Understanding Homeowners Insurance: A Guide

Understanding Homeowners Insurance: A Guide

Your home is, by far, the most valuable asset you are likely to own so understanding homeowners insurance is key. Homeowner’s insurance is not just a luxury; it is mandatory in most cases. Besides protecting the interior and exterior of your home, the insurance also covers the damage/loss incurred to your furniture, lawn, patio, and medical bills in case a visitor is injured at your property.

While you can always customize your policy according to your needs, the most basic homeowners insurance usually offers four types of coverage– the structure of the house, personal belongings like furniture, liability protection, and additional living expense coverage.

Why Do You Need Homeowners Insurance?

As stated above, homeowners insurance is more of a necessity. In most cases, like getting a mortgage, the lender will ensure that you have some kind of protection insuring the property. Besides getting the basic coverage, you may also be required to get other types of coverage, depending upon where you live. For example, if your house is situated in a flood-prone area, you might be required to get flood insurance.

The Consumer Financial Protection Bureau clearly states that if the owner does not have a kind of insurance protecting the house, the lenders must purchase the coverage and charge the owners its cost. However, it’s better to get coverage on your own, as you might be able to get more coverage at lower rates.

However, necessities aside, it’s safe to say that homeowners insurance is always the right choice. Besides covering your home, homeowners insurance also protects personal belongings and medical bills.

Understanding Homeowners Insurance: What Does Homeowners Insurance Cover?

Basic Homeowners insurance offers the four main coverage options stated above. However, you can customize your policy according to your needs. Here’s a brief on the basic coverage options-

Personal Liability

Personal liability coverage protects you against any lawsuit filed against you if anyone has been harmed/injured at your property. In addition to covering the legal fees, this coverage also covers the medical bills of the person injured.

Generally, liability coverage starts from $100,000. However, if you are looking for more coverage, you can purchase an excess liability policy.

Personal liability also offers protection when you, your family member, or even your pet destroy someone else’s property like a rug or fence. However, this coverage won’t cover the damages incurred to your property.


A standard policy also covers the damages incurred to your property by fire, lightning, hail, hurricane, and any additions listed in your policy. However, in most cases, a standard policy won’t cover the damages if the house is destroyed in an earthquake, flood, or wear and tear.

Some policies might also cover the detached structures of your home, like a garage or lawn. It’s recommended to purchase coverage that can help you rebuild your home if the unexpected occurs.

Property Loss

If your home was completely destroyed due to any of the covered perils, additional living expenses coverage would cover the cost of staying in a hotel and restaurant meals until your house is being rebuilt.

However, the coverage offered might be restricted to some time limits. Therefore, it is recommended to check with the insurance provider to get an idea of all the important details.

In the case you have given a part of the property on rent, the insurance company would also provide you with the rent you would have collected if the house wasn’t destroyed.

Personal Possessions

If a covered peril has destroyed your personal possessions like furniture, equipment, or other items, a standard policy will cover all the damages incurred to these possessions. In most cases, the coverage offered on personal possession is 50%-70% of the insurance you bought for the house’s structure.

If you are unsure about the actual worth of your possessions, you can conduct a home inventory. Moreover, the items covered are usually covered off-premises as well. Meaning, you can recover the possessions if they were stolen or destroyed from anywhere in the world. However, this limit is 10% of the coverage bought for the home’s structure.

Some policies might also cover trees, plants, and shrubs if they are destroyed by a covered peril.

Types of Homeowners Insurance

When it comes to insuring your home, a single-family apartment might come to your mind. However, did you know that there are eight types of homeowners insurance you can get for different kinds of homes?

Let’s walk you through all of them-

HO-1 Basic Form

HO-1 Basic Form is the most basic form of homeowner’s insurance that only covers the home and personal possessions up to their actual cash value and against only ten covered perils.

The ten covered perils are-

  • Fire/lightning
  • Hail/windstorm
  • Riot
  • Vehicles
  • Aircraft
  • Explosion
  • Fallen objects
  • Vandalism
  • Theft
  • Smoke

Basic form homeowner’s insurance is not offered by companies anymore. In fact, according to the National Association of Insurance Commissioners (NAIC), this coverage was purchased only by 1.57% of people throughout the country.

HO-2 Broad Form

Broad form homeowner’s insurance is an upgrade of basic form coverage that offers protection against six additional perils. Besides this, HO-2s also cover the home at its replacement cost and personal possessions at its actual cost value.

The six additional perils are-

  • Weight of sleet, snow or ice
  • Freezing
  • Overflow of water/stream
  • Accidental and sudden burning, breaking or bulging of built-in appliances like heating or centralized air conditioning systems
  • Volcanic Eruptions
  • Accidental and sudden damage to artificially generated electrical current

According to the NAIC, about 6.05% of single-family homes have this coverage.

HO-3 Special Form

Special form homeowner’s insurance is the most common type of coverage option that offers protection against everything except the following

  • Law
  • Earth movement
  • War
  • Neglect
  • Water damage caused due to flooding or water seepage
  • Nuclear hazard
  • Power failure
  • Intentional loss
  • Government action
  • Theft while the house is under construction
  • Wear and tear
  • Vandalism in case the house was vacant for more than 60 days
  • Wet rot, molds or fungus
  • Pollutants, discharge or seepage
  • Rust
  • Smoke from industrial activities
  • Damage caused due to pet
  • Expanding or bulging or structure of the house

The policy covers the dwelling at its replacement cost and possessions at its actual cost value. According to the NAIC, 79.09% of single-family homes have this type of insurance, making it the most common type of homeowner’s insurance.

HO-4 Contents Broad Form

HO-4 policies or renter’s insurance are for those people who put their homes or apartments at lease. The policy offers coverage for liability, additional living expenses, and personal possessions against 16 perils listed above.

The dwelling is usually covered at the replacement cost.

HO-5 Comprehensive Form

Comprehensive form insurance is usually for high-end properties located in high-risk areas. The policy offers extra coverage for expensive items like jewelry and electronics. While it might seem similar to HO-3, there are some notable differences between the two.

Unlike an HO-3 policy, HO-5 policies cover dwelling and personal properties at their replacement cost and offer all-risk coverage for both residence and personal possession. HO-3 policies, on the other hand, offer coverage at replacement cost only for the dwelling.

HO-6 Unit-Owners Form

Unit-Owners homeowner’s insurance policies are usually for people living in a condominium or a co-op. The amount of coverage you choose for condo insurance depends upon the HOA insurance.

What is HOA insurance?

To put it simply, HOA insurance is a master policy that covers the structure of a condo and its surrounding common areas, which is usually purchased by the condo’s association. It will, however, not cover the cost of any upgrade or home renovations conducted by you for your unit.

You would need to purchase enough coverage under the condo insurance to cover up the cost of renovations and home upgrades.

HO-7 Mobile Home Form

Mobile home homeowner’s insurance usually offers the coverage provided by HO-3 insurance policies, but for mobile homes that do not qualify for a single-family home policy.

Here are some of the mobile homes that are covered under these policies-

  • RVs and park model homes
  • Sectional homes
  • Modular homes
  • Single- and double-wide mobile homes
  • Single- and double-wide manufactured homes
  • Trailers

HO-8 Modified Coverage Form

HO-8 modified coverage homeowner’s insurance policies are for older homes that usually don’t qualify for a standard homeowner’s insurance policy. These homes are generally at high risk because of aluminum wirings, a falling-apart roof, or outdated plumbing.

To qualify for a standard homeowner’s insurance policy, you would need to renovate the home by installing copper wiring, replacing the roof, or installing new piping. However, if you are unwilling to remodel the house, you can opt for this type of insurance. HO-8 policies are similar to HO-1 policies as they offer coverage against only ten perils and offer dwelling and personal possession coverage at its actual cash value.

What Coverage Types Are Available?

Depending upon the type of residence and the amount of coverage you opt for, homeowner’s insurance is divided into eight kinds of policies, ranging from HO-1 to HO-8. And within these policies, the coverage offered ranges from three different types.

Here’s a brief on the different coverage types offered under homeowners’ insurance.

Actual Cost Value Coverage

Coverage at its actual cost value would mean the company would pay you the value of the property minus the depreciation and routine wear and tear. Simply put, you would be paid the current value of the property and not the replacement cost.

In the case of actual cost value coverage, the claim paid to you in the possibility of the damages incurred would always be less than the amount you could replace the property, aka the replacement cost.

Replacement Cost Coverage

If you opt for coverage at its replacement cost, your claim would be the actual cash value of your home without subtracting the depreciation.

As the name suggests, this coverage would provide you enough to replace or rebuild a part of, or the entire house if it is damaged by a covered peril.

Guaranteed Replacement Cost/Extended Replacement Cost

Guaranteed or extended replacement cost/value coverage offers the exact amount to repair or rebuild the house if damaged by a covered peril. It will issue whatever amount is needed to reconstruct the house, even if it is way above the limit.

Because the market is constantly fluctuating, the rates are likely to increase after purchasing the property. Therefore it is recommended to go for this coverage as it would help you reconstruct the house without any additional costs.

How Much Does Homeowners Insurance Cost?

The cost of homeowner’s insurance differs from state to state and depends upon several factors like construction quality, type of roof, the year in which the house was built, and if the house has add-ons like a hot tub or swimming pools or not.

On average, the annual cost of homeowner’s insurance in the US is $1,312 for a $250,000 dwelling coverage. However, this is not a factual presentation. Actual rates might vary depending upon where your house is located. If the property is located near a disaster-prone zone, you would likely be charged a little higher than usual.

The five most expensive states for homeowner’s insurance are Kansas ($2,694), Nebraska ($2,816), Oklahoma ($3,519), Arkansas ($2,142), and New Mexico ($2,024).

The five least expensive states for homeowner’s insurance are Oregon ($712), Vermont ($686), Delaware ($680), Utah ($647), and Hawaii ($376). The prices listed above are average annual premiums for these states.

Ways to Save Money on Homeowners Insurance

Here are some ways through which you can qualify for lower rates and save on homeowner’s insurance-

  • You can opt for bundle insurance. Simply put, try getting different types of insurance from one company so that you can qualify for bundle discounts.
  • You can shop around and compare different quotes provided by lenders.
  • You can ask for military discounts.
  • You can research different types of coverage available and choose the appropriate coverage type according to your needs.
  • You can start by working on your credit score to qualify for lower rates.
  • To get lower rates, you can increase your deductibles.
  • You can go for home renovations and updates.

Homeowners Insurance Deductibles

Understanding homeowners insurance deductibles is slightly different from health insurance deductibles. A deductible is an amount you would have to pay before the insurance claim kicks in. It would be your out-of-pocket expense you would pay if your house is damaged or destroyed by a covered peril.

Your deductible would be subtracted from the amount the insurance company would be liable to pay to cover up the damages. For instance, if you have opted for $5,000 worth of coverage from a company and your deductible is $1,000, the company would have to pay $4,000, and you would have to pay $1,000.

In case the damage incurred is less than the deductible, say $500, then you would have to cover up that expense from your pocket. The company will only pitch in if the damage amount crosses the deductible limit.

As stated above, home insurance deductibles work differently from health insurance deductibles. In the case of health insurance, you would have an annual max payout amount. Meaning, if you have incurred more than one damage, you would only pay the deductible once.

However, in the case of home insurance, you’ll be liable to pay the deductible on a per claim basis. If you have filled the claim twice, you must pay the deductible twice. The only exception to this rule is Florida, where you would have to pay the deductible once per every flood/hurricane season.

There are usually two types of deductibles- standard deductibles that range from $500 – $2,000, depending upon the company and your location, and percentage deductibles that range from 1%-10% of the home insurance value.

Filing a Homeowners Insurance Claim

For both safety reasons and to get started with the recovery process, it is essential to call your insurance company as soon as possible. However, it shouldn’t be the first thing you do when the unexpected strikes.

You must carry out certain steps to get started with the claiming process.

Call 911

In case of theft, fire, vandalism, or someone being critically injured, you must inform the local authorities first. If you have incurred damage like a leaking roof or wind damage, you don’t need to call the police.

However, if criminal activity is involved, you must start by calling the police and explaining your situation. Some states also allow citizens to file a report online by filling out the necessary information and location. If the police officer visits your house, make sure to let them know about every detail, including any missing property or damage. Also, make sure to inspect the house’s condition yourself so that nothing’s missed.

Notify the Insurance Company

The next thing to do is notify the insurance company even if you are unwilling to file the claim. However, before you call the company, the policy papers must be ready. Give the documents a thorough read, so you know if you’re covered or not.

If the damages caused seem coverable under your deductible, you don’t need to file the claim as you would be paying the amount out of your pocket. However, you won’t get an accurate estimate of the cost without the help of a professional. Therefore, it is recommended to let the company know to get an accurate estimate.

When you call the company to notify about the damages, make sure to be thorough and remember to ask questions like how long will it take to process the claim and when the inspection will occur.

Provide Documentation

After the call at your insurance company, it is essential to get any necessary repairs. However, before doing so, document everything. Make videos, click photographs and explain everything about what happened in a video.

Besides this, keep a copy of every document and track every phone call you made to the company and local officers. This will help you form the basis of your claim. Also, make a list of every possession that has been damaged or stolen along with their worth. This can go smoothly if you have a home inventory ready.

After documenting everything, complete all necessary repairs done. Also, remember to keep a copy of receipts as evidence of payments made.

What Doesn’t Homeowners Insurance Cover?

The coverage provided by different homeowners’ insurance depends upon the type of insurance you choose. If your insurance type is HO-3, you would likely be covered for everything except the following-

Water Damage and Earthquake

A standard homeowner’s insurance won’t cover any damages caused by an earthquake, sinkholes, or other earth movements unless you have a separate endorsement covering that up. An HO-3 policy also won’t cover water damages like water seepage or overflows in the sewer system.

Maintenance Cost

The policy won’t cover any maintenance cost, including termite/insect damage, bird/rodent damage, rot, rust, mold, or general wear and tear. Any damage caused by industrial smoke will also not be covered.

Other Exclusions

A standard HO-3 policy also won’t cover the damages caused by a war or a nuclear hazard.

Other Types of Coverage for Homeowners Insurance

Apart from the three coverage types listed above, companies also offer the following additional coverages-

Flood Insurance

Flood insurance is a type of homeowner’s insurance that covers the damages incurred by floods caused due to melting of snow, heavy rain, blocked storm drainage systems, coastal storm surges, or levee dam failure.

This insurance is generally offered by the federal National Flood Insurance Program (NFIP) in some communities and NFIP-designated floodplains.

Hurricane Insurance

There is no such thing as hurricane insurance. The term, however, might be used to refer to hurricane deductible, an additional amount charged from the policyholder to provide extra coverage for any damages caused by a hurricane.

This deductible is quite common in hurricane-prone areas like Texas and Florida and might also be mandatory in some states.

Picking the Right Homeowners Policy for You

Your home is indeed the most significant investment you are likely to own, and protecting that against any unexpected event is always a responsible choice. You can start by getting online quotes from different companies. Make sure you compare the rates ask for discounts that you might qualify for.

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