Understanding Your Homeowners Insurance Policy

Why do you need Homeowners Insurance?

Insurance is something most people don’t think about until they need it, but it’s absolutely essential for protecting you from financial loss. For people who own a home, homeowners insurance is a necessary safety net to protect your house and possessions in the event that they are damaged or destroyed. 

While it’s not legally required, mortgage companies require homeowners to purchase coverage for the fair market value of their property before they take out any loans to finance their home. Landlords also often require renters insurance before allowing you to rent their home. 

The average cost for homeowners insurance in 2022 is $1393 ($116 a month) for a $250,000 home, so it’s a significant monthly bill. It’s important to understand what is (and what isn’t) covered by your homeowners insurance policy.

What’s covered by a basic policy:

  • The structure of your home (dwelling) – If a fire or a natural disaster such as a hurricane, windstorm, or hail damages your home, a homeowners policy will pay for repairs to your home and any attached structures like a porch, deck, or garage. If it is completely destroyed, the policy will cover the rebuilding of your home. Other structures on the property such as fences, garages, sheds, outbuildings, and even trees and other landscaping are included up to a certain value. The amount for these is typically 10% of the dwelling.
  • Personal property – A basic plan includes coverage of furniture, appliances, clothing, kitchenware, electronics, etc. from peril or if stolen. For high-value items like jewelry, art, and collectibles, there are usually limits.
  • Liability Protection – Coverage of property damage or bodily injury if a lawsuit is filed against you or anyone in your household. It also protects you if someone gets injured in your home.
  • Additional living expenses – If your home is destroyed or so damaged that it’s inhabitable, this coverage will take care of the cost to stay in a hotel (or temporarily rent a comparable home), eat at restaurants, and anything else you need to live outside your home. There is a time limitation.

 

What is not typically included in basic coverage:

  • Flooding, including sewer/drain issues. Flood insurance is additional.
  • Earthquakes and landslides.
  • Routine wear and tear.
  • Issues that arise due to maintenance neglect.
  • Damage to goods in your home caused by you or your household members.
  • Medical bills for you, your family, or your pet(s), if injured in your own home.
  • Insect or rodent infestations, including termite damage.
  • Mold or fungus.
  • Pools and other recreational items – they can be covered but must be specifically listed (and usually require an additional cost).

 

Types of coverage

The costs and coverage of homeowners insurance greatly vary. Usually, the more coverage you want, the more you’ll pay.

There are three levels of coverage:

  • Actual Cash Value – Covers the cost of your home, taking into account depreciation (the current value).
  • Replacement Cost – Covers the actual cash value of your home and belongings, but there is no deduction for depreciation (original value).
  • Guaranteed/Extended Replacement Value – Covers the cost to repair or rebuild your house with inflation taken into account, with a ceiling that is typically 20-25% higher than your policy limit. These plans are the most comprehensive and provide protection if construction costs rise.

 

Recommended amount

  • For your home – The cost of rebuilding your home if it’s completely destroyed, not the amount you paid for it.
  • For your belongings – A good rule of thumb is to cover at least half of the amount of your home coverage. Conducting a home inventory is a good way to calculate what you’ll need, and it’s also useful in the event you’ll need to make a claim.
  • Liability – At least as high as the value of all your financial assets (not including your home) like savings accounts and investments.

 

Cost

Your insurance rate (called a premium) is determined by several factors:

  • Your location – States prone to hurricanes or tornadoes have significantly higher rates due to the higher likelihood of filing a claim.
  • House age, size, and quality – Larger, high-quality homes cost more to replace, so the rates will be higher to cover them. Older and/or more vulnerable homes will also require higher rates.
  • Claims history – Your rate will increase if you’ve made insurance claims in the past.
  • Coverage amount – The more coverage you have, the higher the premium will be.
  • Deductible amount – What you’re required to pay before your insurance company will pay anything. It can be a flat dollar amount, like $1,000 per claim, or a percentage of your home’s insured value. If you wish to reduce your premium, choose a higher deductible.

The bottom line is that you need homeowners insurance to protect you if the unexpected occurs, and you need to repair or replace your home and belongings. And if you need to make a claim, be sure to contact us before your insurance company so you get what you deserve.

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