Homeowners insurance protects what is likely your most valuable asset: your home. If something happens and your house is damaged or destroyed, insurance gives you the peace of mind that you’ll be able to rebuild.
- Homeowners insurance has three main components: replacing your belongings, repairing the house/other covered structures, and liability coverage in the event someone is injured at your home
- Your homeowners insurance policy will have a deductible; this is the amount you are responsible for paying before your insurance kicks in
- There are a lot of factors that can affect your premium cost
Your home isn’t just the roof over your head, it’s also one of your most valuable assets. If it’s damaged or destroyed, you want the peace of mind that comes from knowing that you’ll be able to rebuild.
Homeowners insurance can offer that security — and since most homeowners are also paying a mortgage, lenders typically require proof of homeowners insurance coverage when purchasing a home and at renewal. Here’s an introduction to everything you need to know about homeowners insurance.
What Is Homeowners Insurance?
Homeowners insurance helps people repair extensive damage to their homes from “covered perils.” Homeowners insurance can also pay for expenses in the event that someone is injured on your property.
The three main components of homeowners insurance are:
- To repair property damage to the physical house or other covered structures.
- To replace personal belongings that are damaged
- To cover your liability in case someone who doesn’t live at your home is injured
How Does Homeowners Insurance Work?
Before purchasing homeowners insurance, you will first need to determine how much coverage you will need. Your insurance should cover all of the costs to replace your belongings and rebuild your home if it is lost in a covered event (such as a house fire).
Your home insurance company should provide guidance on the overall cost to rebuild your home. When it comes to your personal property, however, you should create a detailed home inventory to keep track of what you have and how much coverage you would need if it all had to be replaced. Pictures of your belongings are helpful to have if there is ever a claim as well.
Every homeowners insurance policy has a deductible. This is the amount that you will be responsible for paying before your insurance kicks in. Your insurance policy might have different deductibles for certain types of claims, so make sure that you read your policy and ask your agent if you have any coverage questions.
Your insurance premium will typically be paid out of escrow. Not every homeowner has an escrow account – many are self-paid. This is when you pay your insurance premium as part of your mortgage, and that money is held by a third party and paid to your insurer when it is due. Some lenders require escrow for certain types of mortgages or in specific circumstances, such as a high loan-to-value (LTV) ratio. However, sometimes, escrow is not required. In this scenario, the homeowner can choose to pay out of escrow or make payments directly. Homeowners who decide not to use an escrow account will pay their insurance premiums when billed by their insurance provider.
How Do Insurers Set Homeowner Policy Rates?
A range of factors help determine the rates for a homeowners insurance policy. Most of these have to do with the home, such as where it’s located and how old it is. Size is a big factor as well – more square feet can mean more supplies. However, some factors are tied to you, like the number of claims made on previous homes you’ve owned. Claims on that property before you purchased it can effect it too.
Here are just some of the considerations that factor into underwriting a homeowners or condo insurance policy:
- How much it would cost to rebuild your home
- The age and condition of the home
- The zip code where your home is located
- The location of the closest fire hydrant
- What you have selected as your coverages, limits, and deductible
- Your claims history
- Any items that could cause an injury (injury risk examples include a pool, a trampoline, or sometimes certain dog breeds)
Insurance companies are regulated at the state level. Factors that are allowed to be considered in some states (such as marital status or credit score) may be prohibited in others.
What Does a Standard Homeowners Insurance Policy Cover?
- Dwelling: This covers your home and anything attached to it, such as a deck.
- Other Structures: Protects damage to detached garages, sheds, fences, etc.
- Personal Property: Protects your belongings inside your home, such as furniture and clothing.
- Liability coverage: Protection against lawsuits for bodily injury or property damage if someone other than your family is injured on your property. It also pays for damage caused by pets. For example, if your son, daughter, or even your dog accidentally ruins a neighbor’s expensive rug, you are covered. With personal liability coverage, the policyholder must have been deemed liable to have caused or aided in the event of the injury.
- Medical Payments Coverage: Covers medical bills of people who are accidentally hurt on your property, not including members of your own household. With Medical Payments Coverage, your home insurance policy could still help pay for damages, regardless of who is at fault.
- Additional Living Expenses: Covers costs if your family cannot live in your home while it is being repaired
Insurance Perils: Defined
When you read through your homeowners insurance policy, you will see the word “perils” mentioned. In the world of insurance, a “peril” is an event or circumstance that results in property damage. Your homeowners, condo, or renters policy contains a list of covered perils, such as fire, lightning, and vandalism. A peril is an event that can create a claim such as a storm, fire, burglary or anything that damages your home or property.
The four perils of insurance are:
These are all common perils named in your homeowners insurance policy to help cover your personal belongings in the event they are damaged by one of these events.
Homeowners insurance policies cover common perils, but do not assume that a standard policy covers the same perils if you move to a new home. For instance, while damage to your home from hail is covered in most policies, it might be an excluded peril if you live on the Texas coast where hail is common.
A basic homeowners insurance policy might exclude damage in areas where certain perils are common because the risk and insurance payouts are higher and more frequent.
Common perils that could be covered by homeowners insurance include:
- Fire and smoke damage
- Lightning strikes
- Damage from an aircraft or a vehicle
- Windstorms and hail damage
- Falling objects
- Water damage (but not flood damage). Homeowners policies typically cover damage from failed water heaters and frozen pipes, as long as the damage is not due to neglect.
Given that perils are what set an insurance claim into motion, it is very important to understand their limitations.
A “named peril” means that the insurance coverage extends only to events that are specifically listed in the policy. An “excluded peril” is an event that your insurance policy will not cover. An open “peril” policy will cover any event that damages your dwelling unless it is specifically listed as an “excluded peril.”
What Is the Difference Between Replacement Cost and Actual Cash Value?
The personal property coverage section of your homeowners insurance policy will typically mention either “replacement cost” or “actual cash value.”
If you purchased a brand new sofa for $1,000 to furnish your new home five years ago, the actual cash value today is going to be substantially less. However, if you go to the same retailer to buy the same sofa model today, it might cost more than $1,000. Choosing a policy that provides “replacement cost” means that your insurance company will not consider your personal property’s depreciation. Instead, it will cover the item at the cost you paid for it.
Think carefully about this difference when you are reviewing your policy. Selecting replacement cost might result in a higher premium, while actual cash value might not cover the cost of replacing your items.
Are There Different Types of Homeowners Insurance?
Although most homeowners carry a type of coverage called HO-3, there are other types of homeowners insurance that provide varying types of protections. Here’s a brief description of each type of policy:
- HO-1: This type of coverage is very limited and rarely used. It’s called “basic form” insurance, and coverage is scant. It’s so limited that many insurers do not even offer it.
- HO-2: This homeowners insurance covers only named perils. This means that if damage to your home happens that isn’t specifically mentioned in your policy, it will not be covered. This type of insurance is called “broad form,” but it’s still reasonably limited coverage.
- HO-3: This is the most popular form of homeowners insurance by far. This is called “special form” insurance. It covers damage to your home caused by a peril unless specifically excluded. However, personal property losses are covered on a named peril basis.
- HO-4: Technically not homeowners insurance at all, HO-4 policies cover renters.
- HO-5: An HO-5 policy is a more comprehensive form of an HO-3 policy. Some of the most notable features include increased limits for valuables, items repaid at replacement cost and coverage on an “open perils” basis. That means that as long as the damage is not specifically excluded, it will be covered.
- HO-6: An HO-6 policy covers condominiums and co-op units. Since condos and co-op structures present very different issues and have very different coverage requirements, this specialized insurance is designed to meet those needs.
- HO-7: This type of policy covers mobile and manufactured homes, which often are built elsewhere and transported to the home site.
- HO-8: An HO-8 policy is very specialized, and tailored to meet the needs of older homes that would either cost more to repair than the home’s market value or homes with significant historical significance. Older and/or architecturally important homes are often made with materials that are difficult to source, making them expensive to repair–frequently, repairs of this sort end up costing more than the home’s actual market value. Because of this, it’s important to have coverage that adequately protects the home–and the homeowner–if the home is damaged or destroyed.
What Does Homeowners Insurance Not Cover?
Although homeowners insurance companies cover a wide range of perils, there are some types of damage that insurance won’t cover if your home is affected. One well-known exclusion is flood damage. If rising floodwaters damage your home, most policies will not pay for repair or replacement of what was damage or lost. This is also true for earthquakes.
Both of these perils would require separate policies. Other exclusions are possible, so it is important to read and understand what is in your policy. Depending on your policy and where your home is located, damages caused by hurricanes or wildfires could also be excluded.
One unpleasant surprise for some homeowners is that infestations are not covered. Commonly excluded infestations are birds, insects, rodents, mold and fungus. If you neglect your property and fail to repair problems that lead to damage, your homeowners insurance policy may not cover you.
How Can I Get Coverage for Perils That Aren’t Covered by a Standard Policy?
You might be surprised at how many areas of the country are susceptible to events like wildfires, hurricanes, earthquakes and flooding. If you live in an area with one or more of these risks, you should ask about specialized insurance that could cover damage to your home if you experience one of these disasters.
Coverage can be either in the form of an additional endorsement (known as a “rider”) or as a separate policy. You will have to pay more for this additional coverage, but it is worth looking into.
How Much Is Homeowners Insurance? How Can I Save Money on My Policy?
There are several ways that you could potentially save money on your homeowners insurance premiums.
One of the simplest ways to reduce your premium costs is to increase the amount of your deductible. When you choose a high deductible amount, you are signaling to an insurance company that you are willing to pay more up front if there is damage to your home. That means the insured filing a claim is less likely.
However, it is important to consider the pros and cons of raising your deductible. If your home sustains damage, make sure that you can cover the out-of-pocket costs that amount to your deductible. If you are not able to cover the first $5,000 of damage, don’t choose that as a high deductible just to try and save money on your premium. Generally speaking, the lower your deductible is, the higher your premium will be — and vice versa.
You can also potentially save money on your homeowners insurance policy by “bundling” your policies. Bundling refers to having multiple insurance policies covered by the same insurance carrier. If you want to cover both your home and vehicle with the same insurer, ask your agent about bundling.
Having good credit is another great way to potentially save — as is making certain improvements to your home. Some insurers offer discounts for safety features, such as sprinklers and fire-suppression systems or burglar alarms. Talk to your agent about any discounts that might be available.
Can I Be Turned Down for Homeowners Insurance? Can My Insurer Cancel My Policy?
Yes, you can be turned down for homeowners insurance, and yes, your insurer can cancel your policy.
Insurers may turn down homeowners because they do not meet the terms set by the underwriting guidelines, or if they purchase a home in a location where crime or natural disasters are common. Homes in these areas are more likely to submit claims, so the risk to the insurer is higher.
Your insurer may cancel your policy for a variety of reasons:
- Nonpayment is a primary one, which is why many insurers and lenders require you to keep your homeowners insurance in escrow.
- Too Many Claims is another reason an insurer may choose to drop coverage. Frequent claims change your risk profile, and claims are maintained in what is known as the Comprehensive Loss Underwriting Exchange (CLUE) database.
- Disrepair is another reason. If you are not maintaining your property, the risk for claims increases.
- Lying or Making False Declarations to an insurer is a surefire way to get your policy canceled. Inaccuracies when you’re filling out forms can be construed as misstatements, so check and verify your answers. You must not lie to get a lower rate. For example, if you don’t have a security system and state that you do to qualify for the discount, that statement could hurt you in the long run.
- A “Material Change in Risk” recognizes that risks change, and those changes can get your policy canceled. These can include an increased frequency of damaging weather events such as wildfires and hurricanes. Pet owners should be aware that dog bites are often considered a material change in risk. These can cause your insurer to cancel your policy.
See how to save
The Bottom Line
Speaking with your insurance agent is one of the best ways to get answers to questions about your coverage. Understanding exactly what’s in your homeowners insurance policy will give you peace of mind that you’re properly covered in case disaster strikes.
* Savings, if any, vary based on consumer’s profile and other factors. Contact your insurance agent for more information.
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