For many, insurance is a daunting topic. Understanding the types of coverage, terms and conditions of the policies, and balancing protection against value. Homeowners insurance intimidates many because it is comprehensive – covering both possessions and physical structure – along with providing protection against injury claims from accidents on your property.
Although it can be intimidating, one of the tips that we provide to first-time homebuyers is that they shop around for homeowners insurance policies before buying property, as many lenders require such policies. Even if it isn’t required, these policies are essential because a home is an investment that you can’t afford to lose.
Those things in mind, below are a few answers to the primary things that homeowner’s insurance entails.
What does homeowner’s insurance cover?
Most homeowner’s insurance policies cover your possessions within the property, and during travel. It also covers the primary residence and other structures on the property such as detached garages, sheds and in-law units. The third core component of these policies is liability coverage to cover medical and legal costs associated with injuries on your property.
While most of these policies have broad coverage for events such as fire, explosions, hail, and theft, you need to pay close attention to the associated exclusions. For example, homeowner’s insurance policies often cover water damage from faulty plumbing, but coverage for natural floods requires a separate policy.
Other common exclusions include regional-specific issues such as mold, landslides, government action, nuclear hazards and general wear and tear.
What are the most common homeowner’s insurance policies?
The primary types of homeowner’s policies on the market today include:
- HO-2: A basic policy that covers specific problems such as fire, theft, riots and other events/disasters that have clear definitions.
- HO-3: A comprehensive policy that covers named and unnamed risks, except for specific exclusions set by the insurance company.
- HO-5: A comprehensive policy that covers both the home and other structures on the property from loss, if it’s not due to what the insurance company excludes.
In addition to standard homeowner’s insurance coverage, you should also explore purchasing an umbrella policy. This coverage comes in handy if you have a claim that maxes out your standard policy. If your property has a swimming pool, for example, these policies can be invaluable
How much coverage do I need?
The amount of coverage carried by homeowners is determined on a case by case basis. Some homeowners only need minimal coverage, while others choose to purchase comprehensive policies. You should consider the value of your home, possessions and the chances that someone would file an injury claim against you.
Another consideration for property coverage is whether to purchase “replacement cost” or “actual cash value” coverage. The former means the insurance company would pay the full cost to replace a damaged item (within limits) without accounting for depreciation. On the other hand, “actual cash value” accounts for depreciation, but it often is more affordable.