COVER • JANUARY 6, 2018
When Eric Rosenberg bought his first home in his mid-20s, a condo in Denver, and was tasked with getting homeowners insurance, he didn’t find his lender being much help.
“My bank told me that I had to get homeowners insurance, but didn’t give me much guidance beyond that,” says the 33-year-old Rosenberg, who has now gone through the process three times, in three different states.
If you’re a new homeowner and are having trouble making heads or tails of homeowners' insurance, you’re not alone. In fact, according to a J.D. Power survey, only 48% of customers fully understand their policy.
To learn everything he could about homeowners' insurance policies, Rosenberg turned to his personal support network—and the internet—before making a decision.
“In every area, insurance rates tend to vary widely, says Rosenberg, who is the founder of Personal Profitability. “It’s 2018—use the internet!”
“There are some great options out there to find out everything you need and compare rates before you buy. Don’t listen to high-pressure agents or salespeople. Figure out what makes the most sense for you, then reach out to the insurance company.”
The more you know…
Taking the time to know what you’re buying is worth the investment. It really is a case of the more you know the better.
Doing your own research before you opt into a plan will not only help you understand what’s best for you but also help you get your head around what you can expect from your policy.
Overall satisfaction among homeowners who understand their policy is 92 points higher than those who don’t fully understand their coverage, according to the J.D. Power survey.
To help you understand homeowners insurance and find the policy that’s right for you, we’ve got all the basics right here:
What is homeowner's insurance?
Homeowners insurance is a type of property insurance that covers private residences. It offers financial protection in case of an accident, theft or disaster involving your home.
A standard homeowner's insurance policy typically covers structural damage, personal belongings, liability, and additional living expenses.
1. Structural damage
This is one of the key differences between homeowners vs renters insurance. In the case that your home suffers damage from theft, vandalism, or is destroyed by disasters such as fire, windstorms, hail, lightning or explosions, homeowners insurance can cover the costs of repairing or rebuilding it.
Your mortgage lender might refer to this as hazard insurance, but don’t let that trip you up. It’s just part of your homeowner's policy.
Most policies also cover detached structures that are separate from your house, such as a garage or tool shed. These structures are generally covered up to a percentage of the insured value of your home’s physical structure, for example, ten percent.
2. Personal belongings
Personal belongings that are stolen, damaged, or destroyed by an included disaster on your policy are typically covered. These may include:
● home decor
● wine and spirits
● sporting goods
● children’s toys
Your level of coverage for personal belongings will generally be a percentage of your home’s insured value. So if your home is insured up to $100,000, and personal belongings coverage amount was to be 50 percent of this, the limit would be $50,000. The actual percentage used will vary from policy to policy.
Your homeowner's insurance policy will also cover belongings that aren’t inside your home but included on your property: trees, shrubs, BBQ grills, and patio furniture and so forth.
High-value items, such as jewelry, furs, artwork, and antiques are usually covered in a standard policy. There are assigned dollar limits, so you’ll want to read the fine print.
3. Liability protection
Liability protection covers lawsuits against bodily injury or property damage that you, family members, or pets may cause to others. Such protection covers court costs and any awards you may have to pay in court.
Your policy also includes what’s called no-fault medical insurance. So if a visitor happens to be injured in your home, their medical bills can be paid by your insurance company.
4. Additional living expenses
Let’s say your home burns down and it’s now uninhabitable. While your home is being rebuilt, you’ll need to live elsewhere for a short while. Additional living expenses (ALE) cover any living away from home costs and eases the stress of being temporarily uprooted. These expenses may include lodging, meals at restaurants, storage fees, and other costs incurred while your home is being rebuilt.
And if you rent out part of your home, the amount you would’ve collected on rent while your home is being repaired would also be covered.
There are usually payout limits and time restrictions with ALE coverage. The good news is these caps are typically separate from your policy’s cap on repairing or rebuilding your home.
What won’t homeowners insurance cover?
A standard policy typically doesn’t cover wear and tear, or damage caused by an earthquake or flood. It also won’t cover mold if caused by say, high humidity or a preventable water leak.
How does homeowners insurance work?
Just like auto insurance or pet insurance, homeowners insurance has the following components:
This is the amount you pay to keep your coverage. Depending on your policy and insurance company, you can pay monthly, quarterly, twice a year or annually.
A deductible is an amount you pay out of pocket before your insurance kicks in. Deductibles may be either a set amount or based on a percentage of your claim. Typically the lower your deductible, the higher your premium.
With homeowners insurance, you don’t pay the insurance company the deductible. Instead, it comes out of your payout. So if you’re filing a claim for $20,000 worth of damages and your deductible is $1,000, you’ll just receive $19,000.
Home insurance deductibles are per incident. So unlike with, say, medical insurance, where once you meet your annual deductible you’re set for the rest of the year, when it comes to home insurance you’ll need to pay a deductible each time you file a claim.
This is the maximum amount the company will pay for your losses. There are different limits on covered losses for the physical structure of your home, detached structures, personal belongings, liability protection and additional living expenses (ALE).
There are also a few different ways your claim will be settled depending on your policy. Actual Cash Value will reimburse you for the replacement cost minus any depreciation. Because the cost can vary so much overtime when it comes to property, this kind of policy could mean the limit on your coverage ends up coming in significantly below the cost to repair or even rebuild your home.
For this reason, Replacement Cost Value, or Extended Replacement Cost Value are better choices to cover damage to your home.
Replacement cost will cover the cost of the repair or replacement of damaged property with materials of similar kind and quality – ie depreciation will not be deducted.
Extended replacement cost provides extra protection – usually a set percentage above your policy’s limits to rebuild your home. This would guard against sudden increases in costs to repairs.
How much homeowners insurance do you need?
As you might’ve guessed, there’s a no one-size-fits-all answer. When figuring out how much coverage you need, you’ll need to factor in the following:
Current construction costs
In case your home needs to be rebuilt from the ground up, how much would it cost? You’ll need to factor in the costs of local construction, the square footage of your home, the type of materials used, special features, and the style of your house. Let’s not forget inflation, which may affect the cost of rebuilding your home.
When it comes to coverage limits for structural damage, remember that you base it on the cost to rebuild your home, not the actual market value of your home. So if your house has a market value of $1 million, but costs $300,000 to rebuild it, you’ll need $300,000 in coverage.
The value of your personal belongings
To figure out how much coverage you need, conduct a home inventory, which includes:
● snapping photos of all your belongings;
● jotting down details of your items, such as make, model, serial numbers, where you bought it, and what you paid for it;
● holding on to receipts and credit card statements
How much liability coverage you’ll want
You should get enough liability coverage to protect your assets in case of a lawsuit. Most policies offer a minimum of $100,000 in liability insurance.
Your standard of living. In case you need to be temporarily housed in a separate dwelling, figure out how much coverage you’ll need with additional living expenses (ALE).
How much would it cost to rent somewhere else, or stay in a hotel or Airbnb for the amount of time it could take to repair or rebuild your home? What would the cost of food and meals out tally up to? Will there be additional living expenses, such as fuel or other transit costs?
Liability claims generally account for the highest average amounts claimed. However, the claims tend to happen a lot less frequently.
What are the different types of homeowners insurance?
There are several different kinds of homeowners' insurance, and it can be hard to pin down which one you need. These types of policies are known as “forms,” which are categorized into the following:
HO-1: Basic policy. This is the most simple policy and covers 10 specific perils. You may be able to get coverage for belongings inside your home, too. Note it’s no longer offered in most states.
HO-2: Broad policy. This policy covers all 10 perils included in an HO-1 policy along with an additional six. A broad policy typically covers not only the structure of your home but your personal belongings as well. It may also cover liability protection.
HO-3: Special policy. This is the most common type of policy. An HO-3 policy provides financial protection from all perils unless otherwise noted.
HO-5: Comprehensive policy. An HO-5 form is similar to an HO-3 policy, except it can offer greater coverage with your belongings and liability protection. Because it’s more comprehensive than an HO-3 policy, it costs more.
HO-8: Older home policy. This policy is created for older homes where the cost to replace the home is higher than its actual cash value.
Generally, the HO-3 and HO-5 are the ones you are most likely to be dealing with.
How much does homeowners insurance cost?
The average annual premium for homeowners insurance in 2015 was $1,173 according to the National Association of Insurance Commissioners (NAIC). That being said, the cost of homeowners' insurance spans a large gamut. For instance, the average premium for a private dwelling in Utah was $673 a year, while in Florida it was $1,993.
There are myriad factors that affect the overall cost of homeowners insurance:
Location. Areas that are high in density and population tend to have higher real estate and construction costs. In turn, that could bump up the costs of homeowners insurance. And if you’re living that’s experiencing rapid economic growth or is in a vacation area frequented by tourists, that could also increase insurance premiums.
Odds of catastrophe. No matter where you live, there’s no escaping the perils of Mother Nature. But certain areas in the U.S. are more prone to certain types of catastrophe. For instance, the West is more prone to brush fires. In the southwestern states, you’ll find higher incidences of tornado damage.
Construction costs. The cost of construction depends on the type of residence, how large it is, building materials, building regulations, and climate. If your home is in an area prone to earthquakes or hurricanes, designs to help protect it the structure, such as an earthquake retrofit, may impact the cost of repairing or rebuilding your home.
What factors can affect the cost of your premium?
When insurers offer you a quote, they may take into account:
● Age of your home;
● Square footage of your home;
● Construction type;
● Number of inhabitants;
● Crime in the neighborhood;
● Roof type;
● Your personal claim history;
● Your personal credit score;
● If you have a home security system in place;
● If you have pets
Your deductible and the total amount you’d like covered will also affect your premium.
Tips on purchasing homeowners insurance
The hardest part of dealing with home insurance is knowing you have the best rate, explains Rosenberg. “When I bought my most recent home in California, I decided to go with an online agent that could show me rates for multiple major insurance companies at once,” says Rosenberg.
However, you don’t have to do all the legwork yourself. Look for services that can provide you quotes from different providers at the same time.
Avoid taking out a policy where claims would be settled by the Actual Cash Value of the items damaged or destroyed. Because of the depreciation, the money you would receive would be less than what you would need to replace items that get damaged.
Say a fire destroyed our property. Any expensive items of clothing that you lost would cost a lot to replace. Yet the amount you would receive based on actual cash value would be determined on their worth as used clothes. This would be significantly less than the cost to buy them new again.
Don’t make claims
If you already have a policy, try to minimize the number of claims you make. Because this has the potential to increase your premiums so if the amount you claim for is relatively low, you might end up saving money by holding off making a claim and keeping your premiums lower.
Besides shopping around for price, look at reviews on reputation, customer service, and the financial stability of an insurance company. Read up on reviews and ratings on sites such as the Better Business Bureau, A.M. Best, Standard & Poor’s, and the National Association of Insurance Commissioners (NAIC).
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