Homeowners Insurance Policy Basics

Homeowners insurance can be complicated. Here's a breakdown of everything related to homeowners insurance to help you understand it.
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Owning a home is an exciting milestone in a person’s life. But it also brings a lot of responsibility with it. Disaster could strike at any moment. A fire, theft, or even an injury on your property. These are things that your home is at risk from daily.

Homeowners (or home) insurance helps protect your home from expensive damages and liabilities. It’s a must-have for any homeowner. Banks might even require you to have it if you have a mortgage. Without any insurance, you’ll likely end up paying for any damages out of pocket.

This article will help you get a good grasp of homeowners insurance. You’ll learn about whether or not you need a homeowners policy. We’ll also tell you about what homeowners does and doesn’t cover. This includes a breakdown of the various types of homeowners insurance. Finally, we’ll look at how much it can cost.

Do You Need Homeowners Insurance?

Insurance is important for any homeowner to have. But does anybody require you to have it? No state will require you to have homeowners insurance. In theory, it should be up to you.

However, banks will most likely require you to have homeowners insurance if you’re mortgaging your house. They can legally require you to carry a policy if you take out a loan. This is so they can protect their asset. It’s similar to when you finance a car, and the dealer requires you to buy full coverage.

Owning your house outright is the only way to avoid buying home insurance. There wouldn’t be any banks to tell you to buy it. But even if no one is forcing you, it’s still a good choice to have it. A random disaster could ruin your bank account. Having coverage in place can give you peace of mind and potentially save you thousands of dollars.

What Homeowners Insurance Covers

Homeowners insurance covers a lot when it comes to protecting your home. In general, you can expect to have protection from damages and injuries. Home insurance typically breaks down into four main types of coverage:

  • Dwelling coverage. Covers any damages to structures on your property. This is usually your home and possibly other attached structures.
  • Liability protection. Protects you from having to pay for damages related to injuries or other damages that happen on your property. This includes damages that people in your family (including pets!) cause to other people’s property. It also covers you from lawsuits that people may file due to bodily injury or property damage.
  • Personal belongings coverage. Covers any damage to your personal belongings in the event of theft, fires, storms, etc. This includes furniture, clothes, and any other belongings in your home.
  • Additional living expenses. This covers the costs of living elsewhere if you’re no longer able to live in your home due to excessive damages. Costs of living include hotels, food, and any other expenses you incur. Keep in mind that this only covers expenses that are more than your normal cost of living.

What It Doesn’t Cover

Homeowners insurance covers quite a bit. But it doesn’t make you bulletproof from all disasters to hit your home. Some types of natural disaster coverage aren’t part of a normal homeowners policy. For instance, you won’t find flood or earthquake coverage in any homeowners policies. Be sure to ask your insurer about what your home policy includes.

Your insurance also won’t cover any damages that you cause to your home. This includes any poor home maintenance on your part. Your insurer will not help you in this case.

Any cars on the property also won’t be part of your home policy. Your car insurance should be able to take care of any damages to your car. Comprehensive insurance protects your car from natural disasters and theft. Not having it means you’ll have to pay for any random damages yourself.

Types of Homeowners Insurance Policies

When you buy homeowners insurance, you’ll have the option to select one of many policy types. Each type of home insurance policy has its benefits. One of the main benefits is the number of “perils” it protects you from. There are 16 perils that your home is in danger from. According to the Insurance Information Institute (III), they are:

  • Fire or lightning strikes
  • Wind or hailstorms
  • Explosions
  • Riots or civil disturbances
  • Damage from a vehicle
  • Damage from an aircraft
  • Smoke
  • Vandalism
  • Theft
  • Volcanic eruption
  • Falling objects
  • Damage from ice or snow weight
  • Water damage from a discharge of faulty plumbing, sprinkler systems, heat or air conditioning, or appliances (such as a dishwasher or refrigerator)
  • Cracking, bulging, or ripping apart of a faulty air conditioning, hot water, or fire protection system
  • Freezing of a heating, plumbing, or any other water system
  • Accidental damage due to an artificial electrical current

You’ll usually find each type of policy with a number next to it. For instance, HO-1 is the first type, and so on. As the numbers get higher, so do the benefits. Here are the types of home insurance policies you’ll find:

  • HO-1. The most basic form of homeowners insurance. Doesn’t usually include any liability coverage. It protects you from up to 10 perils. You may not be able to find this type of policy from many insurers.
  • HO-2. Grants you limited coverage. Many insurers refer to it as “broad form” because it covers more perils than HO-1. This is still a very limited option.
  • HO-3. This is the most common and popular form of homeowners insurance. It protects you from any peril, except those that your insurer specifically notes. Includes all of the basic home coverages.
  • HO-4. For renters only. It protects their personal belongs from all 16 perils. But it doesn’t cover any damage to the structure. The landlord’s insurance would need to cover it.
  • HO-5. The most premium and comprehensive homeowners policy. Covers all 16 perils. It also adds extra protection for more expensive homes and personal property. This type of coverage may only be available for newer homes. Be sure to speak ask your agent about this policy’s availability if you want to buy it.
  • HO-6. This provides insurance for condo owners. It protects a condo’s walls, floors, and ceilings rather than the whole structure. You may see insurers call it the “walls-in” coverage.
  • HO-7. This type of policy is for mobile homes. It protects your personal belongings and the home’s physical structure. In general, it covers about the same number of perils as HO-2. Though, this may vary depending on your insurer. Your insurer should be able to help you if you’re wondering about the types of perils that HO-7 protects you from.
  • HO-8. Protects homes that are 40 years or older. Typically, HO-8 offers about the same amount of protection as HO-1 when it comes to perils. This makes HO-8 a very limited option.

Replacement Cost vs. Actual Cash Value

Your insurance company will reimburse you if your home sustains any damage that the policy covers. Depending on your policy, they’ll reimburse you using either the replacement cost or actual cash value of the home. Each coverage type will help fix your home, but they’re each a little different. Here’s how each type of coverage works:

Replacement Cost

Insurers use replacement cost coverage to help replace and repair any damages to your property. The key difference from actual cash value coverage is that replacement cost doesn’t deduct the depreciation of the asset (your home). Replacement cost often covers both dwelling coverage and personal belongings coverage.

It’s critical to know how much it’ll cost to replace your home and personal belongings. Otherwise, you could run into trouble if you’re trying to repair and replace your property. It’s also a good idea to keep an inventory of your personal belongings. This way, you’ll have a better idea of how much it’ll cost to replace your items.

Actual Cash Value

With actual cash value, your insurer will replace your asset and belongings after deducting any depreciation of them. Depreciation refers to “wear and tear” that reduces an item or asset’s value over time. Keep in mind that this’ll only cover damages from perils that your policy covers.

Unlike replacement cost, actual cash value may not pay you the full amount that you need to repair or replace your items. This is because your insurer will factor in any loss of value.

Homeowners Insurance Endorsements

Another key part of homeowners insurance are endorsements. You may also see insurers call this an insurance policy rider. Endorsements are extra coverage that your insurer makes available to you. It’s possible that any damages that occur to your home or belongings will cost more than your insurance limits. Endorsements help to protect you from having to pay for any damages that go over your insurance limit.

Types of Endorsements

There isn’t just a one size fits all endorsement that you can get. Insurance companies offer several types of endorsements to fit your needs. Common types of endorsements include:

  • Limited home business coverage. Offers the same liability protection for your small business as you’d have for your home.
  • Scheduled personal property. Extra coverage for expensive items in your possession i.e., jewelry, collectibles, etc.
  • Identity theft protection. Protects you from identity theft attempts and helps you recover afterwards.
  • Sewer backup and pump overflow. Covers any damages that a pump or sewer overflow causes to your house.

How Much Homeowners Insurance Costs

The price of homeowners insurance varies between each person. Insurance companies consider a few different factors when they’re setting your rates. Typically, they look at factors that tell them whether or not you’re a risk to file future claims.

How many claims you’ve filed in the past plays a huge role in your current and future rates. They might also look at your credit score and insurance history. Where you live can also be key. Crime rates, natural disasters, and other risks can cause your rates to rise. As will the number of claims that people are filing in the area.

To best understand how much you’ll pay for insurance, it’s a good idea to compare homeowners insurance quotes. This way, you can get the best deal by finding out what each company would charge you. Doing so could save you money on homeowners insurance.

Frequently Asked Questions

Q: What’s the best type of homeowners insurance policy?

A:  The most common homeowners insurance policy is HO-3. This policy protects you from all 16 perils or disasters that could damage your home. It also typically includes all four of the basic home coverage types:

  • Liability protection
  • Dwelling coverage
  • Personal belongings coverage
  • Additional living expenses

But the type of policy that offers you the most protection is HO-5. This is typically a good fit for those who have expensive belongings or a new home. It covers you from all perils as well.

Q: Does homeowners insurance cover flood damage?

A: In general, flood damage is not part of a homeowners insurance policy. This is a type of insurance that you would have to add separately. Depending on where you live, it might be a good idea to consider adding this to your insurance policy. You’ll have to assess your area’s risk for floods to decide if you need to add flood coverage to your policy.

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What Is Homeowners Insurance?

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