Homeowners Insurance: The Basics
Protecting your home and its contents is probably one of the most important financial decisions you will make. Understanding the details regarding your home and what insurance does can help you be sure you have the right coverage.
Home Sweet Home
For most of us, our homes are our most valuable possession, and your single greatest investment. Whether we own or rent, our home provides a place where we plan to keep our family and belongings safe. A homeowners insurance policy provides the assurance that, if you were to suddenly lose your home or its contents, you would be able to start over. A stipulation of your mortgage is that you carry a required amount of homeowners insurance. The amount of insurance you carry may begin with the amount required by your mortgage lender, but your coverage should also reflect the details of what you need to cover your possessions.
Even if you own your home outright, the dwelling and its contents need to be insured or you might find yourself without a place to live. Be aware that a broad-based homeowners policy may provide more coverage than you really need and represent a higher premium than if you took the time to identify your insurance needs more specifically.
Coverage of Policies
Homeowners insurance policies offer coverage for different types of disasters, or in insurance speak, risks. Risks (sometimes called perils) are a defined group of potential damage-causing events that may, or may not, be covered, depending on your policy.
Fire or lightning
Windstorm or hail - think hurricanes
Riot or civil commotion
Damage caused by aircraft
Damage caused by vehicles
Sudden or accidental damage from smoke
Vandalism (sometimes called malicious mischief)
Damage by glass or safety-glazing material that is part of a building
Flood or rising water (must be insured with a separate flood insurance policy. It is not covered by homeowners insurance.)
Depending on the coverage selected, homeowners may be covered for the above 11 risks, plus these additional six risks:
Falling objects - damage occurring from object falling from the sky (meteorites, airplanes, etc.)
Weight of ice, snow or sleet
Three categories of water-related damage from home utilities or appliances:
o Accidental discharge or overflow of water from your plumbing
o Freezing of plumbing
o Sudden and accidental tearing, cracking, burning or bulging of a steam or hot water heating system
Electrical surge damage
Types of Policies
There are six basic types of homeowner insurance policies that are considered standard in the insurance industry. All include liability coverage, and exclude flood and earthquake coverage. The differences in these policies are the risks covered.
HO-2: Homeowners: Dwelling and contents for all 17 types of risks.
HO-3: Homeowners (Broad Form) Dwelling and contents from all 17 types of perils, plus any other peril not specified in the policy, except for flood, earthquake, war, and nuclear accident. The HO-3 type policy is the most common in use, with over 80% of all households in the U.S. in possession of this broad risk insurance according to the National Association of Insurance Commissioners.
HO-4: Renters Personal property from all 17 types of perils
HO-6: Condo owners Personal property from all 17 types of perils
HO-8: Homeowners: (Older Homes) Dwelling and contents from the first 11 types of risks but only for repairs, not for replacement cost. Usually written for homes with historical value that would be impossible to replace. HO-8 differs from HO-1 by covering repairs or actual cash values and not rebuilding costs. In this case, the home's replacement cost is significantly higher than its m Dwelling and contents for the first 11 types of risks market value.
Homeowners tend to think about insurance in terms of loss of property but the liability portion of homeowners insurance protects against personal injury suffered by others. For example, your dog bites a neighbor or someone slips on your porches wet steps. Under such circumstances, your liability insurance will cover any medical or legal costs that may arise. Umbrella policies are available to provide additional liability insurance.. An umbrella policy provides an amount insurance above the limit on your your homeowners and automobile policies, usually in the amount of one million dollars. Umbrella policies protect you in the event of someone attempting to go after your home or other assets to pay for damages. Your financial situation will determine if you need such insurance. Talk to your insurance agent for more advice about your personal circumstances.
Homeowners insurance is comprehensive in nature, and it covers a broad array of losses, including the loss of personal property when you are away from home including your lost or stolen luggage. While every policy is a little different, the same basic coverage property and liability is included in most basic policies. Check your own policy to confirm your coverage.
Another consideration when shopping for an insurance policy is the amount of the deductible, or the amount you pay out-of-pocket each time you make a claim against your policy. Raising your deductible is a good way to decrease the overall premium cost of your policy, but remember that you will have to come up with that much in cash if your house is destroyed.
Most homeowners policies cover almost every possible disaster or loss except those caused by floods and earthquakes. Examine your policy to see if any other coverage is needed to protect you from catastrophe. Depending on where you live, the expense of coverage for flood and earthquake insurance will vary. Find out how susceptible your region is to flooding and earthquakes before you make any decisions about this additional coverage. Your lender will require you to maintain flood coverage if your property is in a flood plain management area, as established by the National Flood Insurance Program (NFIP). There are other exclusions that may specifically impact you and your coverage.
Coverage only extends to primary insured
Coverage for personal property and liability may include your spouse (if he/she is not listed with you as primary insured); residents (your children or anyone else residing in your home under the age of 21 in the care of any member of your family); employees (housekeepers, au pairs or gardeners); or guests and other visitors, if you request coverage.
Homeowners insurance is something you do not want to be without. Catastrophic events aren't planned, they just happen. At that point, it's too late.