When you are considering purchasing a home, you should be familiar with Homeowner’s Insurance. It is the type of coverage you hope you will never have to use but is essential if the unexpected happens.
The policy is designed to help restore your life back to normal. These policies are generally sold stand-alone, but if you do not have the home insured before your mortgage is approved, the lending bank may take out a policy for you and just attach the cost of it to the mortgage payment.
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Home policies have three elements: the premium you pay per month, your deductible to be paid before the insurance kicks in, and the limits for each of the four base coverages.
The policy will also have an aggregate coverage limit, the max the insurer will cover over the policy term. A standard policy does not cover every conceived incident. The base policy has its limits as to what it covers and what would require separate policies to cover.
Home insurance policies come in many different forms with varying levels of protection. An HO-3 policy is the most common basic homeowner’s policy. While some companies call it by a different name, HO-3 is its official name. An HO-3 policy provides “ordinance or law” coverage. This phrase means that when you suffer a loss, all repairs that will be done will meet the current housing code requirements. The following is what is covered under a basic HO-3 policy: A basic home insurance policy will cover a home and its attached structures damaged or destroyed due to:
- Vandalism and theft
- Other disasters listed in your policy
It will also include detached structures on the property such as; a garage, tool shed, gazebo or the fence that surrounds the property. Decks and porches are usually also covered. Although most homeowner’s insurance can be extensive in what it covers, here are events that are not covered:
- Flood or earthquake
- Normal wear and tear, maintenance issues and neglected repairs: this includes burst pipes, sewage back up, AC/heater failure and water heater failure
- Damage from termites, other insects, birds or rodents
- Damage caused by rust, rot, or mold
- Damage caused by war or nuclear hazard
Additional coverages can be added to enhance the basic policy
Flood insurance -Most people think that because their policy covers hurricanes and damage due to storms that they are covered for the flooding that is caused by these natural disasters.
The fact is that a basic policy does not cover flooding. Flood insurance is a separate policy that can be added to your insurance policy.
Earthquake insurance -If you live in one of the 42 states that are prone to earthquakes, you should consider purchasing earthquake insurance in addition to your normal policy. It will provide a level of coverage for damages done by a shifting of the earth’s crust, but will not cover if a fire would result from the earthquake; your normal homeowner’s policy will do that.
Personal Property Coverage
In addition to covering the home you live in, a basic policy will cover your personal belongings within your home. Property is replaced on an “actual cash value” basis. This means that the policy will pay the reasonable cost to repair or replace the claimed item. Here are some of the items that are covered under your basic policy:
- Sporting goods
The following are items that have limited coverage:
- Money, coins, and certain precious metals
- Jewelry, watches, furs, and semi-precious stones
- Silverware, goldware or pewter
- Watercraft, including trailers and equipment
You can add a policy endorsement to give a higher level of coverage to the specialty items you own.
Personal property endorsement- Expensive items like jewelry, furs, art, collectibles, and silverware are covered under a basic policy, but usually, have limits. These items can be properly insured by adding this endorsement. It will cover your precious items at their officially appraised value.
Replacement cost endorsement -This option will replace your covered items at the cost of the item at the time of loss without any deductions or depreciation. When you suffer a loss, your insurance company will ask you for a detailed list of items that were lost in the event. It is a good idea to know what you have and what it is worth by inventorying your belongings. This can come in many forms. Photos, video, and receipts are the best evidence.
Personal Liability Coverage
Liability coverage protects you from lawsuits for property damage or bodily injury you or your family cause to other people. It will pay for defense and court costs, up to your policy limit. It also provides no-fault medical coverage in the event that a friend or neighbor is injured in your home. Most policies come with $100,000 of coverage. Here are a few incidents that are covered under the Liability portion of your homeowner’s policy:
- A family member damages your neighbor’s property
- A visitor injures themselves on your property
- Your pet bites a someone walking past your home
Liability is meant to cover loss to those not living in the home. It will not cover:
- Damage to your home caused by someone in the home
- Anyone covered under the policy injuring themselves on the property
- Medical bills for your own family or pets
- Things that have a high sense of risk around the home, like a dangerous breed of dog or trampoline are not covered under most policies.
If you feel the liability limits on your policy are not enough, there is an added coverage that can be purchased. Umbrella policy -This is an added layer of protection in the case you are sued and the limits of your liability coverage are insufficient. It will additionally cover other claims such as libel and slander. This coverage can add $1 million, or more, to the coverage limit.
Loss of Use Coverage
Loss of Use is also known as Additional Living Expenses. If an insured disaster occurs and you are forced to live away from home, the ALE portion of your policy will pay the additional cost of living you incur.
It does have limits; usually, 20-30% of the policy value and time limitations of 12 months are common. The imposed limits are not included in the overall limit to rebuild or repair your home, even if you reach your max benefit amount on ALE. Here are some things that are covered under the ALE portion of your policy:
- Hotel bills or rent on a temporary residence, which also pays utilities if higher than normal
- Restaurant meals
- Mileage if the commute is longer than normal
- Laundry costs
- Furnishing a temporary rental home
- Pet boarding and storage facility costs
There are limits as to what is covered. It usually applies to the limits your policy has, including:
- Expenses that are above your normal living level before the incident
- Expenses above the limits of the policy
Several other items are covered under a basic policy:
Food spoilage: If covered incident results in a power outage and you have a refrigerator or freezer full of food that spoils, your policy will cover the spoilage.
Falling objects: This not only includes trees, but satellites that could fall from orbit, aircraft crashes, as well as moving vehicles are covered under your basic policy.
Student personal belongings: If you have a child attending college and living on campus, their personal belongings, such as books, computers, and other personal items are covered under your homeowner’s policy.
Below are a few items that fall under the exclusions:
Mold: most policies exclude it, or they will set limits. Mold, rust, and rot are all considered maintenance issues. The best way to handle mold is prevention, especially after a water incident like leaky pipes, toilet overflow or a rainwater event.
Sewer backups: Once again, this falls under something that should be caught if the owner properly maintains his/her plumbing system.
Sinkholes: This falls under earth-shifting events. Earthquake insurance would need to be purchased for sinkholes to be covered under your policy.
Construction damage: If you’re doing renovations to your home, any damage done will not be covered unless another policy is purchased to cover possible damage. A good way to help is to make sure your contractor has liability insurance to cover damages they may cause.
Pool accidents -Items such as pools are covered to a limit, and it is advisable to purchase an umbrella policy to have extra liability coverage.
Here are a couple of final considerations for the home insurance owner:
Your home ages: Consider the items one tends to take for granted around the home. Your AC unit, your water heater, and other built-in appliances. These items age and need routine maintenance. If you overlook minor things like a drip, knock, or ping then you may be inadvertently costing yourself more money down the line should one of those items fail.
Time changes things: Just as the home ages, so do your circumstances. You obtain new personal belongings, the market changes, your mortgage decreases, and numerous other additions and subtractions occurs to the family as a whole. Periodically review with your insurance agent your policy and see if it is still at the level required, should the unfortunate occur.
How to Select the Right Policy for Your Home
Ask the following questions before making a decision:
How much it would cost to replace your home?
You should consider this from the ground up and figure out the worst-case scenario. Also consider other structures you may have, such as a detached garage, shed and perimeter fences.
How much are your belongings worth?
You have the choice to go with a base coverage or to schedule your belongings. If you have rare or high dollar items, this option would be wise.
How much deductible could you afford to pay out in the event of a loss?
You should also know your lender’s requirements on minimum coverage.
How often do people visit your home? If you have frequent visitors, then you could make sure to carry enough liability coverage in the event of an incident. This is also beneficial if you rent any part of your home or property.
See if you qualify for any discounts.
Your job, military, even some memberships can extend discounts on your homeowner’s insurance. Homeowner’s insurance an area you don’t want to skimp on. It’s the one thing you hope you never have to use, but will be a relief to you and your family if the unthinkable does happen and you need to file a claim.