The Complete Guide to Homeowner's Insurance
Homeowner insurance is a necessity, not only because it protects your home and your belongings against theft or damage and gives you peace of mind in a crisis. The majority of mortgage companies will require their customers to have home insurance cover for the complete or fair value of a property, and they usually won’t enter into a financial or real estate transaction.
What does a Homeowner insurance policy cover?
As with all types of coverage, the policy documentation will need to be examined or specific inclusions and exclusions before you buy homeowner insurance.
Interior and Exterior Damage to your Property
Homeowner insurance will cover any internal or external property damage that occurs as a result of vandalism, lightning, hurricanes, fire or any other covered disaster. The compensation is typically used to cover the costs of a repair or a rebuild. For damage that is caused by an earthquake, a flood, or substandard maintenance; these are usually not covered. However, we will outline exactly what homeowner insurance does not cover shortly. If you have any sheds, freestanding garages or other structures, you might need to obtain additional insurance coverage for these items.
Furnishings, appliances, clothing and most of the home contents are covered in the event of an insured disaster only. You can often get an additional service called ‘off-premises’ coverage that provides additional protection for items of value that you might frequently take outside of the home. There are always limits for this type of cover, and they are never usually insured for 100% of the value.
The majority of homeowner insurance policies will provide coverage for between 50-70% of the value of the structure of your home. For instance, if your property is insured for $150,000, then there would be approximately $105,000 in maximum coverage for your contents. This will vary from one provider to another, so it’s important to check. For those with high-value possessions, there will be an option to purchase additional coverage.
This is for injuries or damage caused by your family or yourself, and it offers protection from legal action that could be brought about by others. In most cases, this includes damage that may be caused by the family pet. While there are always going to be specific policy stipulations regarding this; it essentially means that if your dog was to bite your neighbour, and that neighbour needed medical attention, you would have coverage that would pay the cost of that treatment. The levels of liability coverage can differ greatly from one policy to the next so it’s worth looking at how much you can get. For additional protection, you might consider an umbrella policy to get a higher level of coverage.
We will discuss umbrella insurance a little later in this guide.
Hotel or Housing Costs
If you need to rent a house or stay at a hotel while your home is undergoing any repair or restorative work, then part of your homeowner insurance coverage, known as additional living expenses will reimburse you for any incidental costs you may incur while you await the readiness of your home. This is for items such as hotel room costs, rent, meals, other incidental expenditure. There are usually daily limits in place along with total expenditure limitations as well.
What is covered in a basic home insurance policy?
Homeowner insurance coverage will only kick-in when you suffer a loss as a result of a specific reason or peril for loss that is covered by your policy. For the majority of homeowner insurance policies, the typical perils that are covered include:
Weight of snow, ice or sleet
Fire, lightning, smoke, hail, explosions, wind
Falling objects including trees
Water damage caused by a ruptured pipe
Damage caused by a car, aircraft or other vehicles
What is not covered by homeowner insurance?
Although homeowner insurance will provide coverage at different and often customizable levels for most scenarios where you could suffer a loss; there are particular events that are excluded from most homeowner insurance policies. The most common of which are: an act of war, natural disasters, and other acts of God.
If you live in an area that is particularly susceptible to hurricanes or flooding for instance, then you will have a couple of options which are still applicable. First of all, you will have the option to take out additional riders for these particular events. Or, you can take out a supplementary policy that is specifically for earthquakes or floods.
If you have any other specific concerns that you would like to address, for instance, identity recovery or even drain and sewer backup coverage; there are lots of homeowner insurance policies out there that enable you to add these elements on.
In some regions or states, there are common perils that occur with such frequency that they are also subject to exclusion for a basic homeowner insurance policy. These will vary greatly depending on the area you live in, so always confirm with your insurance company what will and will not be included in your policy.
Damage caused by pollution
Damage caused by rodents, pets, birds or insects
Deliberate damage to a property
Usual wear and tear
Sewers or floods that back up into the house
Land movements such as mudflows, earthquakes, and landslides
Water damage is a common misconception where homeowner insurance coverage is concerned. It is important to distinguish between sudden water damage, for instance, that which is caused by a burst or ruptured pipe (covered); and gradual water damage that may occur as a result of rising floodwater (not covered).
Do you have to be a homeowner to qualify for homeowner insurance?
No, you don’t have to own a home to need insurance coverage. Nowadays, there are many landlords who insist their tenants have renter’s insurance in place. Even when it’s not compulsory, it is wise to get some form of cover for your belongings in place.
How can I lower my home insurance costs?
It’s a great question, and something most people don’t always think to ask. There are a number of things you can do to help reduce the cost of your homeowner insurance premiums.
Increase your deductible
Just like with any other type of insurance, the greater your insurance deductible, the lower the total cost of insurance premiums you can expect to pay. The only downside to this is that for smaller issues that may arise, such as a broken window, which would usually only cost a few hundred dollars to fix, the homeowner will usually have to absorb the cost of these during the policy term.
Install an alarm / security system
If you buy and maintain a security system that is monitored to a central station, this can help to reduce your annual premiums. In some cases, this can be by as much as 5%. However, in order to get the discount, you will usually be asked to provide proof of the monitoring service.
Smoke alarms are also another important factor to consider. Although the majority of modern homes will have these fitted as standard, in older properties, getting these installed could help you get reduced homeowner insurance costs of up to 10%. Other items such as sprinkler systems, deadbolt locks, CO2 detection devices and weatherproofing could also help reduce your homeowner insurance premiums.
Paying-Off a mortgage
This isn’t the easiest way to save money on your homeowner insurance! However, those people who own their residences can expect to see a reduction in their home insurance costs. Insurance companies will work on the basis that if a property is owned outright, the owners will take better care of it.
While this won’t always be applicable, there are many homeowner insurance companies who will give a discount, in some cases, up to 10% for taking out multiple policies with them. If you haven’t already asked them for a quote, consider asking you auto or health insurance company for a quote on your homeowner insurance.
Always compare quotes and review policy documents
Regardless of the initial price you are quoted, you need to shop around and compare prices for homeowner insurance with other companies. If you are a member of a trade or credit union, it could also pay off to check for any group coverage options here or through your employer as well.
Once you have bought a homeowner insurance policy, make sure you check the pricing Vs other homeowner insurance companies when renewal time approaches. If there are any points that you feel may reduce the cost of your home insurance premiums, such as greater security, paying off your mortgage, then providing proof of such matters to your insurance company might help you secure a lower overall premium.
What are the different types of homeowner insurance?
The best homeowner insurance will need to be right for your individual needs and demands. Here is a list of the different types of home insurance policies you can buy. Different insurance companies may use slightly different terms, and they may also offer a range of additional coverage elements that can be added on to a basic homeowner insurance policy. Here are the most common types of homeowner insurance policy types, along with their abbreviated HO references.
HO1 - Basic Homeowner Insurance Policy
A basic policy which typically provides protection against 10 essential perils, such as smoke, lightning, explosions, fire, aircraft damage, volcanic eruptions etc.
HO2 - Broad Form Insurance Policy
A broad form policy offers some additional coverage when compared to the HO1. The 10 perils are covered, along with a couple more, such as accidents that may arise from electric currents. Other elements, such as your personal liability and belongings, are also covered.
HO3 - Special Form Insurance Policy
This will provide coverage for everything mentioned in HO2 and more. If you were to cause damage to another person’s property or injure another party, then this extra element of coverage is provided within this type of policy.
HO4 - Tenants Form Insurance Policy – AKA Renters Insurance
This type of home insurance is designed to meet the needs of renters, thus is commonly known as renter’s insurance. It will provide coverage for personal liability and personal belongings.
HO5 - Comprehensive Form Insurance Policy
This type of insurance policy is given the label of being comprehensive due to the fact it provides coverage for many more perils that other home insurance policies. It is similar to the H03 policy because it offers financial protection from the majority of perils as well.
HO6 - Condominium Unit Owners Insurance Policy
This type of condo insurance policy is designed to meet the need of both occupants and owners of condominium units. It provides coverage for personal property, along with other aspects of the property such as the floors, ceiling, and walls. It also extends coverage for any alterations or additions that may have been made by the unit owner.
HO7 - Mobile Home Owners Insurance Policy
This type of insurance policy is similar to an HO3 policy, but it is tailored to meet the needs of those who own a mobile home. The requirements and coverage needed are slightly different compared to regular or basic homeowner insurance.
HO8 - Older Home Form Insurance Policy
This type of insurance policy is designed to meet the needs of older properties that would cost more to rebuild than the present market value of the property. In term of the perils which are covered, this type of policy will usually cover the same perils as outlined in the HO1, basic homeowner coverage.
Dwelling Fire Form Insurance Policy
This is usually a popular type of insurance for vacation properties. It will only cover the property for a limited number of very specific perils. Personal liability, personal property, and medical payments coverage are not included in this type of coverage.
Different Levels of Home Insurance Coverage Explained
As you can see, not all types of home insurance policies are created equal. Once you have decided on the right form of home insurance to choose from, you will then need to decide on the right level of protection to meet your needs. As standard, there are three different levels of coverage offered.
Actual Cash Value
This will cover the value of the property along with the value of any belongings once depreciation deductions are accounted for.
This represents the actual cash value without any deductions being made for depreciation.
Guaranteed / Extended Replacement Value
This is considered to be the most comprehensive level of coverage because it will cover any costs involved in the repairing and rebuilding of your property; even if this cost is greater than the limits of your policy. Some insurers will give you the option for an extended replacement, but this will usually be limited with a 20-25% buffer.
When you insure a property with enough insurance to cover the value of your home, this will not give you enough insurance to fully rebuild your home. This presents an obvious gap that can be further impacted by fluctuations in housing costs.
How much home insurance coverage do you need?
As we have outlined in the section above, choosing the best amount of coverage for your homeowner insurance needs will depend on whether you decide to insure for the actual cost (ACV) or the replacement cost (RCV).
ACV will factor in deprecation costs and means you get a much lower value than your initial outlay. However, with Actual Cash Value coverage, you can expect lower insurance premiums.
RCV will replace your items without factoring in deprecation. The major difference with premiums could be anything up to 10% more than ACV coverage costs.
What information do you need to get a homeowner insurance quote?
As you compare homeowner insurance quotes online, you need to make sure you are consistent with the information you submit. Writing down or printing out the data you use is a good way to ensure consistency. Another factor to consider is that you request the same coverage and policy limits as these differences can really impact the price you pay.
Whether you use a home insurance agent, an app or a comparison website, there are usually some commonalities in the data you will be asked for, here are the basics:
Number of bedrooms, bathrooms, and floors
When your property was built
The square footage of your property
The type and age of the roof
The type of garage, if applicable
The type of construction
The type of foundations
Security systems and alarms
Types of HVAC systems
How much does Homeowner insurance cost?
Because of the sheer number of variables in both the types of coverage, the level of cover and the individual property and content values; there is no clear-cut answer to this question. As we have detailed above, you need to make sure you are comparing apples-to-apples and using the same data and coverage levels to determine truly comparable quotes.
How do insurance companies work out a premium for home insurance?
The price you pay for homeowner insurance is impacted by a range of factors. As you will probably have already encountered, different insurance companies will charge different prices for virtually the same level of coverage. Here is a range of things that may be impacting your home insurance premiums.
The construction of your property – masonry or brick will usually attract a lower price than wood.
The age of your property – older homes generally tends to cost more to insure.
The rebuild costs - this is not the same as a purchase price as this often include the cost of the land. It is the cost of replacing your property in full, including labor and materials.
The proximity to resources – such as fire hydrants or the fire/police department.
Claim history – of both your home and the local neighbourhood.
Outdoor amenities – whether or not you have a trampoline, play equipment or a pool, for instance.
The breed of pet you own – Some insurance companies will not provide insurance if you have a dog that is considered to be particularly aggressive. Each insurer will classify this list differently, so it’s important to verify this first. Also, there are some exotic pets, such as lizard and snakes which could increase your premiums.
How to choose the best home insurance company
Knowing how to compare homeowner insurance is critical if you want to make sure you’re getting the best policy for your needs. Here is a quick checklist to follow when searching online for the best home insurance.
Make sure you speak with a real person
Talking in-person with a homeowner insurance agent can help you get a feel for the company, and it can give you instant answers to the questions you might have. Usually, an agent will deal with more than one insurance company, meaning you can get more than just a single quote. They will also be able to present you with a range of scenarios that are based on different coverage levels and different deductibles.
Compare more than just the price
You can visit your state’s department of insurance website to learn about the ratings for each insurance company you are considering. This will also give you an overview of any complaints, and help you understand how they operate their business in more detail.
Evaluate customer satisfaction
Most companies will state they have a good claims service, but by asking your insurance agent what their retention rate is, this will give you a very clear indication of how many of their customers actually stayed with them once their policy expired. Another easy way to get a view of current policyholder satisfaction rates is to go online and look at independent reviews and testimonials.
Get at least 3-5 quotes
Some people might choose to get more, but generally speaking, getting home insurance quotes from 3-5 different companies should give you enough of an idea of whether you are getting good value. Just make sure that the quotes are based on like-for-like data with respect to coverage levels and limitations.
If you have ever needed to make a claim on insurance of any kind, then you will appreciate the importance of this point. Before you agree to buy any policy, try to find out who handles the claims process for the company, is it themselves directly or do they use a third-party agency for this work?
If you use an agent, ask them directly if they will help you should you need to claim and/or if they have had any experience working or dealing with their claims team.
After reading this guide to homeowner insurance, we hope you have a more comprehensive understanding for the different factors that can affect the overall price you pay along with the impact on any reimbursements you may receive should you decide to claim.
You need to make sure you understand the details of what you are buying, and more importantly when you are comparing quotes for homeowner insurance; you should ensure that the limits and levels being compared are identical or as close to that point as possible.
Don’t wait until you need to make a claim before you look at these intricate policy details to avoid any unexpected surprises!