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Your insurance coverage is one of your biggest challenges when considering homeownership. Lenders require that you insure your home to protect their interests.
Unfortunately, learning about the features and benefits of your home policy can prove tedious. All the jargon and numbers are intimidating if you don’t understand them but learning the basics is vital.
Knowing the ins and outs of a standard homeowners policy, what it covers and doesn’t, and how to unlock the best prices and discounts will save you time and money.
This post will guide you through the tedious paperwork and process of securing homeowners insurance coverage. By the end, you will:
- Understand the types of coverage options available and their features;
- Get best practice steps for shopping for your insurance;
- Discover potential obstacles in the way of you securing a home insurance policy;
- Know the importance of filing claims responsibly;
- Learn how to save money and unlock discounts on your home insurance premiums.
So let’s begin with the basics.
I | Homeowners Insurance Basics
Definition
Homeowners or Home Insurance is a form of property coverage designed to secure private homes and personal items in the event of losses and damages. It also includes liability coverage where accidents occur in the home or on the property.
Why is home homeowners insurance important?
- It provides property coverage. In the unfortunate event of damage to your home’s physical structure or personal property damage, your policy claims can help you repair or rebuild.
- It provides liability protection. If someone suffers any bodily injury or dies on your property, your legal fees and responsibilities will be paid for by your home policy.
- Your mortgage company requires it. Home insurance doesn’t only secure your interest; it protects the monetary investment of lenders as well. Should you file a claim for damages to your home, your mortgage company will require you to sign them as a co-insured.
- It’s cheaper than the alternative. If you do not purchase an insurance policy independently, lenders may subject you to “force-placed” insurance. This form of insurance comes with a higher premium than regular insurance as lenders consider it a “higher risk” policy.
- It offers you and your family peace of mind. Homeowners insurance is your safety net if you’re not part of the affluent 1% with enough disposable income to replace an entire house and its content in a snap. Don’t go bare. Your insurance pays to repair or rebuild your home after a disaster.
- It covers additional living expenses (ALE). Basic homeowners insurance provides temporary living expenses if a disaster forces you and your family out of your home, whether because of repairable damage or destruction.
What are the pitfalls of opting out of an insurance policy?
If you already have a homeowners policy and you’re considering going without, rethink your decision. You’ll be hard-pressed to get another; if you do, brace yourself for higher premiums.
Every financial decision you made in the past determines your present. Insurers consider past policies and claim history when determining if you are worth the risk.
As Timothy Perr, Managing Principal of the consulting firm Perr and Knight, warns, many companies won’t write you if you have dropped your homeowner’s insurance.
A dropped policy for many insurers is a red flag. It brings into question your ability to pay a new premium when you couldn’t manage the policy you dropped. Or, on the shadier side, they may assume that you’re preparing for a near-future claim.
Yes, you may have a genuine reason for the previous cancellation, but either way, you’ll be labeled a risk. And like force-place insurance, with higher risks come higher premiums.
II | Understanding Your Homeowner Policy
Home insurance products vary between states and insurers. Read your policy, ask questions, and ensure you understand what’s covered and what’s not and if there are any exclusions, exemptions, and penalties.
You don’t want to realize later when a disaster happens that your policy offers little to no coverage for the damages. Or your payout compensation offers inadequate cost coverage.
Home insurance rates fluctuate. Premiums are dictated in large part by the total sum cost for home and content replacement. Other cost factors include:
- Where you live: your city, state, and disaster zone (flood, earthquake, tornado, etc.)
- The insurance company you choose for coverage
We’ll examine additional factors that affect your premium throughout this article.
How do I choose the best homeowners insurance policy?
What coverage you buy depends on the features they provide and how well they align with your present needs. Over time, significant life changes might affect the effectiveness of your coverage. Review your homeowners policy yearly to determine if it continues to offer you adequate protection.
Types of Policies
Policy #1: HO-2
The HO-2 policy offers limited coverage for specific events listed by your insurer. It doesn’t provide the best coverage, and most agents (or brokers) will warn you against it. You want a policy that offers you the most flexibility and protection, and the HO-2 falls short of both.
Policy #2: HO-3
The HO-3 policy is a popular choice that gives you “open perils coverage.” It protects you against sudden or unexpected disasters except those expressly excluded from your insurance contract.
It also covers your personal content, but in this case, only from listed or named perils.
Say, for instance, you live in a location prone to wildfires, and you’re insured for fire damage. If you lose your belongings during a flood, your insurance company will not cover it.
Policy #3: HO-5
The HO-5 is the most comprehensive form of home insurance you can invest in. It gives you the same coverage for sudden or unexpected disasters like the HO-3, but with fewer exceptions. You can, in most cases, set your own coverage limits for this policy.
Special Coverage
There are particular policies issued for specific types of properties. For instance, if you own a condo or live in a co-op building, the HO-6 policy covers the physical parts of the structure you own. Personal belongings and liability coverage included.
Other specific policies include those for vacation homes, rentals, and mobile homes.
A standard homeowners insurance policy has protection limits.
Understand what the “listed” and “named disasters” are and the conditions that apply for filing a claim. Standard home policies exclude several natural disasters like damage caused by groundwater, floods, landslides, and even earthquakes.
The good news is that you can customize standard homeowners insurance to fit your needs. We’ll cover add-on insurance in the next section.
Here are some of the common disasters/perils covered:
- Theft or vandalism
- Falling debris (including tree branches)
- Sudden ruptures or overflows in plumbing, heating, air conditioning appliance, or a sprinkler system
- Damage caused by fire or smoke
- Damage caused by vehicles or aircraft
- Lightning, hail, and windstorms
- Sudden and accidental loss by artificially generated electrical current
- Damages caused by snow, ice, or sleet
- Volcanic eruptions
- Explosions, riots, and civil unrest
Other types of perils that may be excluded (unless specified by you):
- Mold
- Sewer backups
- Pet damage
- Damage caused by birds, rodents, and insects
- Pollution damage
- Deliberate destruction or any damage caused by a homeowner’s neglect and normal wear and tear
Suppose you operate a business on your premises or inside your home with specialized equipment and stocked inventory. In that case, you’ll require a separate commercial policy.
Rider Insurance
Rider Insurance provides additional coverage not offered by your standard policy by adding or amending your coverage.
Though riders come at an additional cost, it is better to be safe than sorry when a disaster hits. There are, however, some disasters that require a separate policy altogether.
Earthquake Coverage
Some insurance companies offer coverage as an amendment or separate policy if you live in an earthquake zone.
Your location and the construction materials will affect your premiums with wood frames, for example, having higher premiums than brick buildings. The difference in the premiums defined by materials used considers your home’s resistance to damage.
With 500+ active faults, California has one of the highest earthquake risks. According to the California Earthquake Authority, the average annual premium is $707.
Flood Insurance
On the other hand, Flood insurance comes only as a separate policy. Premiums vary as insurers evaluate past floodings in your area. Again, premiums will fluctuate depending on the danger level of your neighborhood.
If the premiums make you think twice about purchasing flood insurance, consider that one inch of water can cost more than $25,000 in damages.
Rider insurance can extend to your valuables. Despite the extension, not all your personal items will be covered or protected for the total replacement cost.
The potential shortfalls of your home insurance policy are why you should read and understand all its clauses and dollar limits. From there, you can fortify your protection by adding riders.
Quote-gathering for premiums has never been easier with the available new apps and advanced search algorithms.
Payout Options and Deductibles
Home insurance offers several payout features.
Actual Cash Value (ACV)
Don’t be fooled by the name ‘Actual Cash Value.’ The simple fact is, the price you paid for your television two years ago is unlikely to be the cost of it today. Prices have increased. Newer models with upgraded features are on the market, and sellers remove old models from their shelves.
ACV offers the depreciated cost value of your home and personal property. Your reimbursement hinges on the age and current state of the item. If you file a claim for your two-year-old television with a malfunctioning button, your insurer will pay out the matching cost for one of like kind. Not for a newer model at current market value.
Though premiums are cheap with the ACV feature, you’ll foot most of the bill for repairs and replacement out of pocket.
Pros
- It comes with more affordable premiums.
Cons
- It gives the smallest payout.
- Payments are subject to deduction for depreciation.
- It probably won’t replace your home and possessions, leaving you underinsured.
Replacement Cost Value (RCV)
Replacement Cost Value is ACV without depreciation deductions. It reimburses your losses at the current market value. You will pay more premiums for the added protection than if you opt for ACV.
Pros
- Insurers calculate payouts without depreciation.
- There’s a higher chance of replacing or repairing your home and belongings if you insured them for 100% of the replacement cost.
Cons
- Premiums cost more than the Actual Cash Value Coverage.
- You will only receive coverage up to policy limits.
Guaranteed Replacement Cost (GRC)
Option three takes the provisions of the RCV and boosts it to another level. In times of national disasters, material and labor costs increase with the increased demand. A GRC guarantees that your insurance company will pay a certain percentage over your original policy limits.
Premiums on GRC coverage are the most expensive.
Pros
- It’s the highest and most comprehensive protection coverage.
- Payouts cover the cost of replacements and repairs even if it exceeds the policy limit.
Cons
- It has the most expensive premiums out of the three.
- Older homes may not be eligible for GRC.
- It’s not available everywhere.
Deductibles
A deductible is any expense you cover out-of-pocket before your insurance covers the rest.
If you choose a $1000 deductible and your final repair bill is $10,000, your insurance company will subtract $1000 and send you a check for $9000.
On the other hand, if your deductible is $3000 and the repair bill is $2000, you don’t qualify for a payout. Your policy will only cover claims over your deductible amount.
Calculating Your Options
The price you pay for your home includes the value of the land space as well. Minimize premiums and deductibles by ensuring you quote only the cost of replacing or repairing the physical structure of your home, outbuildings, and your most precious possessions.
In other words, the most accurate homeowners insurance quote depends on you:
- Correctly calculating the replacement and repair costs for your home and valuable items
- Understanding the coverage options offered
III | How to Shop for the Best Home Insurance Policy
Insurance companies charge different rates for similar packages. Shopping around will help you discover the best premium possible, but you should consider some essential steps.
There is security in working with a professional.
The world is a dark and dangerous place. There will always be unscrupulous individuals hoping to con unwitting victims. Watch out for these people. Due diligence is your armor against scams.
In your search for professional assistance, you’ll encounter two types of insurance agents:
- Exclusive or Captive agents who sell the products offered by a single company.
- Independent agents who represent several companies and give you side-by-side quotations of each.
Of the two, independent agents come with the most attractive advantage of multiple quotes in one place. Still, they also come with the most risks.
If you choose an independent agent, look up their credentials and licensing in your state insurance department. Ensure they are who they say and represent the companies mentioned in their quotes.
While you’re at it, gather as much proof about their work history as possible from their company profile or client testimonials.
Outside of being defrauded of your hard-earned money, using an unlicensed insurance agent or broker will affect your claim payouts in the event of a disaster.
To ensure you work with a capable agent or broker, ask your close friends and family for references to agents they’re working with if they also have an insurance policy.
You need an up-to-date home inventory list.
Create a complete list of your personal property along with their purchase prices.
A home inventory list removes the guesswork from setting the best limit to cover repairs and replacement. Cross-reference and compare with the items covered by your policy for gaps you may need to fill with rider insurance.
Another advantage of your home inventory list—if a disaster occurs, the updated records of your belongings will expedite the claims process. Keep scanned copies of your receipts for added proof of cost in case you need to dispute a claim denial or settlement amount.
Store your inventory list with your other policy documents in a safe place. Refresh the list after making big purchases or receiving expensive gifts.
IV | Tailor Home Insurance for Your Lifestyle and Needs
The basic formula you need to remember: high risk = high premium.
If you own a swimming pool, trampoline, or any other outdoor equipment that may cause death or injury, know your premiums will reflect it.
Do you have dependents in your home? Small children or elderly parents? Or pets? If so, that may affect your premium as well.
Do you travel often? Consider the limit for coverage on items taken off-premises, whether for vacations or business. What are the covered losses? How can you extend your homeowners insurance to factor in your travel habits?
Explore all the details of your life when tailoring your home insurance package. It may save you money with bundled insurance (more on that later).
V | Factors That Affect Your Insurance Premium
The underwriting process, which determines your premiums, is affected by several key factors. Some of these factors are within your control, while others aren’t.
Here’s a list of the most common ones you’ll face.
Your Credit Score
Your credit history forms the foundation of your financial life. It determines your ability to rent an apartment, take out loans, and, yes, in some states, your home insurance rate.
California and Massachusetts prohibit insurers from using your credit history when determining insurance rates. Maryland blocks them from applying it to homeowners insurance specifically, while Florida only allows partial use across all insurance types.
An Insurance Quotes study showed if your credit score ranged from fair to median, you might pay up to 32% more than someone with excellent credit. If your credit score is “poor,” that percentage goes up to 100%.
Your Location
If we’ve learned anything in the past decade, it’s the devastating effects natural and human-made disasters can have. In locations prone to floods, earthquakes, and wildfires, homeowners have seen their premiums inflated with the growing risks.
Suppose your home is near an emergency service like a fire station, in an area where the above disasters are not primary concerns. Your proximity weighs in your favor of obtaining a low premium.
Building Material, Labor, and the Age of your Home
Wood frame houses come with higher premiums than brick houses. It doesn’t matter if both homes value the same amount or are in the same area. Insurers regard the materials used in your home’s construction to determine durability.
If there is a fire, the chance of total destruction increases with a wood-frame home.
Additionally, labor costs have also increased. Between the labor and construction materials, the overall cost of rebuilding will exceed the original building costs.
The age of your home and roofing are also areas of consideration. The older your home, especially your roof, the more susceptible they are to damage.
Home Maintenance and Security
Most policies state two critical conditions for coverage: sudden and accidental. This wording immediately excludes anything caused by negligence or poor home maintenance.
Examples of these include:
- Water damage resulting from a leaky water faucet neglected for months, and
- Flooding due to poor drain maintenance.
Trim overhanging tree branches regularly. Inspect your irrigation system for leaks that may compromise your home. Inspect your roof yearly for weather and wear and tear damage.
If your insurance company finds any evidence your oversight led to the damages, they can deny your claim.
Securing your home against possible loss will save you money on premiums. Security and sprinkler systems, deadbolts, and other loss prevention devices weigh in your favor.
Replacement and Repair Costs for your Personal Property
As with replacing your home’s structure, insurers calculate your personal property’s total cost in your premiums.
How much you’ll receive in a claims payout is set by your coverage limits and whether you opted for ACV, RCV, or GRC. Ask your agent to help you estimate the replacement cost for your belongings. Your home inventory list will give your agent an understanding of your assets.
Types of Pets You Own
Standard insurance doesn’t cover pet damage, and your furry and exotic friends could increase your premiums.
Your insurance policy includes liability for all family members, pets included. In particular, insurers see more aggressive breeds as high risks. They make up a third of liability claims.
Insurance companies place some larger breed dogs on their exemption list or inflate your insurance premiums since they’re considered an added liability. Some commonly excluded breeds include:
- Siberian Huskies
- German Shepherds
- Rottweiler
- Doberman Pinscher
- Mastiff
- Pit Bulls Terriers
- Akitas
VI. Claim Responsibly
Do you need to file a claim?
Most insurance companies offer phone and online claims processing. But before you begin the process, evaluate the damage.
During your preliminary assessment document and take pictures of the damage as evidence. Create an estimated cost sheet for repairs and replacements. Your estimate will help you determine if it makes financial sense to file your claim.
Every claim on your record will drive up your premium. If you can replace or repair the damage on your own, do so. Otherwise, call your insurance company, or file online. The pictures you took will act as evidence in defense of your claim.
The Filing Process
The next step after you’ve filed your claim is a formal assessment. Your insurer will send an insurance adjuster who’ll investigate the damage and total cost for replacement/repairs. The findings of this assessment will determine whether the adjuster recommends reimbursement or not.
It’s important to note that policies have claim windows—deadlines from when the damage occurred until your insurance company receives the paperwork. A typical claims window is 14 days. Insurance companies set a deadline to prevent the problem from getting worse because of your delay. Should you delay and the situation worsens, they have grounds to deny your claim, and you’ll end up paying for replacement and repairs yourself.
Additional Living Expenses (ALE) Claims
One essential benefit of your insurance is Additional Living Expenses (ALE). If your home is uninhabitable and you must leave the premises while repairs are underway, your insurance covers temporary relocation.
Reread your policy for all the details on how ALE applies to you. Most insurers offer ALE coverage based on a fixed percentage of your total dwelling coverage amount.
Covered expenses may include:
- Moving costs
- Rental and hotel fees
- Gas for travel
- Food
If you cannot pay for these expenses upfront, ask your insurance agent if you can file a claim for payment in advance. Either route you choose, save all receipts and submit them to your agent as part of the claims process.
Claims Can Raise Your Premium
The general notion among insurers is that once a claimer, always a claimer. Claiming for frivolous, minor damages you could potentially pay out of pocket paints an even more dismal picture.
Once an insurer labels you a potential “serial claimer,” they’ll charge you holding this “risk” of future claims in mind.
Don’t think that switching from one insurer to another after filing a claim means you’re safe. Insurance companies compare notes.
An insurer can track your claims history with databases like the Comprehensive Loss Underwriting Exchange (CLUE). CLUE holds all records of claims you’ve filed, vehicle and home, for up to seven years.
If you buy a home and the previous owners also filed claims in the last seven years, their claims can affect your premium. In the eyes of your insurer, your home is high risk. And as with your location and credit score, high risk equals inflated premiums.
Consider the financial repercussions and if the claim is worth it. Set aside emergency funds for minor damages and claim for substantial damages.
VII | How to Save Money on Homeowners Insurance
Be a model homeowner.
Minimize the chance of your insurance company labeling you as a “potential future” risk.
Invest in home improvement and protective devices that make your home safer—burglary alarm systems, deadbolts, and smoke alarms. Maintain the integrity of your home, trimming trees, cleaning drains, and fixing minor leaks in your yard and home immediately.
Install storm shutters, and reinforce your roof against wind damage. Add earthquake brackets to secure heavy furniture—service air conditioners and water heaters to prevent water damage.
Bundle your Insurance for multi-policy discounts.
Insurers offer discount packages for customers who keep different types of insurance with their business. In other words, if you bundle your home policy with auto or life insurance from the same company, you may get discounts of up to 5% or more.
Raise Your Deductibles.
Higher deductibles mean more out-of-pocket payments in a disaster, but it cuts down on your monthly premium payments.
Consider this, instead of paying high premiums, set aside an emergency slush fund. Monies you can use in minor disasters to avoid higher policy rates.
Keep a spotless credit history or as spotless as possible.
If you live in a state where your credit score is a factor, any minor blemish can set you in line for higher premiums. They will also raise the chance of an insurer denying your application. Check your credit report semi-frequently for any red flags and query all discrepancies.
Conclusion
No one likes to pay insurance, but it’s a financially wise thing to do. The alternative is to leave you, your family, your home, and your property unprotected from possible disasters.
Don’t allow your insurance policy to be another terms and conditions you sign without reading. Tailor your package with your unique lifestyle and needs in mind. If the worst happens, general or incomplete policies can financially disadvantage you.
If you’re underinsured, you can find yourself in debt, dipping into your savings and taking on loans you may struggle to repay.
Only after you’ve set and understood your home insurance coverage limits can you rest assured that you and yours are protected.
