New homeowners have a lot on their plate. Applying for a mortgage, planning the big move, house prep, and other items can eat up a lot of time.
For many homeowners, insurance is just another box on their to do list. Yet, a lack of understanding of what’s in their policy can lead to significant consequences down the road. The policy may not cover what they thought, or may not cover enough of the costs.
That’s why we have created this beginner’s guide to provide new homeowners with everything you need to know. After reading this guide you’ll be able to answer questions like:
- What does my homeowners insurance cover?
- How are my premiums and deductibles related?
- What are special limits?
- How can I make sure my new home is properly covered?
What Is Homeowners Insurance?
In a nutshell, homeowners insurance is a policy taken out by a homeowner that protects their home and property in the event of an accident or event referred to as a peril. You can use homeowners insurance for:
Repairing your home and other structures on your property following a peril.
Repair and replace personal property that was destroyed during an event.
Cover personal liability costs, such as legal fees or medical bills, if someone is injured on your property.
Though not required by law, homeowners insurance is required by most mortgage lenders (after all, they want to protect their investment!).
What’s Included in My Policy?
Homeowners insurance policies are actually made up of several different types of coverage related to property, possessions, and liability. Most include the following:
Dwelling Coverage (Coverage A): Coverage related to repairing or rebuilding your home.
Other Structures Insurance (Coverage B): Coverage related to repairing or rebuilding additional structures on your property.
Personal Property Coverage (Coverage C ): Coverage related to your personal belongings.
Loss of Use Insurance (Coverage D ): Coverage related to expenses incurred while you’re displaced from your home.
Personal Liability Insurance (Coverage E): Coverage related to legal and medical expenses due to accidents occurring on your property.
Medical Payments Insurance (Coverage F): Coverage related to smaller medical expenses due to accidents occurring on your property.
Homeowners also have the option to add additional coverage to their policy. Some common options coverages homeowners choose include:
Water Backup Coverage: Covers damage related to pipe bursts and other plumbing issues.
Enhanced Dwelling Protection: Additional coverage (i.e. raised limit) for your home’s main structure (Coverage A).
Identity Theft Expense Coverage: Covers expenses related to identity theft.
Scheduled Personal Property Endorsement: Covers high-value and rare items (e.g. art, jewelry), that would exceed your Personal Property Coverage limit
Homeowners insurance policies are actually made up of several different types of coverage related to property, possessions, and liability.
My Policy Doesn’t Cover That?
There are several perils that aren’t covered by standard homeowners insurance policies. For example, earthquakes and flood insurance both require separate policies. Homeowners also need to be aware that each state has its own insurance regulations, so make sure that you're staying on the right side of the law. Keep in mind that legally required coverage is typically the bare minimum - for example, you may want to look into a flood policy if your neighborhood has a history of flooding, even if you're not in a FEMA flood zone.
Review the declaration page of your policy. Even though most providers use standard forms for their policies, there can be major differences that could affect your coverage. In addition to listing your coverage types and limits, the declaration page will also include:
Policy information (number, period of coverage)
Address of insured property
Discounts and premium amount
How Does The Claims Process Work?
Claims payments...the whole point of having home insurance. Unfortunately, this process is also known for causing headaches for homeowners who just want to move on from the event or accident that triggered the claim.
Companies first require homeowners to provide them a proof of loss, which is a document that explains why the claim is being filed. The proof of loss document typically includes information such as date the loss occurred, the cause of the loss, and its value.
You’ll also need to provide proof of the value of the loss items and property, such as original receipts and home inventory documents. For home damage, estimates and appraisals may be necessary.
Proof of loss forms usually need to be filed within a specified time frame, such as 60 days, from when the loss event occurred. Companies may also require that the proof of loss be notarized. Notaries can be found at banks and courthouses.
Actual cash value takes depreciation into account, meaning that in a disaster your payment likely won’t cover the cost to replace your house
Actual Cash Value vs. Replacement Cost
If your company accepts the claim, payment will be completed based on the “basis of claims settlement” listed in the policy. Payment is typically calculated in one of two ways: actual cash value or replacement cost.
Actual cash value payments are calculated using the present value of your home or property. In other words, actual cash value takes depreciation into account, meaning that in a disaster your payment likely won’t cover replacement costs. In contrast, replacement cost payments will pay out the cost to replace your possessions or the materials to repair your home.
Policies with replacement cost payments tend to have higher premiums than those with actual cash value payments. However, homeowners may decide the higher premiums are worth greater flexibility if a claim needs to be filed.
The insurance-to-value ratio can be used to understand if your home is properly covered. This shows the amount of insurance you’ve purchased to the replacement value of your property. Most home insurance policies require that your property is insured to a minimum of 80 percent of the replacement cost.
Are There Any Caveats to Homeowners Insurance?
Yes. Pricing is only part of the puzzle when buying homeowners insurance. You must understand the everything about the policy, including the phrasing of coverages. Otherwise, you could be stuck paying for things you thought were covered.
Some clauses and phrases to look out for include:
Ordinance or Law Exclusions
Building codes are always changing and may include a switch to safer (and likely more expensive) building materials moving forward. Ordinance or Law Exclusions mean your policy won’t cover the increase in costs for these code upgrades. This may also be true for replacement cost policies, where only the value for the original materials will be covered.
Special Limits and Limited Items
Homeowners insurance policies are only meant to cover basic personal possessions, not high-end items like art and jewelry. Because of this, policies set limits to coverage for these items. Be sure to review your policy to understand the limits on high-value items including:
Monetary items like gold, silver, and banknotes
Loss by theft of furs, jewelry, precious and semiprecious stones, and watches
Loss by theft of silver and gold-plated items
Property used for business purposes
Homeowners Insurance: A Wise Investment
Your home is likely one the most valuable investments you’ll ever have. Protecting it with the right home insurance policy is a must. Before purchasing a home insurance policy, make sure you understand everything that’s included. Which events are covered under my policy? What special limits are there?
Every homeowner is different and will have different coverage needs. The right insurance company will have agents and a support team to answer all your questions and recommend the right policy for you. The right insurance company should be just as invested in your home as you are.