Everyone who owns a home needs homeowners insurance. That much is easy to comprehend.
But the trickier part for more people is exactly what to look for in homeowners insurance. There are a lot of nuances, options, and details to be aware of as you shop for a plan.
That's why I compiled this post on the ins and outs of homeowners insurance. It's a primer on everything you need to know when shopping for a plan.
So you'll be able to make an informed decision on precisely what type of plan and insurer is perfect for you.
Sound good? Keep reading to find out more!
Homeowners Insurance Basics
Let's first go over exactly what homeowners insurance is.
At its core, homeowners insurance is property insurance, and it's set up to cover privately owned homes and the contents inside them. Sometimes its referred to as "home insurance" or "hazard insurance"
It's a type of policy where the premiums are made as regular payments (usually monthly) directly to the insurer.
Those premium payments cover both the property insurance and the liability insurance and are generally priced out based on how much it would cost to replace the home and its contents in the case of a catastrophic incident.
Why Buy Homeowners Insurance?
The three primary reasons you buy homeowners insurance are to provide property coverage, to provide liability coverage, and to satisfy the requirements of your loan from your lender.
Property coverage applies to the actual physical structure of your home, as well as its contents. It covers you if they get damaged or destroyed.
Liability coverage has to do with anyone who gets injured or killed while on your property. If they aren't covered under your policy, you'll need liability insurance to cover your legal responsibility.
Virtually every lender will insist that a homeowner have homeowners insurance before they will enter into a mortgage agreement with them.
So homeowners insurance satisfies this obligation for anyone borrowing money to buy their house.
Types of Homeowners Insurance
There are several types of homeowners insurance policies to be aware of. They include:
Basic Homeowners Policy: This is the standard policy that most people are familiar with. It protects you against the ten most common dangers. Those include explosions, lightning, and fire smoke. They also include volcanic eruptions and damage from an aircraft.
Broad Form Policy: This policy covers everything from the above, but adds in a few more. Chief among them are electrical current accidents from electric currents.
Special Form Policy: This is an extension of the previous two policies and covers you in a broader scope. It covers everything from the Basic and Broad Form plan, but also covers you if you injure another person or damage their property.
Comprehensive Form: This is an even more expansive level of coverage. It's basically the coverage in the prior plans, but covers even more perils.
Tenant’s Form: This is another name for renters insurance. It might not seem like you need renter's insurance as a homeowner, but it provides you with coverage for your personal belongings as with personal liability insurance.
Condominium Unit Owners Form: If you purchase a condo, you'll need a slightly different form of insurance. This coverage protects personal property and the floors, walls, and ceiling of your condominium.
Mobile Home Form: As the name implies, this is coverage specifically designed for owners of mobile homes.
Older Home Form: This coverage is designed specifically for older homes. Often, the cost to rebuild an older home is more than the market value of the home.
Dwelling Fire Form: This coverage is popular for vacation homes. It doesn't cover personal property or personal liability. Instead, it only covers the structure for a few specific dangers like fire.
Generally speaking, your homeowners insurance won't apply until you have a loss caused by a specific peril. Then you will get compensation to cover it.
For most policies out there, this includes theft/vandalism, trees or other falling objects, and water damage from a ruptured pipe. It also includes the weight of snow, ice, and sleet, and damage from a vehicle or aircraft.
Finally, they will cover damage from fire, smoke, wind, hail, explosions, and lightning.
At the same time, there are some common dangers that aren't covered. This is usually in instances where those dangers common in that geographical region.
Examples are floods and backed up sewers, earthquakes, landslides, and mudflows. Other ones are damage from pets, rodents, and insects, and pollution damage.
Finally, there's damage to the home done deliberately, and normal wear and tear.
ACV Versus RCV
First, let's go over the definitions of actual costs as compared to replacement costs.
Actual cash value, sometimes called ACV is an insurance method that compensates you for damage or destruction to your possessions based on what they are actually worth at the time.
It essentially means that any item that has had wear and tear and depreciation over its lifespan will be worth less than buying a new one. So the reimbursement you'd get for it would be less.
With ACV plans, you'll get paid less than market value for your items. But the tradeoff is that your monthly premiums are usually lower.
Replacement Cost Value, or RCV, is an insurance method that makes an assessment of what it would cost to replace your items at their current value. Then it reimburses you that amount for the items.
With RCV, depreciation and wear and tear aren't factored in. And the coverage costs more. It usually has around 10% higher annual premiums than ACV plans.
With this plan, you should make sure the coverage amount is enough for the full RCV of the home you're covering.
How Much Coverage
The amount of coverage you should get will vary depending on several physical factors of the house, as well as its market value.
Some of the important factors that any insurance agent will ask about are the square footage, when it was built, and the number of bedrooms and bathrooms. They'll also ask about where the house is located, and the type of construction.
Some other details they'll want are the type of roof and how old it is, the type of garage it has, and the foundation type. Plus they need to know if it has security systems, and smoke alarms, as well as any HVAC systems that are installed.
The best way to figure out how much exact coverage you need will be to shop around. Contact a few different insurance agencies and insurance brokers to see what kind of quotes they give you.
But be sure to ask for the same coverage limits and provide the same info to every agent. Otherwise, you might not get quotes that are an accurate comparison.
Ways To Reduce Your Premiums
There are ways you can reduce your annual and monthly homeowners insurance premiums.
One way is to install and maintain a security system and a burglar alarm. If it's a system that is monitored by a central station, or connected to your local police station, it can reduce your annual premiums by up for 5%.
Just keep in mind you'll need to show proof of the monitoring service, usually by providing a bill to your insurance company.
Another method is to install smoke alarms. If you have a more modern house, this may already be taken care of. But installing smoke alarms in an older house that doesn't have them can reduce your premiums by up to 10%
And adding deadbolt locks to the doors, a sprinkler system for fire protection, and a carbon monoxide detection system can also help bring your premiums down.
You can also go for a higher deductible. Every bump up in your deductible amount will reduce your annual and monthly payments.
The drawback is that with a higher deductible, you'll likely have to spend more out of pocket. This is because with homeownership, there are always little things that require fixing or replacing.
And if your deductible is higher, you'll always be paying for these on your own.
Other Ways To Reduce Your Premiums
If you have other forms of insurance, like car insurance and health insurance, consider getting your homeowners insurance from the same company. Often you can get a discount of up to 10% when you bundle your various insurance policies.
It's also good to note that when you've paid off your mortgage, you get better insurance rates. So while that might be a ways off in the future, it's another incentive to try to pay it down as quickly as possible.
What to Look for in Homeowners Insurance
Hopefully, this post has given you a better sense of what to look for in homeowners insurance.
There are a lot of options out there, but if you are diligent about shopping around, and take steps to educate yourself on the various plan types and language involved, you'll be in better shape.
If you have any questions, contact us today!