Understanding home insurance

Posted by Josie Bumgamer on December 3rd, 2020

Home Insurance 101: What you need to know

Homeowners insurance can be seen from many different perspectives, but regardless of whether you are required by your lender to have home insurance or not, this is a piece of the homeownership puzzle you do not want to miss out on.  Policies are largely customizable and can be molded to fit what you are personally in need of to get the best homeowners insurance for you and your family to feel safe.  As a landlord, aside from securing your investment with property insurance, you should also require your tenants to get their renters insurance as part of the lease between you and your tenant.  This is imperative for your tenant to secure their personal belongings as your policy will not cover loss of damages for them.

If you are purchasing your property through a mortgage lender, they will most likely not lend without proof of home insurance coverage making this a requirement before approving your loan.  Aside from that, this coverage provides your home and other personal property with much needed protection against liability in the event of an accident that can injure others or your property.

However, there are many aspects that aren’t covered by standard policies which you should add on to your home insurance policy should specific situations apply to you.  In addition, there are several types of coverage available, so getting familiar with each coverage and what exactly is included before purchasing your coverage is recommended.  If you currently have your coverage you can also update your policy to reflect any revisions you feel you may need.

While insurance is highly customizable, there are some tips for how to always be on your A-game when it comes to home insurance.  We have included some quick but helpful tips at the end.

Understanding home insurance starts off with knowing that your policy is a legal contract which clearly states your rights and responsibilities as well as those for the insurance provider. It is in your best interest to research the company, take a look at the home insurance reviews, and be knowledgeable of their process for claims before choosing one home insurance company over another.  Once you purchase the insurance you will receive the policy: take time to read through its contents, store it in a place where you can easily access it, and of course, know the name of your insurer.

Homeowners Insurance Coverages Explained

Before you get coverage or change from one home insurance company to another, you need to decide how much coverage you need.  More than likely your lender will give you some specifics of what they are looking for at a minimum, any additional coverage is up to you to decide what would be the best homeowners insurance.  Generally, your home insurance policy will cover damage to a property’s interior and exterior, the loss of theft of possessions, and personal liability for harm to others.

One significant differentiation between coverages will be the different types of coverage available.  While the homeowner industry has standardized to range between HO-1 through HO-8, there are essentially 3 levels of coverage: the actual cash value vs replacement cost vs extended replacement cost/value.  This is an option you will likely see when shopping around for insurance and is key to understanding home insurance. 

-          Actual cash value is the amount it would take to repair or replace damage to your home and your belongings after depreciation. In other words, this would be what your items are worth in the present, not how much you paid for them.

-          The replacement cost would be dollar amount it would cost to replace, rebuild the home, or repair damages using materials of similar kind and quality, without deducting for depreciation.  What this means is that if your home was completely destroyed, you would be able to replace the rebuild the home up to the original value. It is important to insure your home for at least 80 percent of its replacement value.

-          In a guaranteed (or extended) replacement cost/value policy, the inflation is basically buffered, and you are covered for whatever it costs to repair or rebuild your home – even if that amount exceeds your home insurance policy limit. Insurers may offer an extended replacement (offering more coverage than you purchased) but this is typically capped between 20% to 25% higher than the limit.

Liability coverage protects you, your family, and even your pets from lawsuits filed by others for personal liability on damage or injuries.  We’ve heard of cases where dogs bite neighbors; a situation like this would be eligible to get a claim filed for your neighbor’s medical expenses – regardless whether it happened on your premises or on theirs.  If your child accidentally shatters your neighbors entrance chandelier, you can file a claim to reimburse the neighbor as well.  If the neighbor steps on the glass and sues for pain and suffering or lost wages as well, then you can be covered for that as well.

Of course, the better your coverage the less you will be paying out of pocket when disaster strikes – as well as the higher your premium will be which would translate to higher payments on your monthly escrow.  The deductible is the amount that you pay out of pocket when the time comes to use your insurance.  When shopping for a home insurance policy make sure to compare what is covered and how much you would need to pay in deductibles.  If your deductible is ,500 and total damages are ,500 that means you would have to pay ,500 before the insurance dishes out their ,000 portion.  Higher deductibles will likely cost less in your monthly premium, but you have to be comfortable paying the deductible when you make a claim. 

The different coverage types and what is covered will of course make the pricing of the home insurance policy fluctuate, but the biggest determining factor in the premium for your property will be based on the likelihood that the insured (read: you, the homeowner) will file a claim.  This is based on several factors including:

-          past history on the home: any past claims on the home and the severity of it. If they insure a home that has had a number of claims over the last three years (even if it was from a previous owner) the home will be seen as a higher risk.  In some cases, if there are an excessive number of claims, some insurance companies may even be ineligible to coverage. 

-          the neighborhood: data on crime rate in the neighborhood will also affect your premium as vandalism would of course increase the likeliness of a claim being filed and therefore be a riskier property to cover. Along those lines, being close to a fire substation or having a fire hydrant within 100 feet of the home will likely lower the premium

-          the home’s condition: if a home is not well maintained, then the insurance company will see this as an increased chance of getting a claim filed. 

Other aspects will create differences in pricing including the insured’s credit, whether there are animals in the home and what kind, as well as oil tanks on premises. You must understand that while covering loss is the insurance company’s objective, they also need to make a profit. 

What Does Homeowners Insurance Not Cover

As a general rule, homeowner’s insurance covers most scenarios where loss can occur including during a fire, in the event of a hurricane, lightning damage, vandalism, and other disasters, but coverage is limited when it comes to other natural disasters (such as floods and earthquakes), poor home maintenance, and acts of war – these will require additional riders and therefore increase the cost of coverage.  For example, if your home is located in a flood zone, your lender will typically do a FEMA flood search and see the risk; a requirement for flood insurance will be part of the loan package requisites.  Along those lines, if a home is in an area prone to earthquakes this home will also have an additional earthquake insurance coverage requirement. 

In addition, while your home insurance can provide you with off-premises coverage (for example, if you lost a pair of diamond earrings in another state, you would be able to file a claim for this) insurers will put a limit on the reimbursement amount, which typically ranges between 50% to 70% of the amount of insurance you have on the structure of your home.  What this means is that if you have your house insured for 0,000, your personal possessions would be limited to ,000 in coverage.  So if you have a lot of expensive possessions such as art collectibles, fine jewelry, antiques, or designer clothes, the best homeowners insurance for you may include adding a rider to your home insurance policy to cover these items separately.

Another additional coverage which you can investigate, is the additional living expenses coverage.  While unlikely, there is a chance that something may happen to your hone where you would need to stay in a hotel or rent a house while your home is being rebuilt and replaced.  If that does occur, attaining the additional living expenses coverage would be the best decision you could’ve made. This would cover rent, hotel room, meals at restaurants, and other incidental costs associated with not being able to inhabit your home for some time.  While there are strict total and daily limits which depends on the coverage you select, this also can be adjusted and increased if you’re willing to pay more in the premium.

One key coverage that is not usual in standard homeowners insurance policies is sewer protection.  While your home insurance may say it covers a sewer line break or collapse, the amount of coverage you would actually get is very limited as damage from overflows or backups from your sump pump, sewer system or drains won’t be covered. To get the most protection, there are companies that offer a backup rider which is a separate insurance policy to protect you in case of issues with the sewage line that have the potential of becoming very expensive.  Something like a tree’s root blocking your sewage pipes, or sewage damage from a flood, earthquake, or hurricane would not be covered under the standard homeowners insurance.

Additional structures in your property aside from the main house including garages, sheds, or others, will likely be requiring a separate coverage as well.  So if you have a shed that may be close to the backyard firepit or in any way may see damage which you want to cover, make sure you get an additional rider in your policy to have this structure covered.

Lastly, identity theft will not be a covered loss when it comes to home insurance.  You would need to get this as a separate coverage as damage caused by anyone who may steal your personal information would have zero coverage from your home insurance provider. General damage resulting from failure to upkeep the property will not get covered either – including rust, rot, mold, and general wear and tear.

Understanding home insurance coverages and what they do not cover is key in getting the insurance you may need.  Next, we will explore what the best homeowners insurance is and where to find it.

Best Homeowners Insurance

You do not have to purchase insurance from the company your lender recommends, but determining which is the best homeowners insurance for you fully depends on what you are looking for; make sure to shop around with the resources available online and over the phone to make the best decision for you and your family to get quotes from at least 5 companies.  The best way to do this is to speak with an independent agent instead of speaking to a traditional agent within the company; since they are knowledgeable and unbiased towards a specific company, getting their input in your journey to understanding home insurance will be valuable.  While these brokers do get a commission which you need to factor into your premium cost, you will be able to get more options from a variety of different companies.  

Also, take the time to get educated and understand the differences in pricing for similar products and services between companies using unbiased sources including your state insurance department, consumer publications, neighbors or friends, and your public library.  You can also look at group coverage options such as through credit or trade unions, employers, or association memberships.

We have covered what to look for in the coverage in the section titled “Homeowners Insurance Coverages Explained”, so review that section as well.  When you are ready to look into the individual companies to decide which is the best homeowners insurance for your specific situation, you should take the below steps:

1. state check: you want to make sure the company you are speaking with is legitimate and creditworthy.  Check the Department of Insurance for your state to see what the rating is and whether they are cleared to business in your state. This information should be available online and should also provide the average insurance costs in different counties and cities
2. Insurance company rating: now that you have confirmation that the company is legit and that they are legally allowed to do business in your state, you can look up information in regards to their good-standing.  There are resources available for you to research insurance company scores on the websites for the top credit agencies such as Moody’s, J.D. Power, Standard & Poor as well as the National Association of Insurance Commissioners and Weiss Research.  On these sites you will find information about consumer complaints, general feedback, claims processing, and other important data. Some sites will even provide you with a company’s financial standing to indicate whether they have the resources to pay out claims
3. claim response: along those lines, you also want to determine how the company’s claim response works.  By asking your agent about their company’s handling of claims, you will be able to figure out whether licensed adjusters or third party call centers will be receiving and processing your claim as having outsourced teams handling claims can cause a delay in your reimbursement from the insurance company.  Holdback provisions (an insurance company’s stand on holding back a portion of their payment until the homeowner proves repairs have started) can also be determined by asking your agent
4. home insurance reviews: you can also ask your agent what their retention rate is; averages are between 80% and 90% for insurance company customers staying with the same provider.  Online home insurance reviews, annual reports, and word of mouth from people you know will also be good ways to gauge their client satisfaction

Home Insurance Advice

Understanding home insurance doesn’t just stop at the kinds of policies, different companies, and the amount of coverage – you also want to know the tips and tricks to getting the most out of your insurance policy.  We’ve gathered some helpful advice which you may be able to apply to your specific situation when choosing the best homeowners insurance for your needs.

1. First: discounts!  Don’t be shy to ask the insurance agent for discount points.  Below are some tips on ways you can reduce your premium:

o   security system: having cameras as well as a burglar alarm monitored or tied to a local police station will automatically reduce your annual premium, typically by about 5% or more.  The homeowner must present evidence of an active security system such as a bill or a contract

o   smoke alarms: while these are more common in newer homes, installing these in older homes can save you 10% or more in annual premiums

o   increase your deductible: this is not recommended at all, but if you are looking to reduce your annual premium and have home insurance on the cheap, this is a way to do it.  Since the deductible would be higher, repairs that take a few hundred dollars wouldn’t be covered such as replacing the sheetrock around a pipe that was leaking – while these seem like small repairs they can add up so its best to really think hard before going down this route

o   bundling coverage: you can create a multiple policy insurance bundle such as car and home or health insurance and home (and car!).  Insurance companies will provide you with a discount of around 10% on average

o   special discounts: request for a breakdown of special discounts that you can maybe apply to your home insurance policy; seniors and individuals who work from home are sometimes eligible for a reduced rate as these individuals will be home more often and therefore leave their homes less prone to theft

o   renovating wisely: if you have renovations in your future home plans, look into which materials you want to use.  For example, if you are looking to build an addition to your home, wood structures will cost more to insure since they are more flammable and more durable than cement or steel framed structures.  Other renovations or additions such as swimming pool and even trampolines can drive the annual insurance costs up by about 10% or more as those are seen as potentially injurious additions

o   loyalty pays: the longer you remain with your insurer the greater the chance of them offering a discount on the premium or reducing the deductible down the line

2. Other things such as installing a new roof, adding dead bolt locks, CO2 detectors, sprinkler systems, and even waterproofing can lower your premium as well.  If you’re in the financial position to do so, paying off your mortgage will also have a lower premium.
3. Check in with your agent every year to ensure you have the best homeowners insurance policy for your current situation as a lot can change in a year, or from the time that you attained the coverage such as:

o   renovations: if you have made modifications such as added a room, upgraded your kitchen, or made other changes, these may add value to your home which would not be covered in your replacement cost in case of a claim using your old coverage

o   other updates:  maybe you have disassembled the trampoline, paid off your mortgage, or installed a sophisticated alarm system, you may be able to get your premium reduced with proof of these changes

4. Along those lines, if you live in an area where home values have risen since you purchased the property, it would be recommended to look into the extended replacement value policies and cover your home based on the current market value.  Since your policy is likely just covering your mortgage, this would be around 90% of your home’s value at best; if anything were to happen to your home you would be highly limited to the rebuild.

Personal liability can come in handy under a lot of situations as lawsuits have the potential to become very expensive.  So while policies typically cover around 0,000 in coverage for personal liability, it is recommended to have at least 0,000 in coverage.  The additional protection will increase your premium by a few hundred but can protect you with an additional million thorough an umbrella policy.