Insurance

WHY HOME INSURANCE

Why do you need home insurance? Your house is your most prized possession and your largest asset. Your home insurance protects your most prized property: your home, your personal possessions and even your financial future.

The home insurance policy is usually a term policy—a policy that is in effect for a fixed period of time. The home insurance payment the insured makes to the insurer is called a premium. The insured must pay the insurer the premium for their home insurance each term. Most insurers charge a lower premium for home insurance if it appears less likely the home will be damaged or destroyed: for example, if the house is next to a fire station, or if the house is equipped with alarms and sprinklers.

Your home insurance usually protects you in two ways: financial loss and personal liability.

Financial Loss

Your home insurance will refund you if your home or personal possessions are stolen or if any other a sudden situation that is specified under your property insurance policy occurs.

If a sudden situation, like a fire, does arise, your home and garage will likely need to be restored. You will be reimbursed for the value of items, such as furniture, cameras and computers—or the items themselves will be replaced.

If you cannot live in your home while it is being restored after a loss, your house insurance will pay for some of your extra living expenses, such as accommodations, restaurant meals and storage.

Personal Liability

If someone is injured while visiting your home, they could sue you for damages. If they win and a court awards them a big settlement, you could be financially ruined. Your wages could be garnished and you could have a hard time getting back on solid ground. Property insurance protects against this kind of liability.

Your home insurance will also protect you against liability for accidental damage to someone else’s property. For example, if you live in an apartment building and your bathtub overflows, resulting in damage to your neighbor’s apartment, your home insurance will pay for repairs or replacement.

If you rent your home or own a condo unit, you might feel that investing in a home insurance quote is gratuitous. If you are just starting out and renting your first place, you might believe that you have nothing of real value that needs replacing should something like a fire occur. If you own a condo unit, you might believe that your condo corporation’s home insurance policy has you covered. Here is why whether you rent or own a condo, purchasing a home insurance policy is a good move.

Renter’s Insurance

If you rent your home, you may think you don’t need to bother with property insurance. However, your landlord’s insurance doesn’t cover the possessions you have as a tenant. Your landlord’s insurance also doesn’t cover upgrades to your rental unit that you’ve paid for yourself—such as a new carpet or built-in shelving in the closets. It also won’t protect you if you are sued for negligence.

Condo Insurance

If your condo corporation has insurance, you may wonder why you need to purchase your own coverage. Here’s why:

Your condo’s corporation policy only covers items that are part of the building. You need your own home insurance to protect any upgrades you have made to the unit, such as carpets or an upgraded bathroom or kitchen.
You need to insure your personal possessions like furniture, computers, and other electronics. You need to protect yourself against personal liability for injuries to visitors to your home, or for damage you accidentally cause to your neighbor’s property.

Whether you make your home in a house, a condo, or a rental unit, the best way to protect it, your possessions and your liability is to purchase home insurance.

One thing to keep in mind when shopping around for a home insurance quote—there is no such thing as a “standard” home insurance policy. Home insurance coverage varies significantly from one insurer to another. Companies that sell home insurance compete for business on coverage, service and price.

Home Insurance Considerations

When shopping for home insurance, there’s much more to consider than how much your coverage will cost. You need to buy the right type of policy. You need the proper level of protection, plus special provisions for valuables such as jewelry, your computer equipment and other possessions. You might also need additional coverage for such things as earthquakes or flooding.

Lending institutions usually require mortgage customers to purchase homeowners insurance. Don’t rely on the coverage levels mandated by your bank or mortgage company. Those levels are designed to protect the house itself, but not necessarily your possessions. That’s why it’s important to check with your agent or insurance company, to make sure you have adequate coverage.

There are several basic types of home insurance policies:

HO-1. Basic homeowners policy covers your house and possessions against 11 different perils.
HO-2. Broad homeowners policy covers house and contents against 17 perils, with premiums running about 5 percent to 10 percent more than an HO-1 policy.
HO-3. Special homeowners policy covers all perils except those specifically excluded by the policy. Costs 10 percent to 15 percent more than an HO-1 policy.
HO-4. Renters Policy covers 17 named perils and includes liability coverage. It does not insure the dwelling itself.
HO-5. Extensive homeowners policy covers damage from practically everything except earthquakes, wars and floods.
HO-6. For owners of co-ops or condominiums provides personal property coverage, liability coverage and specific coverage of improvements to the owner’s unit. Insurance provided by the owner’s association normally covers most of the actual structure.
HO-8. Policy for older homes covers the same perils as HO-1 but pays only for repair costs or actual cash value, since replacement cost could make the policy costly.

These policies are standard except in Texas, where the state insurance board specifies three types of policies listed as follows:

HO-A. Covers your home and possessions against named perils only, for actual cash value.
HO-B. Covers the dwelling for all perils unless excluded against all risks and contents against named perils. The house is covered for replacement cost up to policy limits, while contents are covered for actual cash value unless you buy additional replacement cost coverage.
HO-C. Covers house and contents against all risks not specifically excluded by the policy. Again, the house is insured for replacement cost up to policy limits, while contents are covered for actual cash value unless you buy additional coverage.

There are variations on these policies as well. For example, landlords can buy coverage that insures only their buildings and not your personal property (which is what a renter’s policy would cover). You can get special policies to cover mobile homes (manufactured housing).

When you apply for homeowners insurance, you’ll provide a great deal of information. The insurance company will ask you about your current occupation and employment history, marital status, previous addresses, date of birth and Social Security number. The insurer will check your criminal, credit, and insurance history to see if you are a “good risk.” The insurance company also will look at your “loss history” to see what kinds of home insurance claims you’ve made in the past. Then, you’ll have to decide what type of homeowners policy you want, the deductible, and how you’ll pay for the coverage. Your agent or insurance company will determine how much it would cost to replace your home and many of the items inside. For more expensive property, such as jewelry and computer equipment, you might need special coverage in addition to the basic policy.

Factors to Consider

Many factors go into determining the premiums for a homeowners policy. The age of your home, the materials used to build it, where it’s located, the number of rooms and the square footage are some of the premium determining factors.

How do you heat your home? What’s the overall condition of the house? How many people live in your home? How close is your home to the nearest fire station and fire hydrant? The answers to these questions also help determine how much you will pay for your homeowners policy.

Ways to save

If your home is equipped with an alarm system, smoke detectors and deadbolt locks, you could save money. Those items help make your home safer and more secure. If you have an in-ground pool or a trampoline, you might pay higher premiums. You can also expect to pay more if you are located in a higher risk area, such as a coastline. Your insurance company will also want to know if you plan to use the home for any business purposes, of if you plan to rent all or part of the house, both of which can increase liability. Armed with all this information, insurance companies can determine how much to charge you for insurance, sometimes in a matter of minutes.

If you insure your house for $250,000, that is the most you will get if it is destroyed, even if it would cost more to replace it. The Declarations Page on the front of your policy shows how much coverage you have. Talk with your agent or company representative if you have any questions about your insurance limits. Do not wait until you have a claim to learn your policy limit.

Most homeowner policies contain replacement cost coverage on the home and actual cash value coverage on personal property. Homeowners policies automatically cover household contents - furniture, clothes, appliances, etc. - up to 40 percent of the amount your house is insured for. This means if you insure your house for $250,000, its contents are insured for up to $100,000. You can get more coverage by paying a higher premium. This automatic coverage pays only the actual cash value of damaged, stolen, or destroyed household goods.

Actual cash value is an item replacement cost, minus depreciation. Replacement cost policies give you more protection than actual cash value coverage. For example, what happens if your four-year-old television is stolen? With actual cash value coverage, you get only what you would expect to pay for a four-year-old television. With replacement cost coverage, the insurance company pays to replace your TV with a new set similar to the stolen one. Insurance companies generally want proof you replaced an item before paying your claim in full. An insurer might offer to replace the items instead of paying cash, but the choice is yours.

Many people learn after a fire or storm they did not have enough personal property coverage. Taking inventory will help you decide how much insurance you need. It also will simplify claims. Your inventory should list each item, its value, and serial number. Photograph or videotape each room, including closets, open drawers, storage buildings, and your garage. Keep receipts for major items in a fireproof place.

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 might require supplemental premiums.

Supplemental coverage—Homeowners policies cover specific risks. Depending on what you own and where you live, you might need to supplement your policy with special coverage.
Flood insurance—Homeowners policies do not cover flood damage. The National Flood Insurance Program (NFIP) offers flood coverage in many areas. Local insurance agents sell NFIP flood policies and can tell you about the program in your area. For more information, call NFIP at 1-800-427-4661. If a mortgage lender determines a home is in a special flood hazard area, the borrower might be required to purchase flood insurance.
Earthquake insurance—If you are concerned about earthquakes, you can get coverage with a separate policy.
Extra coverage (Endorsements)—You might want more coverage for certain items than your policy provides. For an extra premium, you might be able to buy endorsements that expand or increase the coverage on these items. Some of the most common endorsements cover jewelry, fine arts, camera equipment, coin or stamp collections, computer equipment, and radio and television satellite dishes and antennas.
Personal umbrella liability insurance—If you want more liability coverage than a homeowners policy provides, you can buy a separate umbrella policy. Because policies vary, make sure the agent or company fully explains the coverage.
Higher deductibles, lower premiums—Deductibles allow you to cut the cost of your insurance, by assuming some of the risk. If you have a $250 deductible on your homeowners policy, you agree to pay $250 to cover any losses, before the insurance company pays the rest of your claim. By increasing that deductible to $1,000, you might save 20 to 30 percent on your premiums. You must decide whether lower deductibles or lowering your premium is right for you.
Bad credit could cost you—Some insurance companies might charge you higher premiums, if you have problems with your credit history. Insurers say past experience has shown people with financial problems pose a greater risk.

HOME INSURANCE GLOSSARY

Actual Cash Value - Replacement cost of lost or damaged property at the time of loss, minus depreciation.

Additional Living Expense - Any increase in living expenses incurred by the insured, so the household can maintain its normal standard of living.

Affordability Analysis - A detailed analysis of your ability to afford the purchase of a home considering all your assets and liabilities.

Amortization Term - The time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For a 20-year fixed-rate mortgage, the amortization term is 240 months.

Annual Percentage Rate (APR) - The cost of a mortgage stated as a yearly rate.

Appraisal - A survey by a Claims Representative or Claims Appraiser estimating the amount of damage to property and the cost to repair.

Appraised Value - An opinion of a property’s fair market value, based on a detailed analysis of the property.

Assessed Value - The valuation placed on property by a public tax assessor for taxation purposes.

Balance Sheet - A financial statement that shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage - A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.

Basic Limits - The lowest coverage amount, as prescribed by law or the company, for which an insurance policy can be written.

Before-tax Income (Gross Income) - Income before taxes are deducted.

Beneficiary - The person designated to receive the income from a trust, estate, or a deed of trust.

Bequeath - To transfer personal property through a will.

Blanket Insurance Policy - Single policy that covers more than one piece of property.

Cancellation - To terminate a contract before its expiration date by either the insurance company or the policyholder.

Capital Expenditure - The cost of an improvement made to extend the useful life of a property or to add to its value.

Catastrophe - A sudden, severe disaster that causes a significant loss.

Certificate of Title - A statement provided by a title company, or attorney stating that the title to real estate is legally held by the current owner.

Coinsurance - A sharing of insurance risk between the insurer and the insured. Coinsurance depends on the coverage amount of the policy and a percentage of the actual value of the property insured at the time of the loss.

Coinsurance Clause - A provision in a hazard insurance policy that states the amount of coverage that must be maintained — as a percentage of the total value of the property — so that the insured may collect the full amount of a loss.

Condominium Owner’s Insurance Policy - Coverage for condo owners against loss.

Credit Life Insurance - A type of insurance often bought by mortgagors because it will pay off the mortgage debt if the mortgagor dies while the policy is in force.

Deductible - The minimum amount of a claim that the policyholder has agreed to pay.

Depreciation - A decrease in the value of any type of property over time.

Dwelling Fire Insurance Policy - Coverage for specific fire and windstorm damage.

Effective Date - The coverage begin date on an insurance contract (policy).

Effective Age - An appraiser’s estimate of the physical condition of a building.

Effective Gross Income - Normal annual income including overtime that is guaranteed. The income may be from one/more sources.

Exclusion - Part of an insurance contract that excludes certain coverage conditions.

Extended Coverage - A clause in an insurance policy that provides additional coverage over and above the basic policy provisions.

Fire Insurance Policy - Contract prescribed by each state insuring against direct loss by fire, lightning related causes.

Flood Insurance Policy - Coverage against damages caused by the rising or overflowing of bodies of water.

Hazard Insurance - Insurance coverage that compensates for physical damage to a property from natural calamities.

Homeowner’s Insurance Policy - Coverage for home owners against certain losses.

Insurable Title - A property title that a title insurance company agrees to insure against defects and disputes.

Insurance Binder - A document that states that insurance is temporarily in effect. A permanent policy must be obtained before the expiration date.

Insured Mortgage - A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.

Liabilities - A person’s long-term and short-term financial obligations.

Liability Insurance Policy - Insurance coverage that offers protection against claims alleging that a property owner is responsible for any bodily injury or property damage to another party.

Mobile Home Insurance Policy - Coverage for mobile home owners against loss.

Mortgage Insurance - A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage.

Mortgage Life Insurance - A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the principal balance declines.

Named Insured - The individual or organization with whom an insurance contract is made and who is specifically named as a Named Insured in the contract policy declarations.

Personal Articles Floaters Insurance Policy - Special coverage for luxury items, including jewelry, antiques, and furs.

Private Mortgage Insurance (MI) - Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults.

Reinstatement - Returning a lapsed policy to its full value after its termination as if it was never terminated.

Replacement Cost - Coverage costs for replacing property with new material; depreciation is not taken into consideration.

Residence Employee - An employee of an insured homeowner whose duties are related to the maintenance or use of the insured residence premises.

Rent Loss Insurance - Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent.

Renters Insurance Policy - A form of homeowner policy sold to person(s) who rent their living quarters.

Underwriting - A process that evaluates an applicant and their property against pre-established criteria for insurability.

RESOURCES

Insurance Information Institute

Homeowners insurance provides coverage in the event of damage to your property, as well as liability for injuries and damage you cause to other people. The homeowners insurance section of the I.I.I. web site can help you make the right choices about this important form of protection for you and your family.

Home Buyers Information Center

This site was developed to help home buyers and sellers feel more secure, confident, and knowledgeable about the home buying and home selling processes.

Home-Owners-Insurance-Information

Home insurance quotes and information.

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