Your home is more than just a roof over your head. It may be your most valuable asset — and one you likely can’t afford to replace out-of-pocket if disaster strikes. That’s why protecting your investment with the right homeowners insurance coverage is so important
What is homeowners insurance?
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. It has three main functions:
- 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.
Homeowners insurance coverage isn’t required by law, but if you have a mortgage, your lender will likely require you to insure the home to protect its investment. Even if you don’t have a mortgage, home insurance is almost always a wise purchase, giving you both property and liability coverage.
What does homeowners insurance cover?
Standard homeowners insurance policies typically include six distinct types of coverage.
| Coverage type | What it does | Typical amount |
|---|---|---|
| Dwelling | Covers damage to the home and attached structures, such as a porch. | Enough to rebuild your home. |
| Other structures | Covers stand-alone structures on your property, such as a fence or shed. | 10% of dwelling coverage. |
| Personal property | Pays to repair or replace belongings that are stolen or damaged in a covered event. | 50% to 70% of dwelling coverage. |
| Additional living expenses | Helps pay temporary living expenses while your home is being repaired. | 20% of dwelling coverage. |
| Liability | Pays if you injure someone or cause property damage unintentionally or through neglect. | $100,000 to $500,000. |
| Medical payments | Pays to treat someone injured on your property, regardless of who’s at fault. Also pays if you, a family member or a pet injures someone elsewhere. | $1,000 to $5,000. |
Types of homeowners insurance
Homeowners insurance comes in several types, called “policy forms.” Some types provide more expansive coverage than others, so it’s worthwhile to know the difference. Although details can differ by state and company, these kinds are fairly standard.
MOST POPULAR: HO-3 INSURANCE
HO-3 insurance policies, also called “special form,” are by far the most common. HO-3 insurance accounted for nearly 80% of coverage on owner-occupied homes in 2017, the most recent year for which data is available, according to the National Association of Insurance Commissioners. If you have a mortgage, your lender is likely to require at least this level of coverage.
HO-3 insurance policies generally cover damage to your home from any cause except those the policy specifically excludes, such as an earthquake or flood. However, where it concerns your belongings, an HO-3 policy typically covers only damage from 16 “named perils” unless you buy extra 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
An HO-5 insurance policy provides the most extensive homeowners coverage. It pays for damage from all causes except those the policy excludes by name. HO-5 insurance accounted for about 14% of homeowners coverage in 2017, according to the NAIC. It’s typically available only for well-maintained homes in low-risk areas, and not all insurers offer it.
HO-5 policies are sometimes called “comprehensive form” or “premier” coverage. However, an HO-3 policy may also be labeled “premier” in some cases, without offering the broader coverage of an HO-5 policy. If you want HO-5 insurance coverage, be sure to ask your agent or representative.
LIMITED COVERAGE: HO-1 AND HO-2 INSURANCE
Much less popular are HO-1 and HO-2 homeowners insurance, which pay out only for damage caused by issues listed in the policy. Together these two types account for about 7% of homeowners coverage. HO-2 insurance, the most common of the two, typically covers your house and belongings only for the 16 causes listed above. HO-1, which isn’t widely available, is the most bare-bones type of homeowners insurance. It covers losses from an even shorter list of perils than the HO-2 form.
Other policy types include HO-4 insurance for renters, HO-6 for condominium owners, HO-7 for mobile homes and HO-8, a rarely used type that provides limited coverage for older homes.
What’s not covered by homeowners insurance
Even the broadest homeowners insurance policy won’t cover everything that could possibly go wrong with your home. For example, you can’t intentionally damage your own house, then expect your insurer to pay for it. Policies also typically exclude damage from other causes, such as:
- 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.
However, you can buy separate coverage for some of these risks. Flood insurance and earthquake insurance are available separately, and in hurricane-prone states, you may also need or want windstorm insurance.
Talk to your insurer if you have concerns about damage and events your policy doesn’t cover. In many cases, you can add what are called endorsements to your policy — which usually cost extra — to provide more protection.
How much homeowners insurance do you need?
You need enough homeowners insurance to cover the cost of rebuilding your home if it’s destroyed. The right amount of dwelling coverage will depend on local construction costs.
Don’t focus on what you paid for the house, how much you owe on your mortgage, your property tax assessment or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.
To estimate your rebuilding cost, multiply the square footage of your home by local construction costs per square foot. Your home insurance agent or insurer should be able to help you calculate the replacement cost.
For “personal property,” your belongings, you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way. However, you can lower this limit if needed or purchase extra coverage if you think the limit isn’t enough to cover your things.
A thorough home inventory is the best way to pinpoint how much it would take to replace all your stuff. An inventory record can also come in handy later if you have to make a claim and need to know exactly what you lost. You could make a list or, as a quick inventory hack, take a video of your home and all your items using your smartphone — should you need to file a claim later, this can help make your case.
Homeowners insurance deductibles
Homeowners policies typically include an insurance deductible — the amount you’re required to cover before your insurer starts paying. The deductible can be:
- A flat dollar amount, such as $500 or $1,000.
- A percentage, such as 1% or 2% of the home’s insured value.
When you receive a claim check, your insurer subtracts your deductible amount. For instance, if you have a $1,000 deductible and your insurer approves a claim for $10,000 in repairs, the insurer would pay $9,000 and you would be responsible for the remaining $1,000.
Choosing a higher deductible will usually reduce your premium. However, you’ll shoulder more of the financial burden should you need to file a claim. A lower deductible, on the other hand, means you might have a higher premium but your insurer would pick up nearly the whole tab after an incident.
Be aware that some policies include separate — and often higher — deductibles for specific types of claims, such as damage from wind, hail, hurricane or earthquake. For example, a policy might have a $1,000 deductible for most losses but a 10% deductible for optional earthquake coverage that was added to the policy. This means if an earthquake damages a home with $300,000 worth of dwelling coverage, the deductible would be $30,000.
Liability claims generally don’t have a deductible.
Replacement cost vs. actual cash value
If your home is destroyed, your homeowners insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose — and much of it will be paid directly to contractors rebuilding your home, in many cases.
One key decision is whether to choose coverage that will pay whatever it takes to rebuild your home, even if that cost exceeds your policy limits. This situation may arise, for instance, if construction costs have increased in your area while your coverage has remained level. Here’s a rundown of several options you may encounter.
Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings. For items that are several years old, this means you’ll probably get only a fraction of what it would cost to buy new ones.
Functional replacement cost value coverage pays to fix your home with materials that are similar but possibly cheaper. For example, damaged plaster walls could be replaced with less expensive drywall.
Replacement cost value coverage pays to repair your home with materials of “like kind and quality,” so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.
Some policies offer replacement cost value coverage for your personal items. This means the insurer would pay to replace your old belongings with new ones, with no deduction for depreciation. If this feature is important to you, make sure to check the policy details before you buy — this is a common option, but you typically need to pay up for it.
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 limit can be a dollar amount or a percentage, such as 25% above your dwelling coverage amount. This gives you a cushion if rebuilding is more expensive than you expected.
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?
Homeowners insurance cost an average of $1,211 a year in 2017, according to the latest data from the NAIC. But prices can skew much higher or lower, depending on your location and the amount of coverage you buy, as well as your credit score and home’s value. Average rates ranged from $690 a year in Oregon to $1,943 in Florida.
To determine your home insurance price, insurers typically consider:
- 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 your premium seems too high, there are easy ways to save on homeowners insurance. For example, many insurers offer a discount for bundling your home and auto insurance. You might also get a lower rate for having common safety features, such as burglar alarms and deadbolt locks. And it’s always a good idea to shop around and compare homeowners insurance quotes to make sure you’re getting the best deal.
Before getting too stressed over the cost of your policy, remember this coverage gives you considerable bang for your buck. The premium you pay will be a fraction of the cost to rebuild your home from the ground up and replace your possessions. Call PINI Insurance today.