Your home is your sanctuary. At the end of a long day, it’s where you go to kick your feet up and relax, surrounded by the people you love. It’s where you make your most important decisions, and where you forge your most precious memories. So the last thing you want to think about is something bad happening to your home.
The unfortunate truth is that disasters happen. If that day comes, it’s important to know that your assets are protected so you can bounce back with ease. In this guide, we’ll walk you through the 8 most important things to know about homeowners insurance.
#1: What’s Covered by Home Insurance?
Your homeowners insurance policy may cover more — or less — than you think it does. It’s important to clarify your specific insurance policy with your insurance representative. However, most home insurance policies cover your dwelling, liability, belongings, and additional living expenses to some extent. Here’s what you need to know about these individual coverages.
Dwelling protection covers your home itself in case of things like fire, vandalism, wind damage and hail damage. In this context, dwelling specifically refers to your walls, roof, and floors. When you have dwelling insurance, if there’s a catastrophic emergency, the insurance will pay an amount of money to help you fix the problem and get back into your dwelling as soon as possible.
It’s important to know that your dwelling insurance specifically helps you repair your home, but does not cover your vehicles or other property. Additionally, the dwelling portion of your insurance covers fixtures, like cabinets and sinks, but does not cover non-fixed portions of your home like your furniture.
When you decide how to insure your dwelling, consider looking at insuring at the replacement cost (RC) rather than the buying cost of your home. Although many people mistakenly cover their dwelling at its market value (what they could sell the house for), you may find that the amount of money it costs to rebuild your dwelling is very different from its market value.
Liability insurance is there to protect you if someone chooses to sue you based on something that happened on your property. For example, if you forgot to salt your steps and the mail carrier fell and broke an ankle, they could choose to sue you. The liability portion of your homeowner’s insurance policy prevents your assets from being seized under these circumstances.
Your liability insurance is there to cover expenses for injuries, court fees, property damage, and any additional money awarded to the person who sues you. In general, you should aim to have at least $300,000 worth of liability insurance. However, if you have a pool or a trampoline, you may need to have a higher liability insurance amount. This is because pools and trampolines increase the risk of injury occurring on your property.
Although the dwelling portion of your home insurance doesn’t cover furniture, clothing, or other personal belongings, that doesn’t mean that you have no allowance for these possessions in your homeowners insurance. Most insurance policies cover the replacement cost of your belongings up to 50-75% of your dwelling insurance amount.
What does this mean? If you have $100,000 of insurance on your dwelling, your policy will likely offer $50-$75k worth of insurance on your belongings as well.
For many people, your belongings insurance is enough to cover the cost of replacing basic household items in case of a fire. However, if you have expensive art or high-priced jewelry in your home, you may want to speak to your insurance agent to see if it makes sense for you to have your belongings assessed and to increase the amount of insurance you carry for your belongings.
Additional Living Expenses
Imagine you suffered a house fire and had to leave your home for an extended period of time and live elsewhere. The additional living expenses portion of your home insurance policy is there to help you in these types of circumstances.
If you have to live outside your home while it undergoes repairs or is rebuilt, additional living expenses insurance is there to help cover the cost of living somewhere else, including:
- Hotel or rental fees
- Emergency clothing
- Food while you’re staying elsewhere
#2: What Isn’t Covered by a Typical Homeowners Insurance Policy?
Although your home insurance policy is there to cover you for most major home catastrophes, there are a number of things your insurance policy won’t cover. Though there are many exclusions in a typical policy, the major ones to consider getting additional coverage for are preventable issues, flood insurance and earthquake insurance.
If your home is damaged because you refused to keep up with regular management, insurance will not cover those damages.
For example, if you ignore a leak in your roof and then wind up with mold in your attic, taking care of the mold will not be covered, because repairing the leak in your roof could have prevented that from happening.
Similarly, most home insurance policies do not cover termites or other pests. For this reason, insurance agents often recommend you go through a termite inspection before starting a new home insurance policy.
There are many “acts of God” that are covered in a standard policy, but flooding due to external conditions is never covered. You can purchase a separate flood insurance policy to cover this or an endorsement that gives the coverage can often be added as part of your existing home policy. Most of these policies are administered through the National Flood Insurance program which is run by the Federal Emergency Management Agency.
For the majority of states, earthquakes and other natural earth movements (such as sinkholes and landslides) are not covered by a standard homeowner’s policy. If you live in an area where these types of natural hazards are more likely to occur, you should consider these special catastrophic policies for these excluded conditions.
#3: What Are the Different Types of Home Insurance Coverage?
Not all homeowners insurance plans are the same. The amount of money your policy will pay if you make a claim, as well as the type of loss you are able to claim, depends on the type of home insurance coverage you have. There are three major types of home insurance coverage: actual cash value (ACV) coverage, replacement cost coverage, and extended replacement cost coverage.
Actual Cash Value
Actual cash value insurance is meant to pay you the actual value of the items you lost. For example, if you had an actual cash value policy and lost all of your clothing in a house fire, the insurance company would look at what those clothing pieces were worth, taking into consideration things like the age of the items and the depreciation of their value over time.
Unlike actual cash value insurance, replacement cost insurance calculates the amount of money to pay you based on what it will cost you to replace your items, rather than based on the amount of money the items were worth when they were lost.
Extended Replacement Cost
Extended replacement cost coverage not only covers the cost to replace your items or dwelling, but extends that amount of money by 10-50% (depending on the policy). The idea of extended replacement cost coverage is that it should cover any unexpected expenses that come up when you’re replacing your dwelling, such as increased building fees due to an unexpected demand for materials.
Guaranteed Replacement Cost
Guaranteed replacement cost also covers the cost to replace or rebuild, just as extended replacement cost does, but without any cap to the amount! With Guaranteed replacement cost you will have complete peace of mind. You know that if something were to happen you will not need to dip into your wallet to cover unforeseen costs, no matter how much that cost ends up being. This is an important consideration as it is very difficult to estimate the cost to rebuild a home considering fluctuation in costs over time such as materials, labor, etc.
#4: How Is Your Home Insurance Rate Calculated?
The average homeowners insurance policy costs $1,132 per year for a policy with $250k worth of coverage. However, the actual cost of your home insurance rate will vary based on a number of different factors.
Some of the factors included when calculating the cost of your home insurance include:
- The age of your home: This includes not only the age of the house itself, but also the age of things like its roof, HVAC system, plumbing system, and electrical system
- The size of your home & other structures: If you have a detached garage or additional dwelling unit on your property and are looking to cover that under your insurance as well, that will increase the cost of your insurance policy.
- The type of home: Construction materials, shape, and features of your home can all affect the cost to insure it. Your insurance costs can also be affected by the presence of a basement, crawlspace, or attic.
- The location of your home: Your insurance agent will look at geographical factors — such as how often it storms in your location — as well as factors like the crime rates in your area when determining your insurance rate.
- Building costs in your area: Building costs are not universal, and the price of materials in your area will affect the cost of your insurance policy.
- Personal factors: There are a variety of personal factors your insurance agent may also consider when determining the cost of your policy. This could include the number of people living in your home, the presence of any animals in your home — especially exotic animals — and whether or not you own hazards such as a pool or trampoline. And just like when you’re buying auto insurance, your credit score also factors into the cost of your homeowners insurance policy.
#5: How Can You Reduce Home Insurance Costs?
Many of the factors that go into determining your home insurance costs are out of your control. For example, while you may consider crime rates in your neighborhood when you’re looking at homes, once you’ve bought a home, you can’t change the neighborhood’s crime rates on your own. You also don’t have control over factors like building costs in your area or the overall age and style of your home.
That being said, there are a number of things you can do that may help reduce your annual homeowners policy cost. Here are a few things you can consider to save money in the long term.
Install a Home Security System
Installing a home security system may help reduce your insurance rates. A basic home security system is estimated to reduce burglaries by up to 87%. Since burglaries are one common incident insurance policies wind up covering, taking steps to prevent burglaries can have a positive effect on your insurance rates.
Update Your Home
There’s a good chance that if you live in an older home, making updates to your home over time is already on your to-do list. But did you know that if you make certain updates and report them to your insurance, they may be willing to reduce your insurance costs?
Major improvements to your home, such as improving your plumbing, electrical system, or roof, have the greatest possibility of reducing your insurance rates. Other improvements that may help your insurance costs include improvements to help make your home more weather-resistant, such as adding shutters to your windows or reinforcing your roof.
Additionally, some insurance companies offer green insurance discounts. This means that if you take steps to make your home more eco-friendly, you may see a discount on your insurance costs. Automatic water shut-off systems are a great example of a green improvement that has a high chance of also reducing the cost of your insurance.
Consider a Higher Deductible
Your deductible is the amount of money you’d be required to pay toward a loss before your home insurance would kick in. So, for example, if you have a $500 deductible, you would have to pay $500 out of pocket on any claim before your insurance would kick in.
Deductibles range widely, from as low as $500 to as high as $50,000. As a rule of thumb, the higher your deductible is, the lower your monthly payments will be. So if you have a fair amount of money in savings and would be able to pay a higher amount of your own money in an emergency, you can opt for a high deductible / low premium insurance plan.
Improve Your Credit Score
Your credit score is one important factor when it comes to the cost of your insurance policy. So, if you want the cost of your policy to decrease, you can take steps to improve your credit score. Generally speaking, a credit score above 700 is considered good and will have a positive effect on your insurance premiums.
Stay with Your Insurer
It’s important to shop around when you’re first buying insurance, but unless another insurance agency offers a significant discount on the same level of coverage, it’s not a good idea to keep changing insurance providers. Many insurance providers offer discounts to customers who have been with their company for five or more years.
Cancel Out-of-Date Policies
At the same time that you purchase your home insurance policy, you should review your other insurance policies and make sure you’re not paying for coverage you no longer need. For example, if you’re leaving an apartment to buy a home, you ought to cancel your renters insurance.
While canceling outdated insurance policies won’t change the cost of your new insurance policy, doing so can free up extra room in your budget, allowing you to pay the new insurance premiums more easily. Reviewing old insurance policies can also help you determine whether any of your policies can be bundled.
#6: What Does it Mean to Bundle Your Insurance?
Another way to save money on your insurance policy is to bundle your insurance.
Bundling your insurance means buying multiple different insurance policies through the same insurance provider. Often, insurance providers are willing to offer you a discount on both policies if you buy them together. For example, you may choose to bundle your home insurance and auto insurance policies together by purchasing both policies through the same insurance provider. When shopping for insurance, always ask if there are any bundles available.
#7: Are You Required to Have Home Insurance?
Homeowners insurance is a smart choice for homeowners, and can prevent you from taking serious losses in the event of an unexpected catastrophe. However, except under certain circumstances, you are not legally required to have home insurance.
The law does not require you to have homeowners insurance. However, you may still find yourself required to invest in some level of insurance. For example, most banks require mortgage recipients to have homeowners insurance. They want to make sure their investment in your home pays off, so they won’t lend you money unless they’re certain your home will be rebuilt if something unexpected happens.
If you manage to buy a home without borrowing money from a bank or you pay your mortgage off, then you won’t be legally or financially obligated to insure your home. But don’t do away with your homeowner’s insurance policy just yet!
Although you may not be required to have insurance, doing so provides you and your family with a level of financial security. If you’re not in a position to start over from scratch if something goes wrong with your home, then investing in a home insurance policy is the smart thing to do.
#8: When Should You Put in a Claim On Your Insurance?
If you have homeowners insurance, you may want to use it any time issues crop up around your house. But this isn’t always wise. Home insurance is really there to cover big issues. If you make small claims too often, your insurance rates could increase.
A good rule of thumb is that you shouldn’t put a claim on your insurance if the total cost of repairs is less than or equal to your deductible. In other words, use your insurance for something that would ruin your life, not ruin your day. Since your deductible is the minimum amount you’d have to pay before your insurance would start paying anyway, putting in an insurance claim for something that costs less than your deductible is unnecessary. You should pay out of pocket for the smaller things that you can handle. In the long run that will save you money because you won’t receive rate increases for making too many claims.
Learn More About Protecting Your Home with Torian Insurance
Now that you understand the most important facts about home insurance, you’re ready to take the next step and begin collecting insurance quotes. Contact Torian Insurance today to learn more about our coverage amounts. We are happy to talk you through our insurance plans and help you discover the right policy and coverage amount to meet your personal needs.