Owning a home entails a lot of responsibilities. One of the most important ones is getting a homeowner’s insurance coverage because it adds a layer of protection for you and your family’s costliest investment. There are many different kinds of homeowner’s insurance policies, so try to fully understand what homeowner’s insurance is and how the policy actually works.
What Is a Homeowner’s Insurance?
Homeowner’s insurance is a collection of coverages that may help you cover the cost of repairs or replacement of your home and belongings if certain perils damage them such as fire or theft. It may also help cover costs in case you accidentally damage another person’s property or if a guest in your home suffers an injury.
Homeowner’s insurance is not a mandatory thing for every homeowner but if you have a mortgage, the lender would most probably ask you to insure your home so they can protect their investment.
Even if you don’t have a mortgage, getting a homeowner’s insurance is an intelligent move to safeguard your finances in a multitude of ways.
What Does Homeowner’s Insurance Cover?
You will find many insurance companies offering homeowner’s insurance, but their products will never be identical. The cheapest homeowner’s insurance will most likely give you the least amount of coverage. And if you want full coverage, you will have to pay more.
1. Standard Coverage
Each insurance policy provides different protection, but the standard policies usually cover the following:
- Personal Property Coverage. Personal property coverage can pay you in case the personal items in your home suffer damage or destruction due to a covered cause of loss. These may include your furniture, clothes, sporting equipment, and electronics. Of course, some of them may be subject to special limits of liability.
- Liability Coverage. Liability coverage can protect you in case there is a claim from a third party. It can provide a defense in the event that somebody sues you or a member of your household for being responsible for bodily injury or property damage to others.
- Dwelling Coverage. Should a covered cause of loss damage your home, dwelling coverage can pay for the repairs or rebuilding of your home. You should buy enough dwelling coverage to take care of the estimated cost to repair or rebuild.
- Other Structures Coverage. Other structures coverage can reimburse you for covered damages accruing to detached structures like garages, sheds, and fences on your property.
- Loss-Of-Use Coverage. What if the large oak in your backyard suddenly topples through your roof and you can no longer live in the house for the meantime? No worries. The insurance will take care of it – as well as other expenses resulting from this calamity such as hotel expenses and increased food cost from eating out of your house.
It’s necessary to note that the homeowner’s insurance does not cover all types of natural disasters. For example, you may not have coverage against damages caused by earthquakes and floods. However, you may purchase separate insurance policies to protect your home and possessions against the other types of risks.
It’s close to impossible to put what a regular homeowner’s insurance policy covers in one generic list. Although you may find some common provisions from one policy to another, the exact details of coverage will vary from state to state and also according to the type of policy that you purchase.
Here are some of the most popular risks that they cover:
- Damage from fire and smoke
- Damage related to weather such as wind or hail
- Damage from explosions like gas
- Damage from falling objects
- Water damage coming from internal sources (except flooding)
- Loss of personal property due to theft
- Damage due to vandalism
- Damage to household items due to freezing
- Damage due to snow or ice on the roof (such as caving in)
- Damage due to civil disturbances
- Damage due to windstorms and hail
- Damage brought about by motor vehicles or aircrafts
2. Optional Coverage
If you want wider protection, you may opt to buy additional coverage. A typical homeowner’s insurance policy will provide insurance cover for damages that your property can sustain through fires, lightning strikes, hails, and windstorms. Here are the ones homeowners commonly favor:
- Jewelry and valuable items. You get higher insurance limits plus expanded protection for special classes of property such as jewelry, silverware, antiques, and furs.
- Contents Replacement Cost. You can receive a settlement for covered personal property losses in the amount equivalent to replacement cost at the time of the loss, without accounting for depreciation.
- Special Personal Property Coverage. This extends your policy to cover your personal property in many more situations than a regular homeowner’s policy.
- Water Backup and Sump Pump Discharge or Overflow. Should water back up from a sewer or drain within your home, or if water leaks or overflows from your sump pump, this provision can cover whatever loss you incur up to a certain dollar amount.
- Identity Fraud. If somebody uses your identity fraudulently, you can get reimbursement coverage for expenses that you incur to restore your identity.
- Enhanced Dwelling Protection. This takes care of the extra coverage for your house’s structure. In case your original coverage limits fall short or there is a rise in construction costs, the enhanced dwelling coverage helps to make sure you don’t touch your savings to pay for rebuilding your home.
Coverage Limits And Deductibles
You should remember that every coverage in a homeowner’s insurance policy carries their own limit or the maximum amount that the insured will receive in case of the appropriate loss. As the policyholder, you may modify the coverage limits to suit your needs so that they would accurately cover the value of your home and belongings. Consider also how much it would cost you to replace or repair them in case the covered risk damages or destroys them.
In a majority of cases, you need to pay your deductible first before your insurance benefits take effect to help cover a loss. You should read your policy or check with your agent to review all these coverage limits and deductibles. Normally, the insurer will allow you to adjust them to fit your needs.
Usually, the insurance agent will sit down with you to determine how much dwelling, personal liability and medical payments coverage you should buy when you take your first homeowner’s insurance. This would depend on your home value, more or less.
How to Shop For Homeowner’s Insurance
We’ve said before that insurance policies come various shapes and sizes. You can say the same thing about insurance companies and agents because they can charge substantially different rates for basically the same coverage. The big companies aren’t exactly always better nor the small local ones warmer with their customer service. So, it’s always to your advantage to shop around for the best deals and to ask the right questions to zero in on the best product and provider for your requirements.
The National Association of Insurance Commissioners (NAIC) formulated a list of good questions to ask an agent while you’re looking around for an insurance provider. Use this helpful checklist the next time you talk with your agent about getting a homeowner’s insurance policy.
- Do the agent and the insurance company have a license from my state insurance department? For how long? (Your state insurance department can confirm the answers to these questions.)
- How can I find out the claims history of the home I want to buy? (The claims history of the home might affect your premium.)
- If I submit a claim, how will it affect my next premium when I renew the policy?
- Will my credit history affect my premium? In what ways?
- What items does the policy cover? What doesn’t it cover? The set limits to the coverages?
- How much insurance coverage is sufficient for my personal property?
- How much liability coverage should I purchase?
- Do I need to buy flood insurance or earthquake coverage? (Your standard homeowner’s insurance policy doesn’t cover either of them.)
- What types of water damage does it cover? Does it cover mold damage?
The Cost of Homeowner’s Insurance
By now, you might be imagining the tremendous amount of information you need to determine the cost of your homeowner’s insurance policy. And those factors do not just circle around your home’s value and your past claims history. Some other factors are:
- The cost of rebuilding your home
- The physical age of the house
- Your insurance coverages, limits, and deductibles
- Recreational or fun installations/items that may pose as major injury risks
- Some other risk factors. For example, a backyard swimming pool can materially boost your homeowner’s insurance costs. Even the mere fact that you own a dog (depending on the breed) can affect your rate.
Your past insurance history will also immensely affect the price you will pay for your homeowner’s coverage. Homeowners who had more claims usually pay more for insurance than those who have fewer claims. Insurers, by practice, will always consider your level of risk to the company. The more claims you have, the higher you are in the risk level – therefore, you should pay more for your coverage.
According to ValuePenguin, homeowner’s insurance premium varies widely from state to state. Depending on which area you live in, the average cost of home insurance may range from about $600 to $2,000 per year.
What’s The Right Amount Of Homeowner’s Insurance Coverage?
This is quite easy because your mortgage lender will ask you for certain coverage. But it is a good practice when buying a home, mortgage or no mortgage, to get a policy that will cover at least the replacement cost of your home. This will be your guarantee that you will have the means to rebuild your home should something unfortunate happen to it.
Take note that your coverage basically determines the amount of premium that you have to pay. If you’re getting an insurance policy to cover a home that you bought for $300,000, then your premium will naturally be higher than the premium of one who bought his house for $150,000. So, it’s important to have a very accurate assessment of how much your home is worth to help you decide the most appropriate amount of coverage.
Remember that the replacement cost of the house is not the same amount as its market value. Although there is a correlation between the two, when it comes to insurance, replacement cost is more important. This becomes even more relevant if you have upgraded some features on your property such as premium kitchens and bathrooms. These things often do not affect the market value of the property based on their cost.
Another thing to remember is to have an amount of contents insurance that will provide reasonable replacement cost for your personal effects in your home. And, if you keep a certain personal property in your house that is of significantly high value such as jewelry, paintings, and valuable collections, you should purchase additional coverage for them.