Protect Your Belongings With The Right Home Insurance Policy
For the first time home buyer there is a lot of information to learn and understand before signing a mortgage. One item of importance is the homeowners insurance policy.
Considering the enormous cost of an average home, it goes without saying that the majority of people could not afford to pay for the replacement of a house in the event of a disaster. That is why it is so important to have a good insurance policy that takes care of all your needs.
Learn what makes up a homeowners insurance policy so that when the time comes to purchase one, you have a better idea of what coverages you’re looking for.
Meeting Lender’s Requirements
Although there is no state or federal law requiring homeowners to have a specific insurance policy, if you finance a home the lender will indeed require an insurance policy. In the event that your home is paid off, it is still a very good idea to have an insurance policy for your property.
Here are the main ways that an insurance policy can benefit you:
- Protect you in a case of liability – If your pet bites a visitor, or if a neighbor happens to fall in your walkway and sustain an injury, you could be responsible for paying the medical costs. Your homeowners insurance policy would take care of the costs
- Fix damage to the home and other items on the property – If your home is damaged in a natural event, such as a thunderstorm or tornado, the homeowners insurance policy would pay for the repairs.
Breaking Down The Home Insurance Policy
Your policy will be comprised of various coverages. Some of these coverages will be applied automatically while others are options that you may choose to add
- Dwelling: This takes care of any damage that may be incurred on your
physical home as well as any building connected to the home, such as a garage.
- Personal property: This takes care of either the price to replace or fix any item in the home that may be damaged. Personal items include clothes, dishes, furniture, appliances, curtains, etc.
- Medical coverage: this will pay for the necessary medical treatments for someone that happens to be injured while at your home
- Additional structures: if you have items such as a toolshed or a fence on your property, this coverage will repair or replace those structures in the event of damage
- Loss of Use: if the damage to your home forces you to temporarily live in a hotel or some other arrangement, this will cover extra expenses like meals and moving costs while you wait for the repairs to be finished.
Add on Coverage
- Scheduled property – This type of coverage is designed for higher priced items like artwork or jewelry
- Water damage – if you live in an area where burst pipes are a problem, this would be a wise add-on option to purchase. This is different from water damage caused by flood, rain, or other natural disasters
- Enhanced property coverage: this covers you in the event that construction prices take a significant hike and the price to rebuild your home is more than your original coverage.
Items Covered, and NOT Covered, By A Homeowners Insurance Policy
The two most common types of policies for homeowners are the HO-3 and the HO-2. The HO-2 will only cover a certain list of items. These items are:
- Damage caused by an aircraft
- Lightning or fire damage
- Objects that fall on the home
- Damage from smoke
- Discharge or the overflow of water
- Damage from hail or windstorm
- Damage caused by artificial electrical current
- Damage created by vehicle crashing into property
- Eruption of volcanoes
- Unexpected bulging, tearing or cracking of the home
- Snow, sleet, ice damage
- Freezing of household system
An HO-3 policy will go beyond the items listed above. Generally speaking, the HO-3 policy will cover all risks. But, the insurance company can exclude specific types of peril and they will be spelled out in the policy.
The policy that has the widest type of protection is called an HO-5 policy. This policy will cover not only your home but also your personal items for almost any situation.
However, there is a major caveat. Certain circumstances are not covered by any policy. These situations include:
- Nuclear Hazard
- Normal wear and tear
- Government action
In areas where earthquakes or flooding is prevalent, it is possible to buy a separate policy against those events.
Determining The Home Insurance Deductibles And Limits For Your Situation
You should always have a policy that will pay for the actual cost to rebuild your entire home. This figure is different from the price paid to buy the home as well as the market value of the home. The price to rebuild is factored on the costs of construction rates in your area. If you only have the market value for your policy it may not cover the actual cost or it may be too much value and cost you in a higher policy.
Your insurance agent should have access to the construction rates in your area. They can use the rates, along with square footage of the home, to determine the replacement cost.
As a rule of thumb, the personal property coverage will start at 50% of the dollar amount for the dwelling. You have the option of lowering the amount if your belongings do not have as much value or you can choose to raise the amount to cover higher priced items.
This is why it is a good idea to have an accurate home inventory record. The record can tell you how much it would cost to replace all of your belongings and help you provide documentation to your agent in the event of damage or loss.
How Home Insurance Deductibles Work
As the name implies, a deductible is an amount of money subtracted from a policy claim. Most insurance agencies will allow you to have a generic deductible amount whether it is for a window damaged by a hail storm or the replacement of a roof due to a heavy snowfall.
When you file a claim with the insurance company, the deductible amount will be removed from the claim. For example, if the price to replace the damaged roof is $10,000 and you have a $1,500 deductible, then you will receive a check for $8,500.
Choosing the deductible amount is a personal preference. Generally speaking, higher deductibles will allow you to save money on the monthly premium. However, it also means you are responsible for more of the financial outlay in the event of a claim.
Summing Up What A Homeowners Insurance Policy Is
Hopefully, you will never need to use your homeowners insurance policy to its fullest extent. However, in the event that you do it is one of the best investments you can make to protect your home.
Additional Homeowners Insurance Resources
Insurance Podcast via Paul Sian
Home Insurance For First Time Buyers: What You Need to Know via Bill Gassett
What Is Covered by Standard Homeowners Insurance? via Insurance Information Institute