Understanding the basics of home insurance
To ensure you
have the protection you need, make sure you're clear on the
terms. Here's the foundation for the seven basic types of
Home insurance usually boils down
to two crucial concerns: protection and price.
The proper home insurance
coverage consists of buying the right type of policy, having
the proper levels of protection within that policy --
including special provisions for jewelry, your computer and
other particularly valuable possessions -- and supplementing
this coverage with special protection against natural
disasters that are not covered
in your basic policy.
Homeowners with mortgages are
required by their lenders to have home insurance. Many
people may think that the policy terms required by their
lenders represent "OK" levels of insurance, but this may not
be true. Lenders want to make sure their exposure is
covered, but that can happen without you being fully
protected. Thus, it's important that you calculate your
needs as well and make sure they are reflected in your
There are seven basic kinds of
home insurance policies and they're pretty much the same
regardless of where you live (except for Texas). They tend
to be defined by the perils they cover:
HO-1. Basic homeowner stuff.
Covers your dwelling and personal property against losses
from 11 types of perils: fire or lightning, windstorm or
hail, explosion, riot or civil commotion, aircraft,
vehicles, smoke, vandalism or malicious mischief, theft,
damage by glass or safety glazing material that is part of a
building and volcanic eruption.
HO-2. Basic homeowner stuff
plus some. Covers dwelling and personal property against
11 perils plus six more: falling objects; weight of ice,
snow or sleet; three categories of water-related damage from
home utilities or appliances; and electrical-surge damage.
HO-3. Extended or special
homeowner stuff. Covers 17 stated perils plus any other
peril not specified in
your policy, except for flood, earthquake, war and nuclear
HO-4. Renters' coverage.
Covers only personal property from 17 listed perils.
HO-5. All risk coverage for
building and personal property. This policy form isn't
sold very often anymore.
HO-6. Condominium owner
coverage. Covers personal property from 17 listed perils
along with certain building items in which the unit owner
might have an insurance interest.
HO-7. Basic older-home stuff.
Covers dwelling and personal property from 11 perils.
Differs from HO-1 in that it covers repairs or actual cash
values, not rebuilding costs. This is for homes where some
historic or architectural aspects make the home's
replacement cost significantly higher than its market value.
There are variations on these
policies as well. For example, landlords can buy coverage
that insures only their dwelling and not your personal
property (which is what a tenant's renter's policy would
cover). And you can get special policies to cover mobile
homes (a k a manufactured housing). Most homes are covered
by HO-2 and HO-3 type policies.
Starting an application
Home insurance companies research
a wide range of personal information including your current
occupation and employment history, marital status, previous
addresses, date of birth and Social Security number. Armed
with that information, they will check your criminal, credit
and insurance history to see if you are a "good risk." They
also will look at your loss history to see what kinds of
home insurance claims you've made in the past. They'll look
into any previous home insurance coverage you may have had,
as well as why you or your insurer canceled that coverage
(if it was canceled involuntarily).
They'll also want you to pick a
type and level of home insurance coverage. They'll want you
to decide what dollar amount or percentage deductibles you'd
like to have, and the sort of payment schedule to which
you'd be agreeable.
Analyzing your home
Your house also plays a role in
determining how much you'll pay for homeowners insurance.
Typically, insurance companies want to know everything, from
when your home was built, to where it is located, to what
your house and roof are made of. They'll want to know the
square footage and number of rooms, and they will calculate
the cost to rebuild it.
They'll also want to know the type
of heat, the location on any fuel oil storage tank, and the
condition of the home, inside and out, as well as the
condition of the foundation. Other home-related statistics
include the number of residents, distance from a fire
station and fire hydrant, and the area's fire safety rating.
Protection devices such as
deadbolt locks and smoke detectors can lower your rates.
Extra features, such as the existence of an in-ground pool
or a trampoline, can raise rates. You can also expect to pay
more if you are located in a higher risk area, such as a
coastline, or if you have a pet that could increase your
liability risk, such as certain breeds of dogs. Your
insurance company will also want to know if you plan to use
the home for any business purposes, or if you plan to rent
all or part of the house, both of which can increase
Armed with all that information,
insurance companies can determine how much to charge you for
insurance, sometimes in a matter of minutes. Then the ball
is back in your court to decide whether to accept their
offer, make changes to lower your premium, or go off in
search of a different company.
There are many special coverage
provisions offered by insurers, but here are some basic
questions that you should answer as part of the home
In the event of a serious
loss -- let's say it's a fire that destroys the house -- how
would I fare?
In most cases, you want to insure
your dwelling and its contents for their replacement values,
which likely will differ from the dwelling's market value
and your personal property's depreciated cash value. You
probably also should get a policy with automatic inflation
adjustments so that the replacement cost keeps pace with the
general level of price increases. (Homes insured under HO-8
policies are only covered for repair costs or actual cash
values, since replacing them would be so costly. Owners of
such homes could always get replacement insurance under
another type of policy, but they'd probably pay astronomical
Standard coverage normally insures
your possessions at 50% of the value of your dwelling. Many
people boost this coverage to 70% or 75% with additional
protection. But there are still individual limits on certain
types of personal property (see below).
Free-standing structures on your
property (garages, gazebos, tool sheds) are also covered,
with standard protection equal to 10% of your dwelling.
Trees and shrubbery normally can be replaced up to a limit
of 5% of your dwelling coverage. As is the case with your
personal property, you should assess your needs to determine
if you want to pay extra amounts to increase these levels of
Also, pay attention to what might
happen if you were to lose the use of your home for an
extended period. Loss-of-use provisions are important
elements of homeowners' policies, and coverage levels equal
to 30% or more of your dwelling's insurance aren't unusual.
If someone who is not covered
on my health insurance were to suffer a serious injury in my
home, and I was found liable, how would I fare?
The standard level of liability
protection in homeowners' policies has been $100,000, but
it's rising all the time. Today, $300,000 is not an uncommon
amount, and even higher levels are recommended for affluent
homeowners with lots of assets to protect. In this
situation, "umbrella" policies have become popular. These
policies provide excess liability coverage on both your
homeowner and automobile policies, and are not that
expensive (you normally need to carry both underlying
policies with the same insurer).
What if I have certain
possessions -- computer equipment, cameras, jewelry -- whose
replacement values far surpass normal coverage limits in my
Standard policies may not come
near covering the replacement costs of even moderate amounts
of home electronics hardware or expensive possessions. For
relatively small amounts, you can purchase "floaters" that
will add protection to certain types of personal property.
In addition, equipment related to
a home-based business will not be covered satisfactorily
unless you obtain a separate commercial policy.
Can I get a high deductible
-- say, $1,000 -- in order to save money on the policy?
The differences in annual premiums
between policies with deductibles of $250 (you pay the first
$250 of damage, the insurer pays the rest), $500 and $1,000
may easily be worth 20% to 30% of the annual premium. So, if
you can afford the expenditure, and want to place a small
bet that you won't face a home-related loss, consider a
What other protections does
my policy provide?
Homeowners' policies regularly
provide other types of coverage, including off-premises
theft protection and unauthorized use of your credit cards.
Make sure you understand which provisions are included in
the standard coverage you elect to purchase and which may
require supplemental premiums.