Table of Contents Navigation
Key Takeaways
|
For many Americans, buying a home is the most significant investment they will ever make, often representing a substantial portion of their net worth. The thought of losing that investment can be scary; if disaster strikes and your home is destroyed, recovering from this financially can be incredibly challenging without the safety net of insurance.
Homeowners insurance safeguards against a loss in your property’s value and provides essential liability coverage so you are not left financially vulnerable to unforeseen incidents that may occur at your residence. It is designed to protect your financial future and is required by lenders when you finance a home purchase with a mortgage.
What Is Covered and Not Covered?
Homeowners insurance protects against ‘perils,’ that is, the direct cause and reason for damage or a loss occurring. These perils can be specially listed in the policy, known as named perils, or covered under an open perils policy, which covers all risks unless specifically identified and excluded. Your homeowners insurance document will contain a provision defining the perils covered by the policy. There are three categories of perils that may be covered:
Basic coverage generally protects against the twelve common named perils: fire, smoke, explosions, lightning, hail, windstorms, theft, vandalism or malicious mischief, damage from vehicles, damage from aircraft, riots and civil commotion, and volcanic eruptions.
Broad coverage expands on basic coverage by providing supplemental coverage for specific named perils, including:
Losses resulting from falling objects.
The weight of ice, snow, or sleet.
Accidental discharge or overflow of water or steam.
Sudden and accidental tearing apart, cracking, burning, or bulging of a steam, hot water, air conditioning, or automatic fire protective sprinkler system or from a household appliance.
Freezing of plumbing, heating, air conditioning, automatic fire sprinkler system, or a household appliance.
Sudden and accidental damage from artificially generated electrical currents.
Open perils policies cover any risk to the home that is not explicitly excluded in the policy, offering broader protection against unexpected risks. Common exclusions include losses from:
Movement of the ground (e.g., earthquakes, volcanic eruptions, mudslides or landslides, and sinkholes).
Ordinance or law regulating the construction, repair, or demolition of a building or structure.
Damage from rising water (including floods; surface and tidal water; waves; water below the surface that exerts pressure on buildings, structures, and improvements; and water backing up through drains and sewers).
War.
Nuclear hazards (including radiation or radioactive contamination).
Power failure caused by an uninsured peril (such as spoilage due to a freezer thawing out).
Intentional acts.
Neglect (such as termite damage).
While basic and broad coverage may seem extensive, they leave gaps in protection and expose the homeowner to a long list of uncovered perils. Therefore, most homeowners who purchase policies with either of those coverages will not adequately protect their homes.
Some perils excluded from standard policies (including sinkholes, earthquakes, sewage backup, and refrigerated property coverage) can be covered by purchasing a supplement to a policy known as an endorsement.
Standard policies do not include flood coverage, but it can be purchased separately through the National Flood Insurance Program (NFIP). If you live near a body of water and are in a high-risk flood area, you may consider purchasing this additional protection. Even if your property is not in a high-risk flood area, flood insurance is relatively inexpensive, and floods can happen anywhere – more than 40% of flood claims come from properties outside high-risk flood zones.
Key Features and Benefits
Most homeowners policies are divided into two sections: Section I covers property, and Section II covers liability. Additional coverage is often provided for debris removal, such as tree damage, credit card loss, and other incidental losses.
Section I, Coverage A – Dwelling
This covers damage to your home, attached structures, and building materials on the premises. Losses associated with the dwelling are paid on a replacement cost basis – the amount necessary for repairs or replacements with materials of similar quality. Certain items attached to the dwelling, like awnings or outdoor antennas, are generally insured on an actual cash value basis – meaning the depreciated cost of the item. Homeowners typically purchase insurance that matches the replacement cost of their dwelling.
Section I, Coverage B – Other Structures
Detached structures like standalone garages, greenhouses, and sheds are typically insured up to 10% of the dwelling (Coverage A) limit. Similarly, these structures are insured on a replacement cost basis.
Section I, Coverage C – Personal Property
Personal property refers to tangible, movable property owned by the homeowner that is not real estate or attached to real estate, including personal belongings, furniture, electronics, artwork, books, etc. The limit of this insurance is typically 50% of the dwelling (Coverage A) limit. It is generally covered at an actual cash value, which can fall short of the cost of replacing the lost items. To remedy this, homeowners can upgrade to replacement cost coverage by adding an endorsement.
Insurance policies typically limit the amount they will pay for the loss of particular personal property, such as money, precious metals, and jewelry. Additional insurance protection for these items is available by purchasing a scheduled personal property endorsement. Other valuable items (e.g., animals, motor vehicles, and business-related items) may be excluded from coverage, so additional insurance policies may be needed.
Section I, Coverage D – Loss of Use
If your home is uninhabitable due to damage, this covers additional living expenses, like hotel bills, while your home is being repaired. The coverage is typically up to 30% of your dwelling limit.
Section II, Coverage E – Personal Liability
Personal Liability coverage protects you and your family from legal claims if someone is injured or their property is damaged by your family or due to negligence. Coverage typically starts at $100,000 per incident, but many homeowners opt for higher limits. Legal defense costs are also covered if a lawsuit is involved.
Section II, Coverage F – Medical Payments to Others
This part of your policy covers medical expenses for guests injured on your property, regardless of fault. This does not apply to the homeowner or other members of the household (except for resident employees like housekeepers) as that is covered by your health insurance plan. Coverage is usually capped at $1,000 per person per occurrence, and expenses must be incurred within three years of the accident.
Types of Homeowners Insurance Policies
Homeowners insurance comes in several standard forms, each offering different levels of protection.
HO-1 (Basic Coverage)
This policy provides minimal coverage, protecting only your home’s structure and detached buildings against specific named perils. It does not provide liability insurance or protection for personal property, thus making it cheaper but less comprehensive and unlikely to meet mortgage lender requirements.
HO-2 (Broad Form)
HO-2 expands on basic coverage by protecting against additional perils associated with falling objects, the weight of ice, snow, sleet, accidental discharge or overflow of water, bursting of steam appliances or hot water systems, freezing, and accidental damage caused by artificially generated electrical current. It also provides broad protection for other structures, personal property, and loss of use.
HO-3 (Special Form)
One of the most common policies, HO-3, provides greater protection for the dwelling and other structures, as well as loss of use, by using an open perils (or all-risks) definition instead of specifically listing the covered perils. However, personal property coverage under this policy is still provided on a broad form basis.
HO-4 (Renters Insurance)
This policy is designed for renters and provides personal liability coverage, coverage for personal contents, and loss of use of the premises on a broad perils basis. The landlord’s insurance covers the unit itself, so structure coverage is not included.
HO-5 (Comprehensive Form)
Similar to HO-3, but the primary difference is that an HO-5 policy provides personal property protection on an open perils basis (instead of a broad perils basis), thus offering one of the most comprehensive levels of coverage.
HO-6 (Condo Insurance)
HO-6 covers the interior structure of the condo owner’s unit and its contents. The outside structure is maintained and owned by the condo association. This covers the same perils provided in the HO-2 and HO-4 forms but does not provide building coverage other than for additions and alterations.
HO-7 (Mobile Home Insurance)
An HO-7 policy covers mobile, manufactured homes, trailers, sectional homes, RVs, and modular homes. HO-7 policies provide open peril coverage for the dwelling and other structures, but personal property is only covered for named perils.
HO-8 (Modified Coverage Form)
Instead of providing replacement cost coverage (using materials of like kind and quality) for damage to property by a covered peril, an HO-8 policy provides repair cost (materials that are functionally equivalent to those used prior to the loss) coverage. These policies typically insure older homes, and they can be quite expensive to repair if the insurance is required to use original construction materials and craftsmanship. Therefore, HO-8 policies provide coverage for basic perils but provide functional replacement cost coverage. Thus, the homeowner’s damaged dwelling and other structures will be repaired or replaced in the event of a covered loss, but the insurer pays only for currently accepted building materials and craftsmanship.
How to Choose the Right Homeowners Insurance Policy
Selecting the right homeowners insurance is more than just finding the cheapest policy. It is about ensuring one of your most valuable assets is fully protected and getting coverage that fits your needs. Here are some things to keep in mind to help you make the best choice:
1. Assess Your Home and Personal Needs
Start by evaluating your home’s value, location, and unique features that could affect your insurance. Consider how much it would cost to rebuild your home from the ground up. Also, take stock of your personal belongings (e.g., furniture, electronics, jewelry, etc.) and determine how much coverage you would need to replace them in case of loss or damage.
2. Understand Different Coverage Options
As discussed earlier, there are various components of a homeowners insurance policy, including:
Dwelling Coverage: Protects the structure of your home.
Personal Property Coverage: Covers your belongings inside the home.
Liability Protection: Shields you if someone is injured on your property.
Loss of Use: Pays for temporary housing if your home becomes uninhabitable.
Make sure the policy and the limits you choose align with what you need in these areas. Also, endorsements can provide additional protection for things like floods or earthquakes, which may be essential depending on your location.
3. Shop Around and Compare Quotes
Do not settle for the first policy you come across. Reach out to multiple insurance companies, get quotes, and compare coverage and costs. Make apples-to-apples comparisons – different companies might offer slightly different coverage limits, deductibles, and exclusions, so read the fine print carefully. We recommend creating a spreadsheet like the following:
4. Look Beyond the Premium
While the premium (the amount you pay for your policy) is important, it is just one piece of the puzzle. Pay attention to:
Deductibles: This is the amount you pay out of pocket before the insurance kicks in. A higher deductible can lower your premium, but make sure you can afford it in case of a claim.
Policy Limits: Make sure your policy covers the total cost to rebuild your home and replace your belongings.
Exclusions: Understand what is not covered, like certain natural disasters, so you are not caught off guard if something happens.
5. Consider Additional Coverage or Endorsements
Depending on your situation, you might need extra protection. For instance, standard policies often do not cover floods or earthquakes, so you will want to add those if you live in a high-risk area. You can also get endorsements for high-value items, such as expensive jewelry or collectibles, to ensure they are fully covered.
6. Check the Insurance Company’s Reputation
It is not just about price and coverage – you also want to be sure the company you choose is reliable. Research the company’s financial stability and customer service reputation. You can look at third-party ratings from agencies like A.M. Best or J.D. Power to see how they stack up. After all, an insurance policy is only as good as the company behind it when it is time to make a claim.
7. Review Your Policy Regularly
After selecting a homeowners insurance policy, reviewing and updating it regularly is crucial. Most policies require coverage of at least 80% of the property’s value to cover partial losses fully. However, as property values rise, your coverage may drop below this threshold, potentially leaving you underinsured.
To help guard against this, consider adding an inflation protection endorsement. This automatically increases your policy’s coverage at set intervals to keep pace with inflation. However, it is still important to periodically compare your coverage limits to your home’s current replacement cost, as inflation adjustments may not always match the actual increase in rebuilding expenses.
Bottom Line
Protecting your home with the right insurance policy is a financial safeguard and investment in your future security. Choosing a policy that fits your needs, lifestyle, and budget is paramount in protecting your biggest asset.
As you consider your options, review your policy regularly, stay informed about potential risks in your area, and do not be afraid to adjust your coverage as life circumstances change. The right homeowners insurance policy protects not only your home but the life you have built inside it.
Understanding your homeowners insurance options can make all the difference when you need it most. Stay proactive, protect your home, and invest in a policy that gives you confidence for the future.
To learn more about how Holzberg Wealth Management can help you achieve your financial goals, check us out! You can schedule a complimentary, no-obligation call with us here.
If you liked this post, please share it and let us know if you have any comments or questions!
About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.