Everything You Need to Know About Homeowners Insurance
Homeowners insurance covers damage to your home and its contents. It also typically reimburses you for losses due to theft and pays out if visitors to your property are injured. Your policy may also pay for living expenses, such as a hotel stay, if your home becomes uninhabitable.
Learn how to choose the best home insurance for your particular needs.
Find the Right Home Insurance Policy
Being prepared when you speak with an insurance agent can help you make the best choice for your home insurance policy. You might begin by making a home inventory list of your possessions, including information such as serial number, cost at time of purchase, and current cost to replace.
Shopping for insurance through an independent agent may be your best option because these agents aren't beholden to one insurer and therefore can compare policies from various companies.
Insurers take many factors into consideration when determining whether they will offer you a policy and its cost, including the following:
- The size of your home
- Your neighborhood's crime rate
- The prevalence of particular natural disasters where you live
- Your credit history
Those factors are also considered when it's time to renew your policy.
Understand What’s Covered
When buying insurance, it's crucial to get covered for the perils you want to be protected against and for those items you want to be compensated for if they are destroyed or stolen.
Forms of Insurance
In most states, there are a few standard levels of home insurance, called forms, to choose from. The HO-3 is the most common form homeowners choose to purchase. It covers all perils that might harm your home except for those that are specifically excluded.
An HO-3 policy also reimburses you for the loss of specifically named possessions and offers personal liability coverage if a visitor sues you because they were harmed on your property.
The HO-5 is another common homeowners insurance form. It differs from the less expensive HO-3 in that it covers all personal property except for those items that are specifically excluded.
Endorsements, Special Limits, and Additional Policies
To make additions, deletions, or changes to an insurance contract, you can include endorsements, or riders. If you own a particularly valuable painting, you might want to add an endorsement that you will be reimbursed in full for it. That's because home insurance policies typically set special limits on the amount of reimbursement you can receive in categories such as artwork, jewelry, appliances, tools, electronics, clothing, cash, firearms, and securities.
If you want coverage for a flood, you will generally have to buy a separate policy. If you want to be reimbursed for losses that result from an earthquake or a sewer backup, you may be able to attach a rider to your homeowners policy or you may have to buy a separate policy.
Perils That Are Not Covered
Homeowners policies will generally not cover damage caused by the following things:
- Nuclear disaster
- Failure to do routine maintenance or make repairs
- Animals, including termites
- Government action
- Loss of power
They will also not cover corrosion, rust, rot, deterioration, or anything that could be categorized as normal wear and tear.
Understand How Claims Get Paid
In almost every situation, you will have to pay a deductible—some amount of cash—before your insurer will begin paying on your claim. You will also have to provide proof that you incurred the losses you are claiming.
There are a few different ways a claim might get paid, and the basis of claim you have chosen will be spelled out in your policy.
Actual Cash Value (ACV)
This basis takes into consideration depreciation—the decline in value of an item over time—when determining the current cash value. For example, if your five-year-old TV was stolen, you won't get reimbursed for the cost of a brand-new one.
In this claims process—the most common one—you will first be given partial reimbursement, typically either the ACV or 50% of your declared replacement cost. Once you have replaced the items or rebuilt your home, your insurance company will review your receipts and invoices and may then pay you the balance of the replacement cost.
Extended or Guaranteed Replacement Cost
These claims-paying options are designed to prevent you from being reimbursed too little to cover your actual replacement cost. For example, if the price of certain building materials has risen, you might be on the hook for the amount of the increase.
If you chose to pay extra for the extended replacement cost option, you would be covered for an increase in replacement cost of 20% to 25%. If you had opted to pay even more for guaranteed replacement cost, you would be covered for the actual replacement cost, regardless of the increase.
This final option is available only for those with high-value homes who are willing to pay commensurately high premiums. When you make a claim, the insurance company will write you a check for your verified losses, and you are under no obligation to rebuild your home or replace your possessions.
Don’t Be Afraid to Update Your Coverage
Before you renew your coverage, you should list any significant new purchases and home improvements you've made. If you've decided you want a higher level of coverage but are leery of the resulting higher premiums, ask your agent how much you would have to increase your deductible to get the extra coverage.
If you are considering changing your insurance company and have a history of not making claims or making only minimal claims, ask your existing insurer for a letter of claims experience. It might help you lower your premiums.
The Bottom Line
Your homeowners insurance is only as good as what's in the final policy. Work with your agent to get the coverage you want—and nothing more—and make sure what you've agreed to actually ends up in the policy. That way, if you have to make a claim because of an unfortunate loss, you won't be in store for any surprises.