A homeowners insurance policy is a necessary investment for all homeowners. Most mortgage companies require borrowers to have insurance that can cover the value of a property in order to issue a loan. Naturally, they want to make sure you’re able to pay the loan back in case there’s an accident. You are not required to have homeowners insurance if your mortgage is paid off. Still, it’s a good idea to purchase home coverage. So, how do you know which type and how much homeowners insurance coverage you need?
Homeowners’ insurance provides financial protection from wide-ranging losses. Standard policies typically include four types of coverage: dwelling, personal belongings, personal liability, and loss of use. There are also different levels of coverage to consider, such as whether your policy pays out cash value versus replacement value for lost or damaged property. More on this below.
Dwelling coverage helps pay for repairs and rebuilding costs for the interior and exterior of your home and structures, but not routine wear and tear. If a tree falls through your roof, you’re covered. But for a roof worn from years of exposure to sun and rain, you’re not covered.
Generally, a policy will cover a range of accidents as well as damage caused by fires, hurricanes, or other natural disasters listed in your policy. However, most homeowners’ policies won’t cover destruction from floods and earthquakes, so be sure to get additional coverage for these natural disasters for an added level of protection.
In the case of detached structures, such as garages, mailboxes, sheds, or fences, many policies will cover them for up to 10 percent of the cost to rebuild the primary dwelling structure (unless used for commercial purposes). If any detached structures will cost more than a standard policy covers, consider adding an endorsement to your policy to help cover them.
Homeowners insurance doesn’t just cover damage to the structure of your home. It can also cover the personal belongings you keep within it, including furniture, clothing, and appliances. Personal belongings will cover most contents of your home if they’re lost or destroyed in an insured event.
Be sure to understand the limits of your policy to replace personal belongings, though. To ensure your policy covers all items, consider buying more coverage for your personal belongings. For example, if you own fine art, antiques, or expensive jewelry, we recommend purchasing extra coverage for financial protection as standard homeowners policy limits will not be enough to replace these items in the event of a loss.
It’s not uncommon to forget all the stuff that we stuff into our homes. In order to make sure you’re covered, start with a home inventory checklist.
Personal liability coverage offers protection for accidents and/or physical harm someone experiences while on your home property, including damage caused by your pets. If your new labradoodle bites your visiting mother-in-law, you’ll be covered for legal costs associated with the incident and reimbursement for lost wages and the medical expenses of the injured party, so long as they don’t live in your dwelling. Of course, you’ll have bigger problems than insurance in this scenario.
Standard personal liability limits may not be enough to cover you in a lawsuit, so we recommend looking at your total financial picture to determine how much overage you need. Paying just a few hundred dollars more in premiums can buy you an extra $1 million or more with an umbrella policy.
Loss of Use
Pays for temporary living expenses after a covered loss. Expenses covered may include meals, hotel bills, and even groceries, laundry, and pet boarding, depending on your policy.
Loss of use coverage will not cover mortgage payments, taxes, or other things you usually pay for. But If you rent your home, it may reimburse you for lost income while your home is being repaired.
Levels of Coverage
In the United States, homeowners’ insurance policies range from HO-1 through HO-8. Less expensive coverage (HO-1) will likely provide less coverage, while more expensive (HO-8) should offer excellent protection. For example, an HO1 policy is likely to cover dwelling only, without liability or personal property protection. And it gets better from there as you work your way to an HO-8 policy.
Coverage falls into three main buckets: actual cash value, replacement cost, and guaranteed replacement value.
- Actual cash value: This covers the cost of your home and the value of your belongings after accounting for depreciation. This means that you’ll get money for what the items are currently worth, not what you paid for them.
- Replacement cost: This covers the actual cash value of your home and possessions without deducting for depreciation.
- Guaranteed replacement value: This is the most comprehensive coverage. It pays for whatever it costs to rebuild your home and replace your possessions, even if it exceeds your policy limit (to a certain extent). This level of protection will come in handy given the increase in the price of lumber and other construction materials.
When purchasing homeowners insurance, follow this simple guideline: buy enough coverage to rebuild your home and replace your belongings.
Be sure to read your policy and understand how protected you are from the unexpected. Contact us today for a review of your coverage limits. We’ll tell you if you need to make any necessary adjustments based on the totality of your circumstances.