Homeowners insurance, usually referred to as home insurance, is a requirement, not a luxury. And not just because it protects your home and goods from damage or theft. Almost all mortgage companies require borrowers to have insurance coverage for the full or fair worth of a property (typically the purchase price) and will not grant a loan or finance a residential real estate transaction until proof of coverage is provided.
You don’t even have to own your property to get insurance; many landlords need renter’s insurance coverage. But, whether or not it is required, having this type of protection is prudent. The fundamentals of homeowners insurance policies will be covered.
The Benefits of a Homeowners Policy
A homeowner’s insurance policy has certain standard parts that specify what costs the insurer will cover, despite being infinitely customizable.
Damage to Your Home’s Interior or Exterior
In the event of damage caused by fire, hurricanes, lightning, vandalism, or other covered disasters, your insurer will compensate you so that your home can be repaired or rebuilt. Damage or mutilation caused by floods, earthquakes, or bad property upkeep is typically not covered, and you may need to purchase extra riders if you want that type of protection. Freestanding garages, sheds, and other structures on the property may also need to be covered separately under the same criteria as the main house.
Clothes, furniture, appliances, and the majority of your home’s other contents are covered if they are damaged in an insured disaster. You can also buy “off-premises” coverage, which means you can file a claim for misplaced valuables anywhere in the globe. But, there may be a cap on how much your insurer will reimburse you. According to the Insurance Information Institute, most insurance companies will provide coverage for 50% to 70% of the amount of insurance you have on the construction of your home. 1 For example, if your house is insured for $200,000, there is up to $140,000 in coverage for your goods.
If you have a lot of high-priced items (fine art or antiques, fine jewelry, designer clothes), you may wish to pay extra to put them on an itemized schedule, purchase a rider to cover them, or even purchase a new policy.
Personal Responsibility for Damage or Injury
Liability coverage shields you from third-party litigation. This clause applies to your dogs as well! Consequently, if your dog bites your neighbor, Doris, whether at your house or hers, your insurer will cover her medical expenses. Alternatively, if your child damages her Ming vase, you can file a claim to reimburse her. And, just like if someone had been harmed on your property, if Doris slips on the broken vase pieces and successfully sues for pain and suffering or lost income, you’ll be covered for that as well.
According to the Insurance Information Institute, while policies can provide as low as $100,000 in coverage, experts recommend at least $300,000. A few hundred dollars more in premiums can get you an extra $1 million or more in protection with an umbrella policy.
Renting of a Hotel or a Home While Your House Is Being Reconstructed or Repaired
It’s improbable, but if you are forced to leave your house for an extended period of time, it will surely be the best coverage you have ever purchased.
This section of insurance coverage, known as supplementary living expenses, would reimburse you for rent, hotel rooms, restaurant meals, and other incidental charges incurred while waiting for your house to be habitable again. Nevertheless, before booking a suite at the Ritz-Carlton and ordering caviar from room service, keep in mind that policies set daily and total restrictions. Of course, if you’re ready to pay extra for coverage, you can increase those daily limits.
Homeowners Insurance Comes in a Variety of Forms
All insurance is not created equal. The cheapest homeowners insurance will almost certainly provide the least amount of coverage, and vice versa.
In the United States, there are numerous types of homeowners insurance that have established industry standards; they are classified HO-1 through HO-8 and offer varying levels of protection depending on the needs of the homeowner and the type of residence being covered.
There are essentially three levels of coverage.
Real monetary worth
Real cash value covers the cost of the house plus the value of your belongings after depreciation (i.e., how much the items are currently worth, not how much you paid for them).
Cost of replacement
You would be able to repair or rebuild your property to its original value thanks to replacement value policies, which cover the exact cash value of your home and goods without taking into account depreciation.
Guaranteed (or prolonged) replacement cost/value
The most comprehensive, this inflation-buffer policy pays for whatever it costs to repair or replace your home—even if it exceeds your policy maximum. Certain insurers provide extended replacement coverage, which means it provides more coverage than you paid, but there is a cap; typically, it is 20% to 25% greater than the limit.
Some consultants believe that all homeowners should get guaranteed replacement value policies since you need enough insurance to rebuild your home, preferably at current rates, not simply enough insurance to cover the worth of your home (which probably will have risen since you purchased or built). “Often shoppers make the mistake of insuring [a property just] enough to cover the mortgage, but that normally translates to 90% of your home’s worth,” says Adam Johnson, a home insurance product manager for policy comparison site QuoteWizard.com. “Since the market is volatile, it’s usually a good idea to buy coverage for more than your home is worth.” Guaranteed replacement value policies absorb the increasing replacement costs and give the homeowner with a cushion if construction costs rise.
What Doesn’t Homeowners Insurance Cover?
While homeowner’s insurance normally covers the majority of loss situations, some occurrences, such as natural disasters or other “acts of God,” and acts of war, are typically excluded from policies.
What if you live in a flood- or hurricane-prone area? Or a region with a history of earthquakes? You’ll need riders or an additional policy for earthquake or flood insurance. You may also add sewage and drain backup coverage, as well as identity recovery coverage, which will reimburse you for expenditures incurred as a result of identity theft.
What Factors Affect Homeowners Insurance Rates?
So, what is the driving force behind rates? According to Noah J. Bank, a vice president and insurance expert at HUB International, it’s the possibility a homeowner will submit a claim—the insurer’s assessed “risk.” And to estimate risk, home insurance firms take into account the homeowner’s previous home insurance claims, as well as claims relating to that property and the homeowner’s credit. “Claim frequency and severity of the claim play a big part in setting prices, especially if there’s more than one claim linked to the same issue like water damage, wind storms, etc.,” Bank explains.
While insurers are in business to pay claims, they are also in business to make money. Insuring a home that has had many claims in the last three to seven years, even if the claim was submitted by a previous owner, might raise your home insurance premium to a higher price tier. According to Bank, you may not even be eligible for home insurance depending on the number of recent past claims submitted.
The location, crime rate, and building material availability will all play a part in setting rates, too. Of course, coverage options such as deductibles or additional riders for art, wine, jewelry, and so on—as well as the amount of coverage desired—also influence the size of an annual premium.
“Pricing and eligibility for home insurance can also vary depending on an insurer’s appetite for certain building construction, roof type, condition or age of the home, heating type (if an oil tank is on-premises or underground), proximity to the coast, swimming pool, trampoline, security systems, and more,” says Bank.
What other factors influence your rates? “The state of your home may also diminish a home insurance company’s interest in offering coverage,” says Bill Van Jura, an insurance planning expert in Poughkeepsie, New York. “A poorly maintained home increases the likelihood that the insurer will pay on a damage claim.” Even the presence of a dog in your home can increase your home insurance costs. Depending on the breed, some dogs can do significant damage.
Insurance Savings Strategies
While it is never a good idea to skimp on coverage, there are strategies to reduce insurance premiums.
Maintain a security system
A burglar alarm that is monitored by a central station or directly linked to a local police station can assist reduce the homeowner’s annual premiums by 5% or more. To qualify for the reduction, the homeowner must normally present proof of central monitoring to the insurance carrier in the form of a bill or a contract.
Smoke alarms are another important issue. While most newer homes have them, installing them in older homes can save the homeowner 10% or more on annual premiums. CO detectors, deadbolt locks, sprinkler systems, and weatherproofing can assist.
Increase your deductible.
The homeowner picks a greater deductible, just like with health insurance or vehicle insurance, which results in reduced annual premiums. However, the problem with selecting a high deductible is that claims/problems that typically cost only a few hundred dollars to fix—such as broken windows or damaged sheetrock from a leaky pipe—will most likely be absorbed by the homeowner. And these can add up.
Check for multiple policy discounts.
Many insurance firms offer a 10% or higher discount to consumers who have multiple insurance contracts under the same roof (such as auto or health insurance). Try getting an estimate for other forms of insurance from the same company that provides your homeowners insurance. You can wind up saving on two premiums.
Make renovation plans in advance.
If you plan to build an addition or adjacent structure to your home, consider the materials that will be used. Because wood-framed structures are very combustible, they typically cost more to insure. Contrarily, structures made of cement or steel will be less expensive since they are less likely to be destroyed by fire or harsh weather conditions.