The "Everything You Need to Know" Guide: Understanding Home Insurance
Many things play a part when deciding if your home insurance policy is the best for you. If nothing else, remember this: Your insurance policy is only as good as what is in the contract. All insurance policies carry clauses that can enhance the coverage—meaning bigger claim payments—or place limits on coverage that yield lower claim payments.
How to Get the Best Home Insurance Policy That Pays the Most in a Claim
Asking the right questions is key to taking control of your home insurance policy search. Be prepared when you speak with an insurance representative so you can make the best choice for your circumstances and get your money's worth if you ever need to file a claim.
You probably know the basics. An insurance policy sets a value for the amount of insurance on your building or personal property. The mistake most people make is stopping the research there.
Insurance is not so simple. Understanding the type of policy you need—and what it includes and excludes—will keep you covered when you need it most.
Cut Through the Jargon to Understand What's Covered
The general insurance coverage offered to you is often defined by the type of policy form used. For example, there's the Homeowners Broad Form (HO-2), Homeowners Special Form (HO-3), and the Homeowners Comprehensive Form (HO-5).
Each of these policy forms offers varying levels of coverage—the higher the HO number, the better the coverage. The HO-2 offers limited coverage. The HO-3 offers intermediate coverage—all-risk on the building, but only named perils (limited coverage) on the contents. The HO-5 is considered the best form because it covers personal property and the building for full coverage on an all-risk basis.
Tip: If you can't afford the highest level of coverage, ask if you can add the coverage you need by an endorsement, or increase your deductible.
The trick to finding the best insurance policy for your home is discovering the one that will give you the most advantage in a claim. You might think that by buying an HO-5, you're getting the best coverage, but this is where the key differences come into play.
You also want to look at the various value-added features, special limits, clauses, and claims handling philosophy. If you are changing your insurance company and have few or no claims, ask for a letter of claims experience because showing your insurance history will get you a lower price.
What Are Home Insurance Special Limits?
Special limits are clauses within your insurance policy that specify areas where the coverage will be limited in the event of loss. If any are relevant to you, you can ask to add coverage through a rider or endorsement. Here is a checklist of items that typically have special limits or exclusions associated with them:
- Collections and collectibles
- Fine Arts
- Sporting Equipment
- Swimming pools
- Electronic Data Restoration
- Business Property
Keep in mind there may be other things your policy limits, which is why a discussion with an agent and written explanation are recommended before you make any home insurance purchase.
Choose Home Insurance to Fit Your Lifestyle and Needs
Home insurers tailor their offerings to their target clients. Insurance companies are just like other businesses, they have to come up with points of differentiation and will evolve by adding more options to the policy basics. To understand, simply ask your insurance representative where the insurance they are quoting you is superior to their competitors.
If you are dealing with a captive insurance agent who works for one company, you may be at a disadvantage because they may not have this information at hand.
Shopping for insurance through an independent agent who can compare various insurance companies will give you the best advantage.
Be sure to ask:
- Does coverage apply if an item is misplaced or disappears?
- What happens if your home is under-insured? Is there a capped payout?
- What happens if after a claim the by-laws have changed and this increases the cost of rebuilding?
- How does the policy handle claims payments for items like antiques or fine arts?
- Is there a waiver of deductible if the loss reaches a certain amount? Does the policy contain certain coverages that are not subject to a deductible? Waivers of deductible can be very advantageous. Having your deductible waived if a claim reaches a certain value can save you thousands of dollars.
- How does your policy cover various forms of water damage?
- Do you have small children at home, or college-aged kids?
- Do you have parents in a nursing home?
- Do you have pets?
- Do you travel often?
You might not see the connection to buying home insurance, but there are limits or special features that could work to your advantage by exploring these questions. If incorporated into your policy, it may save you from having to spend more money on additional coverage elsewhere.
Some high-end home insurance policies will have higher limits for contents off- premise or temporarily removed. This could save you money on travel insurance.
How Does a Claim Get Paid?
How a claim gets paid is called the basis of claims settlement. The three types are:
- Actual Cash Value
- Replacement Cost
- Replacement Cost with no obligation to replace, often referred to as a cash-out option.
All situations are usually subject to a deductible. When you buy a policy, what you will get paid in a claim is not always clear.
- Every claim is subject to you providing a proof of loss.
- The insurance company will then assess or analyze your declaration in the proof of loss and will reserve the right to make their assessment. They will pay the claim based on the basis of claims settlement stated in your policy.
The least desirable settlement option is Actual Cash Value (ACV) because it offers you the depreciated value of property at the time of loss.
Put in simple terms, in an ACV claim, if you have a 5-year-old TV, you'll get enough money from your claim to buy a 5-year-old TV, if you can find one at a garage sale!
Replacement Cost: A Two-Step Process
Replacement Cost Insurance is the most common type of coverage and it is a fair settlement. However, that doesn't mean you can buy everything new. What you will get during the claims process is the option to provide a list of all the things you had (which should include: make, model, where you bought it and when) with an assigned value.
Then the insurance company may pay you a partial amount, sometimes half the value. When you replace the item(s), they will give you the difference. So, what does this mean?
In a two-step replacement claim, be prepared to pay out half the value of the items you need to replace before you get fully compensated.
A lot of people become very frustrated with this. However, this is how the insurance contract works, so make sure you understand your wording and ask your insurance agent to explain the specifics to you fully. Also, be sure to ask how this applies to items you cannot replace.
The One-Step Cash-Out Option
Offered by high-end insurers whose premiums often cost more than regular HO-5 homeowner policies, the cash-out option could save you a lot of time and money in the long run.
Not only do these exclusive policies provide higher limits and more special clauses than the standard HO-5, no one will chase you down to see if you've replaced items or property.
In the one-step process, you declare your loss items, get the final tally of how much it will cost you to replace it all, and a check is written to your name. No more questions asked.
Insurers offer this coverage only to clients who meet insurance company underwriting criteria. There's typically a minimum requirement for the home value insured, as well as a credit score review of financial stability. The gold standard for those who qualify, this type of policy usually includes liability insurance as well.