Everything You Need to Know About Homeowners Insurance

Homeowners insurance covers damage to your home and its contents. In most cases, it also 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 needs.

How Do You 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. Be sure to include information such as serial number, cost at the time of purchase, and current cost to replace.

Shopping for insurance through an independent agent may be your best option. These agents aren't tied to one insurer; they can compare policies from various companies.

Insurers look at many factors when determining whether they will offer you a policy and its cost. They will consider:

  • The size of your home.
  • Your neighborhood's crime rate.
  • The prevalence of certain natural disasters where you live.
  • Your credit history.

Those factors are also taken into account when it's time to renew your policy.

What Does Your Policy Cover?

When buying insurance, it's crucial to get covered for the perils you want to be protected against. You'll also want coverage for the 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 to choose from. These levels are called "forms." The HO-3 is the most common form homeowners choose. 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 certain possessions. And it offers personal liability coverage if a visitor sues you because they were harmed on your property.

The HO-5 is another common form. It differs from the less expensive HO-3; it covers all personal property except for those items that are specifically excluded.

Endorsements, Special Limits, and More

To make changes to an insurance contract, you can include endorsements. These are also sometimes known as "riders." For instance, let's say you own a valuable piece of art. You might want to add an endorsement that you will be reimbursed in full for it. That's because home insurance policies often set special limits on the amount of reimbursement you can receive in certain categories. These may include artwork, jewelry, appliances, tools, electronics, clothing, cash, firearms, and securities.

If you want coverage for a flood, you will likely 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:

  • Nuclear disaster
  • Failure to do routine maintenance or make repairs
  • Animals, including termites
  • Mold
  • War
  • Government action
  • Loss of power

They will also not cover corrosion, rust, rot, deterioration, or anything that could be seen as normal wear and tear.

How Do Claims Get Paid?

In most cases, you will have to pay a deductible 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. The basis of claim you have chosen will be spelled out in your policy.

Actual Cash Value (ACV)

This basis takes depreciation into consideration when finding the current cash value. Depreciation is the decline in the value of an item over time. For instance, let's say your five-year-old TV was stolen. You wouldn't get reimbursed for the cost of a brand-new one.

Replacement Cost

This is the most common type of claims process. You will first be given partial reimbursement; in most cases, it's either the ACV or 50% of your declared replacement cost. Once you have replaced the items or rebuilt your home, your insurer will review your receipts. It may then pay you the balance of the replacement cost.

Extended or Guaranteed Replacement Cost

These options are to prevent you from being reimbursed too little to cover your actual costs. For instance, if the price of 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%. What if you opt to pay even more for guaranteed replacement cost? You would be covered for the actual replacement cost, no matter the increase.

Cash Out

This final option is only for those with high-value homes; it's also for those who are willing to pay very high premiums. When you make a claim, the insurance company will write you a check for your verified losses. Then, you are under no obligation to rebuild your home or replace your items.

Why Should You Update Your Coverage?

Before you renew your coverage, you should list any significant new purchases. Also, be sure to make note of any home improvements you've made. Let's say you decide you want a higher level of coverage, but you're leery of the higher premiums. Ask your agent how much you would have to increase your deductible to get the extra coverage.

If you are thinking about changing your insurance company and have a history of not making claims or making only minimal claims, ask your current insurer for a letter of claims experience. It might help you lower your premiums.

The Bottom Line

Your 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. Also, make sure what you've agreed to actually ends up in the policy. That way, if you have to make a claim because of a loss, you won't be in store for any surprises.