Homeowners insurance takes a bite out of your budget when you own a home. Laura covers ten facts you should know about home insurance so you get the most out of it, fully understand the coverage, and pay less.
When you borrow money to buy a home, the lender requires that you purchase insurance to protect their interests. Unfortunately, many people who must buy homeowners insurance never really understand all of its features or how they could save money on premiums.
In this post I’ll cover 10 facts you should know about home insurance so you get the most out of it and pay less.
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10 Facts You Should Know About Homeowners Insurance
In addition to meeting your mortgage requirements, having a comprehensive homeowners policy is a smart way to protect your financial future. You probably know that it pays to repair or rebuild your home after a disaster.
In addition, there are lesser-known coverages it includes, such as additional living expenses or ALE, which pays a certain amount of lodging and meals when you’re forced to move out of your home while repairs are made after a covered disaster.
Plus, you should have liability coverage to stay safe from a lawsuit if someone gets hurt on your property or you injure someone or their property in or outside of your home.
However, unlike with auto insurance, there’s no law that says you have to purchase any amount of home insurance. So once your mortgage is paid off you can drop coverage if you like, but I generally don’t recommend it.
Here are 10 facts you should know about homeowners insurance to protect your personal finances:
Fact #1: There are different types of homeowners policies
Home insurance is pretty standard across the U.S. However, some states or insurers may offer policies that are slightly different.
The most popular homeowners policy is called HO-3 and it gives you open perils coverage. That’s industry jargon which means it protects you against all disasters, except any that are specifically excluded in the policy. Theft, fire, and tornadoes are examples of perils.
An HO-3 policy also insures your personal belongings, but it only gives you named perils coverage for them. That means you’re only covered for disasters listed or specifically named in the policy.
So If something happens to your personal property—such as your furniture, clothes, or TV—and the peril that caused the damage isn’t listed in the policy, you’re out of luck.
There’s another type of homeowners policy called HO-5, which gives you open perils coverage for both your home’s structure and your personal property. It typically costs more and may not be offered by every insurer, but could be worth it if you have many valuable possessions.
Condo or co-op owners need an HO-6 policy, which covers the structural parts of the building that you own against named disasters, including your belongings and personal liability.
No matter what type of policy you have, there are 3 options for the amount of coverage you’ll receive, minus your deductible, when you make a claim:
- Cash value coverage – pays to repair or replace your property or possessions up to the policy limits, less a deduction for depreciation. It’s sometimes called market value coverage. This is the least expensive option, however, it means you probably won’t get a payout that’s enough to rebuild your home or replace personal items after a serious disaster.
- Replacement cost coverage – pays to repair or replace your property or possessions up to the policy limits, without a deduction for depreciation. This costs more than cash value coverage, but means you could fully replace what you lost. When you have an HO-5 policy, this is the typical coverage amount.
- Guaranteed or extended replacement cost coverage – gives you the highest protection because it pays the cost to replace your home as it was before a disaster, even if it’s higher than the policy limit. Some companies extend the benefit to a certain percentage over the limit, such as 25%.
If you include the value of land in your home insurance, you’ll end up paying an unnecessarily high premium.
When setting your homeowners coverage limits, remember that the price you pay for a home includes the land, which is never insurable. You only need insurance to rebuild or repair damage to your home’s structure and outbuildings. If you include the value of land in your home insurance, you’ll end up paying an unnecessarily high premium.