Financial Fiddler

Have you ever been driving when suddenly you see firetrucks racing past you?  Chances are, they were heading to put out a fire at someone’s house. Did you find yourself wondering if they were heading to your house?  If you own a home, homeowners insurance is one of the most important things you can put into place. Here are some of the main reasons why you need homeowners insurance.

1. Protects Your House

When you see the weather forecast, do you cringe when you see that bad weather is heading right for your house?  You start playing the “what if” game. What if a tree falls on my house in the middle of a storm?  

Your home is one of the biggest investments you will ever make in your lifetime.  According to Zillow, the median home value in the United States is $227,700.  Homeowners insurance helps to protect this valuable investment.  Most homeowner insurance policies help to cover the cost to repair and rebuild damage caused by events including, but not limited to:

• Fire
• Tornadoes
• Wind damage
• Thunderstorms
• Vandalism
• Theft
• Hail    

2. Protects Your Belongings

Not only does homeowners insurance protect your home’s actual structure, it also protects the contents of your home.  If your personal belongings are stolen, vandalized or destroyed by a hazard, your policy will typically cover the value of these belongings.  Your policy even protects your belongings outside of your home. Things that are typically covered include, but are not limited to:

• Clothes
• Electronics
• Furniture
• Appliances
• Sports Equipment 

3. Protects Your Guests

Typically, your homeowners insurance will cover more than just your home and the contents inside.  Coverage also extends to a visitor who could accidentally be injured on your property. This liability protection covers you against any lawsuits that could arise from the injury sustained on your property and provide legal representation if you are sued.  This protection can also pay for medical bills and material damage caused by the accident.  

4. Your Lender Requires It

If you have a mortgage on your home, your lender will require you to carry homeowners insurance.  By having homeowners insurance, your lender safeguards their investment in your property. The minimum amount of insurance that your lender has you carry depends on the amount of your mortgage.

5. Peace of Mind

You work hard every month to pay your mortgage on time.  Maybe your home is completely paid-off and you have not paid a mortgage payment in years.  Whatever the case, lots of time, work and money has gone into your house. A natural disaster or robbery can happen in an instant.  Having homeowners insurance will give you peace of mind that your house and everything inside is covered.

Understanding Homeowners Insurance Options

So you’ve decided that you need homeowners insurance, but you do not know where to begin.  You know that it is important to cover your home and everything inside in case of loss. We are going to dive into the different types of homeowners insurance, coverage options, and overall cost.

Types of Homeowners Insurance

There are several different types of homeowners insurance policies that are available to most people.  These policies are sometimes referred to as “forms.” The type of policy you can choose from depends on if you own a standalone home, rent a home or own a co-op or condo.  We will focus on five of these types of policies that cover standalone homes which include: HO-1, HO-2, HO-3, HO-5 and HO-8.

1. HO-1

This is the most basic type of homeowners policy that is available to homeowners.  Homeowners that are interested in this type of policy are insuring for catastrophic losses only.  It typically will cover the following perils:

• Fire or Lightning
• Windstorm or Hail
• Smoke
• Explosions
• Riots and Civil Commotion
• Theft
• Damage from Vehicles
• Damage from Aircraft
• Vandalism
• Volcanic Eruptions

Under this type of policy, only perils named are covered.  Most policies will not cover personal belongings in the home.  HO-1 coverage is not available in most states or accepted by many lenders due to the restrictiveness of the policy.  

2. HO-2

This is a more common homeowners policy and is considered a mid-range policy.  An HO-2 policy covers every peril that an HO-1 policy covers plus:

• Falling Objects
• Weight of Ice, Snow or Sleet
• Accidental Discharge or Overflow of Water or Steam
• Overflow or Freezing of Pipes, Heating, A/C, Fire Sprinkler or other Household Appliances
• Tears, Cracks, Burns and Bulging in Household Systems
• Sudden and Accidental Damage from Artificially Generated Electrical Current

An HO-2 policy is also a named peril policy, so only perils named are covered.  In this policy, coverage can also extend to personal property in the home.

3. HO-3

This is the most common homeowners policy and covers a broad range.  It covers the same perils as an HO-2 policy but does not limit coverage to only named perils.  However, your personal belongings are only covered under the same perils listed in an HO-2 policy.  

An HO-3 policy does have some exclusions including: earthquake, flood, nuclear accident, government action and many others. 

Overall, this policy will typically insure your home, attached structures, personal belongings and your personal liability in case someone is injured on your property.

4. HO-5

The HO-5 policy is considered an open perils policy.  This means that the policy does not list the perils for which your home or personal belongings are covered.  Instead, it lists what the policy does not cover.  Typically, an HO-5 policy will not cover:

• Earth movement
• Floods
• Water damage
• Neglect, deterioration and general wear-and-tear
• Damage from birds, insects, rodents and vermin
• Settling, bulging, shrinking or expanding of your home’s foundation
• Mold, fungus and rot
• Intentional loss
• War and government action
• Nuclear hazard
• Ordinance or law
• Smog, rust and corrosion
• Animals owned by the insured

An HO-5 policy is considered one of the best policies that a homeowner can have due to the extensive coverage that is offered.

5. HO-8

An HO-8 policy is designed specifically for older homes.  It only insures against the named perils in the HO-1 policy.  This policy is for older homes that have a replacement cost that exceeds the value of the home.  Historic homes and registered landmarks will typically carry this type of policy.

Understanding your Homeowners Policy

1. Standard Coverages

Most homeowners insurance policies cover a few standard things which include: Dwelling, Personal Property, Liability and Additional Living Expenses.  Your policy may look different from your friends, family or neighbors, so it is important to check with your insurance company in order to know your coverages.

• Dwelling.  Dwelling coverage protects the structure of your house and anything that is attached to it, like a garage or deck.  Your dwelling coverage should equal the replacement cost of your house. So basically, what it would cost for someone to rebuild your house.  To get a general estimate, you can multiply the square footage of your house by local construction costs per square foot.  

• Personal Property.  This is the coverage that protects your belongings.  Many times, we underestimate just how much stuff we have in our homes.  Because we underestimate, we then tend to underinsure our belongings. One way to ensure your belongings are insured is to make a list of everything that you have.  This can take a while, but in the long run, could pay off if you lose everything and do not know where to start.  

• Liability.  This is very important coverage that protects you if someone is injured on your property.  It protects you from a lawsuit or having to pay medical bills out of your pocket.

• Additional Living Expense (ALE).  This coverage will help pay for temporary relocation and basic living expenses if your house is destroyed or needs to be vacated while it is repaired.  There may come a time when you are out of your house for several months, and having ALE will help cover the additional costs.

2. Optional Coverages

There are times when standard homeowners insurance coverage is not enough.  This is why sometimes it is necessary to get optional coverages and policies in order to truly protect yourself from loss.  Here are some optional coverages and policies that many people end up adding to their standard homeowners policies.

• Flood.  This type of coverage protects your home from flood-related damages.  Depending on your homeowners insurance carrier, you can add this as an optional coverage within your policy or you may have to purchase this separately outside of your homeowners policy.  This type of coverage is important if you live in an area or state that is prone to flooding.

• Earthquake.  This type of coverage protects your home from damages caused by an earthquake.  Just like flood insurance, you can add this optional coverage to your homeowners policy, depending on your insurance carrier. If it is not offered, you can purchase this separately outside of your policy.  

• Water Backup.  This covers damage caused by a burst pipe, sewer backup or sump pump break.  Depending on your insurer, sometimes this coverage is included in your standard protection and sometimes you need to add it as an optional coverage.

• Other Structures.  This covers other structures on your property that are not attached to your home.  This can include a shed, gazebo, fence, unattached garage and other related structures.  Depending on your insurer, this maybe included in your standard coverages. If it is not, you may want to consider adding it to your optional coverages.  

• Scheduled Personal Property.  There are limits to your personal property coverage.  This optional coverage typically covers your high-end personal property like jewelry or fine art.  

• Enhanced Dwelling Protection.  This optional coverage provides an extra level of protection if your home needs to be rebuilt.  This is in case your original dwelling protection limit does not cover the entire cost of the building materials, labor and other items.

3. Cost of Homeowners Insurance

A recent study by the National Association of Insurance Commissioners (NAIC) showed the average homeowners premium is $1,192 per year.  There are many factors that are taken into consideration by insurance companies when they determine your rates for homeowners insurance.  Here are some factors that may affect your rates.

• Location.  If you live in a state that is prone to having a natural disaster, you will pay significantly higher rates than someone who does not live in a higher risk area.

• Age of your home.  An older home will typically have older plumbing and wiring making it more susceptible to fires and flooding.

• Rebuilding cost of your home.  Your insurer will look at the costs of materials to rebuild your home, whether it be wood, brick, or other building materials.

• Home’s claim history.  This will include all claims that have been filed on your home.  The more claims that have been filed, the higher your premium.

• Your coverages limits and deductibles.  The amount of coverage plays a huge factor into how much your premium will be.  The higher the coverage, the higher the amount of premium. Also, insurance companies like higher deductibles because that is less money out of their pockets.  So the higher the deductible, the less the amount of premium you will be responsible for.

• Credit score.  Your credit history and credit score will affect your homeowners insurance rates.  Your insurance company will use your credit report to calculate your insurance score.  An insurance score helps to predict which consumers are more likely to file claims. So the higher your credit score, the better your insurance score.

Summary

Homeowners insurance is a complicated insurance that is extremely important.  Your home is one of the biggest investments you will make in your lifetime. Having peace of mind in case something were to happen to your home is priceless and will allow you to focus on other financial goals and dreams.