What is homeowners insurance?

Homeowners insurance will reimburse you for damages to or destruction of your home or your personal belongings to an incident protected by your policy. In certain cases, it can even protect you if you kill or cause collateral harm. Insurance provides homeowners three major roles:

• Repair your house, yard and other structures.
• Repair or replace your personal belongings.
• Cover personal liability if you’re held legally responsible for damage or injury to someone else.

The insurance cover for homeowners is not needed by statute, however if your lender has a mortgage you would probably need to insure your home for the purpose of protecting your investment. Home insurance is almost always a sensible investment, even though you do not have a mortgage, providing both property and liability coverage.

What does homeowners insurance cover?

Standard homeowners insurance policy typically includes six distinct types of coverage.

Types of homeowners insurance

Insurance of homeowners is available in various kinds, known as 'political types.' Some forms provide a broader coverage than others, so knowing the difference is worthwhile. Although specifics can vary according to state or firm, these types are very common.

MOST POPULAR: HO-3 INSURANCE

The so-called "special type" HO-3 insurance policies are by far the most popular. According to the National Association of Insurance Commissioners, HO-3 insurance accounted for almost 80 percent of the coverage for owner-occupied houses in 2018. If you have a mortgage, at least the amount of coverage is likely to be essential for your lender.

HO-3 legislation usually covers harm from your home for any reason other than one expressly excluded by the policy, such as an earthquake or flood. However, when it comes to your assets, HO-3 normally only protects damage from 16 "named hazards" if you do not purchase additional coverage:

• Fire or lightning.
• Smoke.
• Windstorms and hail.
• Explosions.
• Riots.
• Damage from aircraft.
• Damage caused by vehicles.
• Vandalism.
• Theft.
• Volcanic eruptions.
• Falling objects.
• Weight of ice, snow and sleet.
• Water overflow or discharge from household systems like plumbing, air conditioning and appliances.
• Freezing of those same household systems.
• Sudden damage from a power surge.
• Sudden tearing, cracking or bulging of a hot water system, steam system, air conditioning or fire protective system.

BROADEST COVERAGE: HO-5 INSURANCE

The most generous homeowners coverage is provided by a HO-5 insurance policy. It pays for any damage except for damage by name excluded from the agreement. According to NAIC in 2018, HO-5 insurance represented approximately 13 percent of homeowners. It is generally only available for well-maintained homes in low-risk areas and not offered by all insurers.

Often "complete form" or "premier" coverage is called HO-5 policies. In certain situations, however, the "premier" strategy of HO-3 can also be called without providing a wider coverage for HO-5. Please ask your agent or manager if you want HO-5 insurance coverage.

LIMITED COVERAGE: HO-1 AND HO-2 INSURANCE

HO-1 and HO-2, insurance companies that only pay for damages caused by problems specified in the policy, are far less common. These two categories together represent approximately 8% of the household coverage. HO-2, the most popular insurance, usually only protects the house and property for the above 16 reasons. HO-1, the most barebone style insurance for householders, is not commonly available. It deals with losses from a list of risks much shorter than HO-2.

Other policy forms include homeowners' HO-4 insurance, condominium owners' HO 6 policy, mobile home insurance HO-7 policy and HO-8 policy.

What’s not covered by homeowners insurance

Also the largest insurance policy for homeowners won't cover anything that could potentially go wrong. You should not deliberately harm your home, for example, and then expect your insurance to pay for your house. Policies usually often exempt damage from other sources, for example:

• Flooding, including drain and sewer backup.
• Earthquakes, landslides and sinkholes.
• Infestations by birds, vermin, fungus or mold.
• Wear and tear or neglect.
• Nuclear hazard.
• Government action, including war.
• Power failure.

But for some of these risks, you can purchase separate coverage. Flood insurance and earthquake insurance are separately available and you may want or need windstorm insurance in hurricane-prone countries.

Talk to your insurer if your policy does not cover damage concerns and incidents. In certain instances, you can add so-called backings to your policy, which normally cost additional security.

How much homeowners insurance do you need?

COVERING YOUR HOME

If your house is lost, you need enough homeowners' insurance to cover the loss. To estimate the reconstruction costs, increase local building costs per square foot in the square footage of your house. You should be able to assist your home insurance company or insurer in calculating the substitution rate.

Don't just concentrate on what you paid for the home, what you owe to your mortgage, property tax or the cost you would get if you were to sell. You could end up with the wrong amount of insurance if you base your policies on those figures. Set your housing cap at the expense of reconstruction instead. You can be sure that you will have sufficient funds for maintenance and will not pay more than you need for coverage.

COVERING YOUR STUFF

You usually want coverages for 'personal property,' your belongings and your insurers will set the cap automatically, that is, at least 50%. your dwelling coverage. If you do not think the cap is sufficient for your things, you can however lower this limit if you need or buy additional coverage.

The easiest way to determine how long it takes to replace all your things is a comprehensive house inventory. A stock record can also be useful later, if you have to claim and know what you missed exactly. You can make a list or take a video of your home and all your things with your smartphone as a quick inventory hack.

Homeowners insurance deductibles

Household plans normally have a premium — until the insurer begins paying the sum that you have to cover. The allowance may be:

• A flat dollar amount, such as $500 or $1,000.
• A percentage, such as 1% or 2% of the home’s insured value.

Your insurer subtracts your deduction number when you receive a claim check. For example, if you have a deduction of $1,000 and the insurer accepts a repair charge of $10,000, the insurer will cover the remaining $9,000 and the remaining $1,000 will be liable for it.

You typically reduce your premium by choosing a higher allowance. However, if you need to make a lawsuit, you will be more responsible for the financial burden. In contrast, a lower deductible means that you would have a higher rate, but after an injury, the insurer will almost take up a complete tab.

Be aware that certain plans have deductibles on some forms of claims such as wind, hail, storm, or earthquake, which are often higher. For instance, for most damages, a policy might be deductible at $1,000 with an optional earthquake protection deduction of 10 percent. If an earthquake causes damage to a house with a housing coverage of $300,000, the insurance will be $30,000.

In general, liability claims have no deductible.

Replacement cost vs. actual cash value

If your house is lost, you probably won't just write a check on the sum shown on your policy for your homeowners. Your payment will vary depending on your reconstruction and the amount of coverage you have chosen, and in many cases contractors reconstructing your home are compensated directly.

One important choice is whether to select coverage that pays for your house, even though it exceeds your insurance limits. For example, if your region has raised construction costs while your coverage remains high. This circumstance can occur. Here is an overview of a number of possible choices.

Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies use this method not for the house itself, but for personal property it is popular. This ensures that you probably get a fraction of what you would have to purchase new products for goods that are several years old.

Functional replacement cost value coverage costs to fix your home with identical but even cheaper products. Damaged plaster walls may, for instance, be replaced by cheaper drywalls.

Replacement cost value coverage pays to repair your home with materials of “like kind and quality,” in order to replace plaster walls with plaster. The payout will however not surpass the coverage limits of your policy.

Some plans protect your personal belongings at replacement cost. This ensures that the insurer pays no deduction to replace the old items with new. Be sure to review policy information before you buy if this feature is important to you - this is a popular choice but usually you pay.

Extended replacement cost value coverage will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home. The cap could be a dollar or a percentage number, 25% above the amount of your home coverage. If reconstruction is costlier than you thought, this gives you a pillow.

Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits. Not all insurance companies offer this level of coverage.

How much does homeowners insurance cost?

According to a CompareInsurance report, the average cost of homeowners' insurance for 2020 was $1,631 per year. But, depending on your position and the coverage you purchase, rates will decrease much or much higher. Your loan score may also be a factor in most states.

Insurers typically include the following in order to assess your home insurance price:

• What it would cost to rebuild your home.
• Your home’s age, condition and other characteristics.
• Distance from your home to the nearest fire hydrant.
• Your city’s fire protection rating.
• Your claims history and the claims history of others in your neighborhood.
• Your coverages, limits and deductible.
• Items that pose major injury risk, such as pools or trampolines.

If the premium seems to be too high, homeowners insurance can be saved easily. Many insurers, for example, give discounts for home and car insurance combinations. You may also have a lower rate for common security characteristics like burglary alarms and deadbolt locks. And it is always a smart idea to make sure you have the best price and compare home insurance quotes.

Know that this coverage makes you bang for your buck before getting too stressed on your policy costs. The fee you pay is a fraction of the cost of rebuilding and replacing your property.

Key takeaways:

• Homeowners insurance provides financial relief if a covered event damages your home, property or personal belongings.
• It can also pay out when you’re held responsible for an accident or injury.
• In some cases you can get additional policies for events not covered by your regular home insurance, such as flooding.

Your house is over your head rather than just a roof. This may be your most important asset—and one that you would probably not be able to replace when catastrophes hit. This is why it is so vital to protect your investment with the right insurance plan.