Homeowners Insurance: What you need and how much
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The biggest purchase of your life is your house. Whether you're preparing to close on a house or looking at a renewal bill for your current home's insurance, you might have questions about homeowners insurance coverage and its cost.
Frequently asked home insurance policy questions relate to the amount of insurance you need and the type of events covered.
Those are just a few things you'll want to consider when shopping for homeowners insurance. Keep reading to learn more!
What is Homeowners Insurance?
You probably wish you could put the money you're paying for insurance toward other financial goals like paying down debt, building up your emergency fund, or saving for retirement.
But you also understand the importance of protecting yourself from a significant financial loss.
According to regular surveys done by the Insurance Information Institute, approximately 95% of homeowners report having homeowners insurance.
Many respondents are likely required by their lenders to have insurance because they hold a home mortgage.
Standard homeowners insurance policies protect the structure of your house and your personal belongings from covered perils including fire, lightning, wind, hail, or theft.
Your policy also pays for additional living expenses for the time you have to leave your home due to damage or destruction. Homeowners insurance also provides you with a level of liability coverage.
Standard Policy Coverage Exclusions
While your home insurance policy covers a broad range of possible damages, you may not realize there are some exclusions.
In most states, standard policies do not cover earthquakes and sinkholes. Tornado damage isn't included in some states either. You may be able to buy an endorsement or addendum to your policy to cover these natural events.
A big mistake is merely assuming you have coverage.
Standard policies also exclude flood or mudflow damage. If you want flood insurance, you must work with an agent to purchase it through the National Flood Insurance Program.
Most standard policies don't cover water damage from overflows of sinks or tubs or backups from septic systems or drains. But you may be able to purchase a separate endorsement through your insurance agent.
Damage to your house from neglect, failure to repair, or normal “wear and tear” are other examples of coverage exclusions.
If you have a rodent or insect infestation causing damage, it won't be covered. And while you may not often worry about nuclear events or war, your policy won't cover damage from those situations either.
The best advice is to talk to your insurance agent and read your homeowners policy carefully.
Knowing precisely what coverage and exclusions your insurance includes will prevent surprises if you need to make a claim.
Important Terms To Understand – ACV, RCV, Deductible
When it comes to insurance on your home and belongings, you have a decision to make about actual cash value or replacement cost value coverage for your dwelling and belongings.
Actual Cash Value Coverage
If you incur a covered loss, actual cash value (ACV) pays you what your property is worth at the time of the damage.
ACV (sometimes called fair market value) is determined by taking the current cost of an item and subtracting depreciation factors such as age and condition.
In other words, you probably won't get enough money from insurance to buy the exact same item you had before the loss with ACV coverage.
Replacement Cost Value Coverage
With replacement cost value (RCV) coverage, you receive compensation for the full cost to replace covered property damaged or lost.
RCV is preferred by many people because of their concern for having to come up with large sums of money to replace property.
If you have RCV and make a claim, keep in mind your insurer may only pay you the ACV value until you purchase a replacement item and provide them with a receipt.
Others prefer ACV because it is cheaper than RCV coverage. But ACV also offers less protection for the insured homeowner because it requires you to pay more out of pocket to replace similar quality items or structures.
Keep in mind both ACV and RCV coverage are paid only after you pay your deductible.
A deductible is the amount of money you pay out of pocket before insurance coverage begins.
Work with your insurance agent to choose a deductible you'd be comfortable paying if you need to file a claim. Lower deductibles usually result in higher insurance costs.
One other important note – certain property may be subject to a different type of valuation by your insurer.
Make sure you refer to your specific policy for the exact definition and explanation of these terms as they apply to your particular situation.
The 4 Major Areas of Protection
Let's take a more in-depth look at the essential protections your insurance policy offers. We'll define essential terms and explain what you need to think about as you make decisions about homeowners insurance.
If the structure of your home incurs damage or a covered event destroys your home, you'll need to make decisions about repairing or rebuilding your home.
Standard homeowners insurance policies usually extend to any structure attached to your home.
If you have a sunroom or an attached garage, you likely don't need a separate addendum to cover them. Speak with your insurance agent about your policy limits and whether they include the costs of attached structures too.
If you have a structure like a shed in your backyard, it may not be covered by your standard policy. You may need to purchase “other structures insurance” if you don't want to risk paying for damage or destruction of those structures in a covered event.
Another important point – if you use any part of your home for business purposes, you may need business insurance to be covered. Speak with your agent about how your business may impact your standard home insurance coverage.
A licensed insurance agent is the best person to help you determine the amount of dwelling coverage you need. You can try online calculators such as this one by Esurance to see if it aligns with your agent's calculations.
A standard homeowners policy covers personal items stolen, damaged, or destroyed by a covered event up to the policy limit. Be proactive and create a detailed home inventory to use if you have to make a claim.
If you have expensive items, talk to your insurance agent about the need for scheduled personal property supplemental insurance to extend your standard coverage.
This insurance could cover things such as jewelry, art, antiques, collections, or silverware. An appraisal of your expensive personal property will help you determine the level of coverage you need.
Check your policy to determine coverage of your belongings if you are traveling away from home.
Homeowners insurance may also cover up to $500 of unauthorized credit card purchases.
Depending on the circumstances, home insurance may cover trees, shrubs, and plants from covered events too.
Spending the time to review your specific policy details may reveal coverage situations you never knew about.
Coverage for your belongings is usually a percentage (40-75%) of your dwelling coverage. Your agent can help you determine what coverage is appropriate to cover your inventory of personal belongings.
Additional Living Expenses
Should you lose the use of your property because of an insured event, hotel stays, meals, and other costs may be covered while making repairs to your home or your house is rebuilt.
But most policies limit the time and money for additional living expenses (ALE). It's important to understand the protection offered by your insurance policy. Keep in mind ALE is separate from dwelling protection.
If your home has a rental space, ALE may cover the rental income you can't collect if a tenant is displaced from the rental area due to construction.
Your policy describes situations like this in detail. Read it over and ask your insurance agent any questions relating to additional living expenses.
The amount of ALE coverage you have depends on your insurance company and the specific policy you purchase. Many policies provide up to 20% of the dwelling coverage for additional living expenses.
Personal Liability Coverage
Personal liability coverage included with your home insurance covers bodily injury and property damage sustained by others when caused by you or members of your household.
If you or a member of your household is legally responsible for the injury or damage, your insurance can pay the other party up to the policy limit per occurrence.
Many policies offer $100,000 of liability coverage, but agents often suggest homeowners increase coverage by at least $200,000 – $400,000.
You can also protect your assets by purchasing additional liability insurance.
An umbrella policy provides extra protection by covering any remaining balance (up to policy limits) after your standard liability coverage is applied. You can purchase a $1 million umbrella policy from many companies for $150-300 per year.
Whether you are legally responsible for an accidental injury to someone else on your property or not, homeowners policies cover medical payments up to a limit (often $1,000).
As you might expect, there are exclusions to liability coverage too. Read your policy and talk to your agent to better understand specific details related to liability coverage.
Final Thoughts on Homeowners Insurance Coverage
Homeowners insurance is designed to protect your most expensive asset, along with your personal property.
You also have a level of liability protection from home insurance. Coverage if you're forced out of the home for some time after an insured event is also available.
Even though you're paying for something you hope you never have to use, you'll sleep better at night knowing that if something bad happens – you'll be covered.
A common theme throughout this article is the importance of reading your insurance policy documents and speaking with your agent. Making assumptions about your coverage is a big mistake.
While it takes time to learn about your policy, consider it an investment in yourself, your finances, and your future.
Written by Women Who Money Cofounders Vicki Cook and Amy Blacklock.
Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.