In 2020, 6% of insured homes in the US filed a home insurance claim. That’s more than 8 million homeowners who have had to file a claim due to property damage from weather events and break-ins, and theft.
Homeowner insurance is extremely important for anyone who owns a home, whether they have a mortgage on the property or not.
Anything can happen at any time. If you don’t want to be on the line for the cost of repairing your home or replacing personal belongings, you need to understand the different types of home insurance policies.
You need insurance options that are actually going to help you out when you are ready to file a claim.
So what are the home insurance policies you need to know about? Keep reading below to learn all about home insurance coverage today.
Homeowners Insurance
If you finance the purchase of your home, your lender will require you to get a homeowners insurance policy in place before you sign the documents and get your key.
Why? Because their money is on the line. If something were to happen to the home, and you couldn’t pay to repair it, they lose money, too.
If you own your home outright, insurance is optional. But not having a policy in place is extremely unwise.
If a hurricane blows through your city and demolishes your home, you’d have to pay out of pocket to repair, rebuild, or buy a new home.
But if that same hurricane blows through and destroys your home with a homeowners insurance policy in place, you can file a claim. Your insurance company will assess the damage and determine how much it will cost to fix.
They will pay for the repairs minus your deductible. Since your home is likely your biggest investment and most important asset, it makes sense to get the best possible policy that you can afford.
What Does Homeowners Insurance Cover?
Home insurance policies are highly customizable. There are no one-size-fits-all policies. But most will cover a few of the same things.
Damage to the Home
The most basic form of home insurance is protection from damage caused to the interior or exterior of your home. If a weather event blows down and rips your roof off or knocks a tree onto your home, your insurance policy would cover the cost to repair the damage.
Your specific policy will outline the types of disasters covered and those that specifically aren’t covered. Most often, damage from fires, lightning, hurricanes, and theft or vandalism will be covered.
Certain types of disasters are usually excluded, such as floods or earthquakes. If you’re in an area prone to these disasters, you’ll need an additional policy in place to protect your home. Considering that flooding is the most dangerous part of a hurricane, it makes sense to have flood insurance if you’re in the Southeast.
Also, your basic policy will only apply to your home. If you have any structures on your property that aren’t attached to the home, like a shed, guesthouse, or fence, you might need to customize your policy to include them.
Personal Belongings
Your policy will also cover the cost of your personal belongings stored inside the home. If your home sustains damage in a weather event, or your experience theft, your policy can pay to replace those items.
This includes everything from furniture and electronics to clothing, jewelry, collectibles, and so on. There’s typically a limit on the coverage for personal belongings that averages about 50% of the insured home’s value.
So if you insure your home for $300,000, your personal belongings coverage will be around $150,000. However, this number is customizable whether you have more or less stuff in the home.
And you can also add additional coverage for items lost outside the home, too.
Liability Coverage
Liability coverage is very important. It protects you from lawsuits should your property (or pets) cause harm to others or property damage to other people’s properties.
If someone gets injured while on your property and sues you, you should be covered. Likewise, if your pet or child causes an injury to someone on your property, such as at your neighbor’s property, and they sue, then you would still be covered.
Liability coverage ran ranges from $100,000 to $1 million, though somewhere around $300,000 is typically recommended for most homeowners.
Additional Living Expenses
Say your home is badly damaged during a hurricane. The roof has come off, the windows are gone, and the power is going to be out for weeks.
The home is unlivable, even though your insurance policy is going to cover the cost of repairs. But repairs can take time.
In the event you need to live elsewhere for a period of time, your policy should include additional living expenses to cover the cost of hotel stays as well as meals until your home is livable again. There may be other costs that can be reimbursed as well.
You’ll essentially have a daily limit on reimbursements available. So you won’t be able to book the most expensive hotel and eat at. 5-star restaurants. But you can go somewhere comfortable as opposed to the cheapest hotel in town.
You’ll need to pay for everything out of pocket, save your receipts and deliver them to your insurance company for them to reimburse you.
Different Types of Home Insurance Policies
Homeowners’ insurance coverage works differently depending on the policy chosen. How your policy pays out, and how much, determines which plan you sign up for. Here are the three main levels.
Actual Cash Value
Actual cash value policies will pay to cover your home and belongings at their current cash value. This factors in depreciation.
If you bought a nice TV for $700 two years ago, it might only be worth $300 today. So you’d get paid out according to its current value.
Replacement Cost
Replacement cost policies don’t factor in depreciation. Instead, they payout based on how much it would cost to replace those items or make those repairs today.
So if that same TV you purchased two years ago for $700 was destroyed, you would receive a payout of around $700 (give or take) to purchase a comparable one today.
Guaranteed Replacement Cost
This is the most extensive type of homeowners policy. It’s an inflation-proof policy.
It will cover the cost to repair or replace your home even if it costs more than your policy limit. But there is a limit, often no more than 20% to 25% above your policy limit.
This ensures that you can repair or rebuild your home at today’s prices rather than hoping you have enough to make those repairs. Other policies focus on the cost it would be to replace the home back when you purchased, it or even when it was built.
But it would cost much more to build it today, and a guaranteed replacement cost policy gives you the peace of mind to rebuild in today’s market.
What Isn’t Covered by Home Insurance Policies?
Home insurance policies are meant to cover most events that homeowners face in the US, but not all. There are certain events specifically not covered, and some you can purchase additional policies for.
As mentioned earlier, earthquakes and floods aren’t covered, and additional policies should be purchased. The cost of flood damage is rising each year, and millions of homes are susceptible, even if they aren’t required to have flood insurance.
Other types of water damage, such as backed-up pipes or sewers also aren’t covered.
Termites and insect damage generally aren’t covered either. If DIY repairs or additions to the home are built poorly and fail, these probably aren’t covered.
And if the power goes out and all your food is spoiled, you’re likely on your own with that.
Renters Insurance
Even if you don’t own a home, it’s likely you’ll need to have renters insurance in place in an apartment, single-family home, or another type of rental unit. Many landlords require you to have a renters insurance policy.
Renter’s insurance covered the main things that homeowners insurance covers, which include personal belongings, liability coverage, and additional living expenses.
The main difference is that a renters policy likely doesn’t cover the physical structure, since it’s not your property. Landlords will have a separate policy in place that covers the cost of repairs or replacements of the building.
But a landlord’s policy rarely extends to the tenant, so all renters should have their own policy in place.
Homeowners Insurance Tips
Your goal shouldn’t be to get the cheapest policy available. When it comes time to file a claim, you want the best possible plan to cover you.
Still, you can save money when shopping for a policy.
For one, you can install a security system at your home. It can deter theft from ever happening. But it can also provide you with discounts on your policy.
You can also bundle multiple insurance policies with one provider, as they typically offer bundle discounts.
You can also raise your deductible. This will lower your monthly premium but increase the cost you need to pay before for repairs before your policy kicks in.
Insuring Your Biggest Asset
For most people, the home is the biggest asset. It’s the most important thing you own. So it makes sense to protect it as best as possible.
The different types of home insurance policies can be confusing. Buy by speaking with multiple agents, specifically those not tied to a single insurance company, can help you find the best possible options.
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