

Flood Insurance

Unlike car insurance, the damages resulting from floods are not covered by a homeowner’s policy. Typically, flood insurance is provided by the FEMA or the Federal Emergency Management Agency. Depending on your location, your mortgage company may require you to purchase flood insurance.

Earthquake Insurance

Like damage caused by floods, an earthquake is not a peril or risk that is covered in a typical insurance policy. However, unlike flood insurance, some insurance companies offer a separate policy or endorsement for Earthquake protection. If you live in an earthquake-prone area, speak with your insurance company about earthquake protection.

Wind and Hail Deductible

Some insurance companies have added an additional deductible for wind and hail damage, plus a deductible for your other covered perils. While the impact on your premium is up to you, this additional premium is designed to keep policies affordable.

Our best advice

If you’re shopping for home insurance or even if you already have it, you should consider some simple steps to ensure you’re both properly covered and not overpaying.

Make an inventory of all your items

By going through all your belongings, both big and small, you can adequately determine how much coverage you need. Plus, in the event of a claim, you can quickly determine what is missing and its value.

Update your policy with expensive purchases

Pay attention to coverage limits for specific items. If you purchase a new item that exceeds your policy’s limit, you risk not having sufficient coverage. Consider additional endorsements and floaters with any newly purchased valuable item.

Double check your policy for any policy discounts

While discounts vary per insurance company, typical home policy discounts are multi-policy (home and auto), new roof, claims free, non-smoker, and new home discounts. Look closely at your policy to see if you or your home qualifies for any possible discounts.

Maintain your home

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.

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