Homeowners Insurance 101

Homeowners insurance protects your dwelling and its contents against a variety of events and risks that would be financially challenging (or devastating) to pay for out-of-pocket. Can you imagine having to replace everything you own inside your home and afford for a new place to live if your house burned down, was flooded, or robbed? It’s a terrifying thought!

Homeowners insurance is so important that some states require homeowners to carry a policy. However, even if your state doesn’t require it, your mortgage lender most likely will. You should research, compare, and purchase a policy before applying for a mortgage. Note: homeowners insurance is not included in your mortgage payment unless it’s escrowed. Bundling mortgage payments, home insurance, and property taxes into an escrow account is pretty common.

As with other insurance policies, there are a variety of homeowners policies offering a range of coverage at a matching range of prices. How much you need and can afford will depend on your individual situation and requirements.

Types

There are three general types of homeowners insurance:

  • HO-1 Basic Form and HO-2 Broad Form — These are still offered but in dwindling frequency, mostly because they cover so few events. Yes, they are the cheapest options, but that doesn’t mean they offer the best value.
  • HO-3 Special Form — The most common policy these days, the HO-3 covers damage to a home’s structure and occupants’ belongings, with exceptions outlined in the policy’s terms (e.g. floods, earthquakes, landslides, and construction needed to bring your home up to code).
  • HO-5 Comprehensive Form — This is the most inclusive and expensive policy. It contains fewer exceptions than the HO-3.

Whichever policy you choose, be sure to understand all events and damages not covered. This will allow you to keep a sufficient balance in your emergency savings to cover them if something does happen.

You can also add what’s called a “rider” to your policy, which adds or amends coverage. Of course, this comes at an additional cost, but it can be worth it if your area is prone to flooding, for example.

Risks covered

Your homeowners policy should enable you to refurnish (personal property loss) and rebuild or repair (property damage) your home after a catastrophe. It should also cover the cost of a lawsuit (personal liability) if someone is injured on your property and temporary rehousing (added living costs). You should have a policy that covers at least 80% of your home’s replacement value (minus the land value and foundation), although most basic policies cover the contents of the house for 50% to 75% of the amount for which the house is insured.

  • Property damage — If your residence or a detached structure on your property is damaged or destroyed due to a covered hazard/event, you will receive compensation up to the policy limit.
  • Personal property loss — Damage or theft of personal property will be covered, up to the policy limit, under covered circumstances. For very valuable items (think high-end electronics, jewelry, antiques, artwork), you’ll want a rider to either compensate you for replacement value or other set amount.
  • Personal liability — If you, a family member living with you, or a pet causes an accident, injury, or property damage, you will be protected against medical care costs, repair costs, or legal fees if you’re sued. Like the other categories of protection, there will be a liability limit and exclusions.
  • Added living costs — This covers you if you can’t stay in your home and need to pay for alternative living arrangements. There are typically daily and total overall limits for this coverage.