Homeowner's
Insurance

Homeowners insurance comes in several types, called policy forms. Some types provide more expansive coverage than others, so it’s worthwhile to know the difference. Although details can differ by state and company, there are certain kinds are fairly standard.

HO-3 insurance policies, also called special form, are the most common. HO-3 insurance policies generally cover damage to your home from any cause except those the policy specifically excludes, such as an earthquake or flood. However, where it concerns your belongings, an HO-3 policy typically covers only damage from “named perils.” These include things like fire or lightning, smoke, windstorms and hail, explosions, and vandalism.

An HO-5 insurance policy provides the most extensive homeowners coverage. It pays for damage from all causes except those the policy excludes by name. It’s typically available only for well-maintained homes in low-risk areas, and not all insurers offer it. Much less popular are HO-1 and HO-2 homeowners insurance, which pay out only for damage caused by issues listed in the policy. Other policy types include HO-4 insurance for renters, HO-6 for condominium owners, HO-7 for mobile homes and HO-8, a rarely used type that provides limited coverage for older homes.

Even the broadest homeowner’s insurance policy won’t cover everything that could possibly go wrong with your home. For example, you can’t intentionally damage your own house, then expect your insurer to pay for it. Policies also typically exclude damage such as flooding, earthquakes and infestations. Often you can buy separate coverage for some of these risks. Flood insurance and earthquake insurance are available separately, and in hurricane-prone states, you may also need or want windstorm insurance. Talk to your insurer if you have concerns about damage and events your policy doesn’t cover. In many cases, you can add endorsements to your policy — at a cost — to provide more protection.

You need enough homeowner’s insurance to cover the cost of rebuilding your home if it’s destroyed. To estimate your rebuilding cost, you can multiply the square footage of your home by local construction costs per square foot. Your home insurance agent or insurer should be able to help you calculate the replacement cost.

Don’t focus on what you paid for the house, how much you owe on your mortgage, your property tax assessment or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, you want to set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.

For personal property — your belongings — you’ll generally want coverage limits that are at least fifty percent of your dwelling coverage amount, and your insurer may automatically set the limit that way. However, you can lower this limit if needed or purchase extra coverage if you think the limit isn’t enough to cover your things. A thorough home inventory is the best way to pinpoint how much it would take to replace all your stuff. An inventory record can also come in handy later if you have to make a claim and need to know exactly what you lost. You could make a list or, as a quick inventory hack, take a video of your home and all your items using your smartphone. This will also make claims go a lot smooth if the worst happens.

Homeowner’s policies typically include an insurance deductible — the amount you’re required to cover before your insurer starts paying. When you receive a claim check, your insurer subtracts your deductible amount. Choosing a higher deductible will usually reduce your premium. However, you’ll shoulder more of the financial burden should you need to file a claim. A lower deductible, on the other hand, means you might have a higher premium, but your insurer would pick up nearly the whole bill after an incident.

Be aware that some policies include separate — and often higher — deductibles for specific types of claims. These normally include damage from wind, hail, hurricane or earthquake. Liability claims generally don’t have a deductible. Make sure you read your policy thoroughly before you sign. This isn’t the fine print you want to read after the fact.

If your home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your pay-out could differ depending on the cost to rebuild and the coverage you chose — and much of it will be paid directly to contractors rebuilding your home instead of to you.

An important decision is whether to choose coverage that will pay whatever it takes to rebuild your home, even if that cost exceeds your policy limits. This situation may arise if construction costs have increased in your area while your coverage has remained level. Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings. For items that are several years old, this means you’ll probably get only a fraction of what it would cost to buy new ones. Functional replacement cost value coverage pays to fix your home with materials that are similar but possibly cheaper. For example, damaged plaster walls could be replaced with less expensive drywall. Replacement cost value coverage pays to repair your home with materials of “like kind and quality.” This means plaster walls can be replaced with plaster. However, the pay-out won’t exceed your policy’s dwelling coverage limits.

Some policies offer replacement cost value coverage for your personal items. This means the insurer would pay to replace your old belongings with new ones, with no deduction for depreciation. If this feature is important to you, make sure to check the policy details before you buy. This is a commonly offered option, but you will likely need to pay for it.

Prices can vary depending on your location and the amount of coverage you buy. In most states, your credit score can also be a factor. To determine your home insurance price, insurers typically consider factors like what it would cost to rebuild your home, your home’s age, condition and other characteristics.

The insurance price will also take into account the distance from your home to the nearest fire hydrant and your city’s fire protection rating. You can ask your buyer’s agent all the variables to expect when factoring in the cost of insurance, because it will ultimately play a role in the total cost of your new property. At the end of the day, remember this coverage gives you considerable bang for your buck. The premium you pay will be a fraction of the cost to rebuild your home from the ground up and replace your possessions.