Insuring Your Home

Focus on home insurance
Home insurance 101 – What you need to know about homeowner policies

It’s fair to say that at least part of the American Dream still contains the idea of owning your own home. Whether the market is on fire or slumping, you still know people that are saving up and looking at potential homes. After weekends of open houses, you finally find the one and when the stressful closing procedures are finished, you get the keys. You’re officially a homeowner. It can be a very exciting time and while you may be eager to start ripping out that orange shag carpeting, making sure you understand home insurance policy is more important.

As a general rule, home insurance is fairly affordable and one of the best investments you can make since it’s protecting one of your biggest assets but it can also be confusing to a first time homebuyer. Even a seasoned homeowner should revisit their policy at least once a year to make sure that it’s up to date. Once you understand how your policy works, you’ll be prepared for the worst (orange shag carpeting excluded).

Basic Home Insurance

When you begin your search for insurance, don’t make the mistake of picking your policy based on price. You could end up with the wrong coverage. Do your research and figure out the value of your personal property and the type of risks you face. Certain locations will be at a higher risk for natural disasters than others. This is something you need to take into account.

A simplistic definition of homeowner’s insurance is that it’s meant to protect your house in case of an accident. If you’ve ever sat down with an insurance agent though, you know it’s not that simple and for good reason. Since a house is where you spend the majority of your time, the risk of something happening is huge. That’s why homeowner’s insurance is so extensive.

Your most standard insurance policy is going to provide coverage in six different areas:

  • Dwelling

This is going to cover any kind of damage and/or loss to your house’s structure that falls under a covered claim. Not everything that can cause damage is covered and this is called exclusion. It’s best to buy more coverage to protect against exclusions.

  • Detached Structures

The normal amount of coverage assigned to your detached structures is 10% of your coverage limit from your HO1. If you decide you need more protection, you can purchase more under this form.

  • Personal Property

If your personal property is stolen or damaged, your homeowner insurance policy can cover for the loss. Just like with your HO1, the claim needs to be part of your coverage because some exclusions exist. Taking an inventory of your belonging may be necessary to understand just how much coverage you might need.

  • Loss of Use

If your home is damaged under a covered claim that qualifies under HO1, 2 or 3 and you need to stay in a hotel for an extended amount of time, your insurance can cover the costs.

  • Personal Liability

If someone decides to file a lawsuit against you or any member of your family listed on your policy for property damage or bodily injury, your insurance company can help. This also includes any lawsuit as a result of a pet you own.

  • Medical Payments

If someone is injured on your property but they don’t want to file a lawsuit, your Medical Payments coverage can help pay their medical bills. Accidents happen all the time and most often, happen at home.

Forms of Insurance

Once you understand the different areas your policy can cover, you can narrow your focus to the specific forms of policies that are offered. Depending on the type of house you own or whether you rent, picking the right form will determine your coverage. There are six common forms offered:

HO-1 Home Insurance

This provides basic coverage to your home and personal belonging. Claims are subject to approval based on certain criteria. This policy is rarely offered due to its coverage inefficiency.

HO-2 Home Insurance

Normally, this is where your form search will start. It is a peril based approach that covers your house and personal belonging as long as the damage occurs as a result of pre-determined causes.

HO-3 Home Insurance

As far as homeowner’s policy forms goes, this is one of your best options. As long as your claim doesn’t fall under a specific list of exclusions you are covered. Your personal belonging claims are subject to a pre-determined list of perils.

HO-4 Home Insurance

This is renter’s insurance. While it doesn’t cover your rented structure, it covers your personal belongings.

HO-5 Home Insurance

This is similar to the HO-3 policy but better. Not only does your house receive special coverage but so does your personal property. This means as long as you claim is not due to exclusion, you are covered. This is the best you can buy.

HO-6 Home Insurance

Commonly referred to as condo insurance, this will provide broad coverage for your unit and personal belongings.

The Value of Your Home

To determine how much your insurance is going to cost, the value of your home needs to be determined. Certain factors like age and location are going to be taken into consideration and when you and the insurance company decide on coverage, the amount will depend on what is known as the loss settlement clause. This is basically the amount you will settle for in case your home is damaged or destroyed. There are a few ways you can settle. The two most commons are actual cash value and replacement cost.

Actual Cash Value

If you insure your home at actual cash value, your run the risk of being underinsured. If damage occurs, your insurance company will estimate the claim at its value at time of loss. This means that if you bought a $3,000 couch 5 years ago, its actual cash value at time of destruction might be $750. This policy is cheaper than most but also won’t pay much when you need it.

Replacement Cost

This is the recommended form of loss settlement. When at all possible, make sure your home and your belongings are insured under the 100% estimated new replacement cost. If you lose that $3,000 couch, your insurance company will pay you what it would cost to replace. While this policy is going to cost most than your average ACV, it’s worth it for the extra common sense protection.

Understanding how an insurance policy is formed can help even most novice home buyer protect their investment. To truly start earning equity on a house, you usually need to stay for at least 3-5 years so taking a day or two to study up on how it will be protected seems minor in the scheme of things. As soon as your policy is set and your payments are budgeted, you can start tackling the fun stuff.