Comprehensive home insurance can reduce what might be a disaster to a bump in the road. Some damage happens unexpectedly and could be as simple as forgetting to turn off a pot before bed. Other times homeowners are impacted by truly consequential events like natural disasters. No matter the cause, the destruction of your home and belongings is a horrible experience to live through and having inadequate insurance only makes matters worse.
Homeowners insurance isn’t a luxury; it’s an absolute necessity. That’s not just because it protects your home and possessions against damage or theft. Nearly all mortgage companies require borrowers to have insurance coverage for the full or fair value of a property, usually the purchase price, and won’t make a loan or finance a real estate transaction without proof of it.
The first and most fundamental question to ask when shopping for homeowners insurance is, “What does it cover?” A standard homeowners insurance policy typically covers the following:
- Dwelling coverage: This protects your home’s structure in case of damage due to nightmares such as fire, windstorms, and vandalism.
- Personal property coverage: It provides protection for your belongings, including furniture, clothing, and electronics, if they are damaged or stolen.
- Liability coverage: This covers legal expenses and damages if someone is injured on your property and sues you.
- Additional living expenses (ALE): If your home becomes uninhabitable due to a covered peril, ALE helps cover the cost of temporary accommodation and additional expenses.
Let’s Touch on Coverage Limits
Every homeowners insurance policy has coverage limits, which are the maximum amounts the insurance company will pay in the event of a claim. It’s critical to determine financially if these limits are sufficient to replace or repair your home and belongings. If your policy’s limits are too low, you could essentially be responsible for covering the remaining costs out of pocket.
Homeowners insurance policies have an all-perils deductible and wind/hail deductible. All peril deductibles apply to the inside of your home and can range from $500 to $5,000. Wind/Hail deductibles apply to the outside of your home including your windows. Deductibles range from $1,000 to 1% of your dwelling rebuild dollar amount. The deductible is the amount you must pay out of pocket before your insurance company kicks in and pays the remaining of the balance to have your home repaired.
Which is Better: Actual Cash Value or Replacement Cost Coverage?
When it comes to personal property coverage, you’ll need to decide between actual cash value (ACV) and replacement cost coverage. ACV coverage reimburses you for the current market value of your damaged or stolen items, factoring in depreciation. On the other hand, replacement cost coverage covers the cost to replace your items at their current market prices. While ACV coverage is the less expensive way to go, replacement cost coverage can help you replace your belongings with brand new items.
Constance Squires with HomeServices Insurance told us, “The horrible fires in Boulder County a few years ago revealed that so many homeowners were inadequately insured to rebuild their homes. Many weren’t able to rebuild with the funds they received because the cost of demolition and construction had risen far above their coverage limits.”
Don’t Forget Liability Coverage!
Liability coverage is essential for protecting you in case of home accidents. Ensure that your homeowners insurance policy includes adequate liability coverage to protect your assets and provide financial support in the event of a lawsuit.
Insurance companies often offer discounts on homeowners insurance policies. These discounts can help reduce your premiums and make the policy more affordable. Common discounts include multi-policy discounts, when you bundle homeowners insurance with auto insurance or other policies from the same insurer.
Other possible discounts can include home security features, like installing a security system or smoke alarms, having a claims-free history, and loyalty discounts, which translates to staying with the same insurer for an extended period.
Special Coverage for High-Value Items
If you have valuable items like jewelry, artwork, or antiques, consider whether you need additional coverage for these items. Standard homeowners insurance policies often have limits on the coverage for high-value items. You may need to purchase a separate endorsement or schedule these items for full protection.
Looking Into Policy Exclusions
Understanding what your policy does not cover is just as important as knowing what it does cover. Exclusions are circumstances or perils that are not covered by your homeowners insurance.
This is everyone’s nightmare: to hear from an insurance provider that catastrophic damage is not covered by insurance. Common exclusions include damage from floods, earthquakes, and neglect or intentional acts. If you live in an area prone to these perils, consider purchasing additional coverage or a separate policy.
There are also some home repair and maintenance costs that are often not covered. Many standard policies exclude damage from sewer or drain backups. Repairs or replacements due to the normal course of use are also generally not covered. Damage caused by termites, rodents, other pests, mold, and mildew may also be excluded, especially if prevention methods were not taken by the owners.
How Are Homeowners Insurance Rates Determined?
Rates are set based on your insurance credit score and the likelihood a homeowner will file a claim, otherwise known as the insurer’s “risk.” To determine risk, home insurance companies give significant consideration to past home insurance claims submitted by the homeowner as well as claims related to that property and the homeowner’s credit.
Insuring a home that has had multiple claims in the past three to seven years, even if a previous owner filed the claim, can move your home insurance premium into a higher pricing tier. This is a red flag to underwriters that the home may be a possible liability to insure. Meanwhile, the neighborhood, crime rate, and building material availability will all also play a part in determining rates.
Homeowners insurance is a critical component of safeguarding your home and property. Remember that not all insurance policies are created equal, and it’s essential to shop around, compare quotes, and work with a reputable insurance provider to find the right coverage for your home.
Your insurance needs may change over time. Make sure your homeowners insurance policy allows for flexibility and plan to check in annually with your insurance company on your coverage.
At Kentwood Real Estate, we’re here to help you find the perfect space to call your home. Feel free to reach out to us for more information online at www.Kentwood.com.
*Updated as of November 8, 2023