Who Needs Home Insurance?
Home insurance (often referred to as homeowners) should be purchased by just about anyone that wants to protect themselves financially from a major loss related to their house or belongings. In short, everyone should have home insurance.
Banks will often require an individual to obtain a homeowners policy before lending money for the purchase of a new house. They can also require ongoing coverage to guarantee the house is protected.
What Does Home Insurance Cover?
Home insurance is like a group of policies all rolled into one. Home insurance policies can cover everything from the structure itself to liabilities that arise on the premises. Here are the basic coverage items many home insurance policies have:
The Home Itself – Home insurance will generally cover the building or structure associated with the policy. That means damage that happens to the home will be paid for, as long as the damage was caused by a covered peril (more on covered perils later).
Personal Property – Policies often will cover the items that are stored in the home, such as TVs, furniture, clothes, etc. In some cases a homeowner’s policy may even cover items stored in a car that were stolen as well. If a policy does cover the contents of a home, there is usually an associated maximum value. This means the insurance company will pay for lost items until they reach the policy maximum. After that, the insured is on their own for replacement costs.
Reimbursement For Losing a Home – Home insurance policies will often cover the cost associated with being temporarily displaced by a covered incident. If a family must live in a hotel for a period of time while a house is repaired, the insurance policy would cover up to the stated terms. It can also help replace lost income if the house is rented out to tenants.
What Are the Different Types of Home Insurance?
There are nine different types of homeowners insurance policies. For the scope of this guide, we will cover the three main policy types that are related to family homes and home owners.
HO1 – Basic Form Homeowner Policy – The basic homeowner policy protects against 11 “named” perils. They include: fire, windstorm, vandalism, theft, damage from vehicles, civil commotion, glass breakage, smoke, volcanic eruption, and personal liability. As long as a loss occurs and one of these 11 listed is the cause, the insurance company will pay for the damages up to the listed amount on the policy.
HO2 – Broad Form Homeowner Policy – The broad policy covers all 11 perils listed in the basic policy, plus damage caused by: bulging, discharge of water or stream, artificially generated current, falling objects, weight of ice or sleet, and freezing.
HO3 – Special Form Homeowners Policy – The special home policy is considered an “all-risk” policy, which means it covers everything except any exclusions listed in the contract. Typical exclusions are things like earthquakes and flooding. If the cause is not listed as an exception, it should be covered.
Home Insurance Coverage Explained
One of the most important parts of any insurance policy is how the company will determine the value of something which is lost in a covered incident. Unfortunately, the terms used can be a little confusing for many individuals. Here are the main ways that insurance companies value property:
Actual Cash Value – ACV is a method that calculates value by subtracting depreciation from the cost of replacing an item. Let’s say a couch costs $3000 to replace today. The insurance company determines that a typical couch has a “shelf life” of 10 years, and couch which was lost was 5 years old. Since the couch had 50% of its life remaining, the insurance company would pay $3,000 x 50% = $1,500.
Replacement Cost – (or Replacement Value) Determines the value of an item by how much it costs to replace at today’s prices. Using the above example, the insurance company would pay $3,000 since that is what it costs to replace the full value of the couch.
How Much Home Insurance Should You Get?
When figuring out how much home insurance to buy, it is important to remember the long-held belief is get a policy for 80% of what it would cost to rebuild your home. The idea here is that most accidents will not totally wipe out a house, but recent disasters have proven otherwise in some cases. Either way, 80% is a good minimum.
When insuring the contents of a home, it is important to get a realistic value on what everything costs to replace. People often overlook how much money it would take to repurchase all the clothing lost by an entire family, or all of the furniture in case of a big disaster. Imagine starting fresh with nothing. How much money would it take to buy everything over again?
Who Should You Buy Home Insurance From?
There are a number of insurance providers in the US that sell home insurance, and there is no shortage of agents in just about every city. It is important to find a company that is both reputable and financially strong, because you will likely be insuring your most valuable asset with them. We have reviewed dozens companies, and in our opinion the best home insurance company is: