Homeowner insurance policies differ as much as homes—they are all different. Although the basic coverage will likely be very similar, many options are available. You may have gotten a good deal on your insurance policy from an agent, but it may not give you the coverage you need. When it comes down to it, it is up to you to know what you need and how much you can afford when buying or modifying a homeowner insurance policy.
Typical Coverage
A homeowner’s policy is purchased based on the type of structure you own and the kind of coverage you want. Policies are designated by HO-1 through HO-8, except for HO-7. Each one is different and offers certain features or is for a specific type of dwelling. A HO-3 policy is the standard policy offered today to homeowners.The HO-3 policy covers potential property damage based on 16 possible “open perils.” These policies cover any type of risk except for those that are specifically mentioned in the policy. They provide coverage for events such as fire, wind, theft, lightning, smoke, vandalism, riot, vehicles, accidental discharge of water or steam, and more.
The exceptions to a standard policy include acts of God, war, government action, earthquakes, landslides, sinkholes, loss of power, backup of a sewer, infestations (mold, birds, fungus, etc.), and neglect. Coverage for some of these items may be available in your area—especially if that type of damage is more likely to occur.
Optional Coverage
Some areas where threats from specific types of damage are higher may require you to purchase a rider for it. It would typically include areas where earthquakes, flooding, or hurricanes often occur. Be aware that some riders for certain types of risks—such as hurricanes, earthquakes, or floods—are likely to have a higher deductible—possibly as high as 10 percent.
Good home insurance can protect your benefit. Jakub Krechowicz/Shutterstock
Three Types of Coverage
When buying your homeowner insurance policy, you want to carefully consider the type of coverage you have. There are three kinds, and each one will reimburse you differently for damage or loss.Actual Cash Value
This type of policy reimburses you for your loss using the actual cash value. This means that depreciation is considered before you obtain reimbursement. In an older home, or with older personal goods, it may mean you end up with anywhere between 20 to 50 percent of the value.Replacement Cost
A policy with this type of coverage will replace or repair (whichever is less expensive) damaged or lost property. The extent of the settlement will be any limits the policy has for coverage. The replacement cost option is a better choice than the actual cash value but will cost more.Guaranteed (or Extended) Replacement Cost/Value
A guaranteed or extended replacement cost/value is the best kind to have, but it is also the most costly. The replacement cost paid out by the insurer is not limited by any limits on your policy. It is also the best if you live in an area prone to disasters, but some homeowner insurance companies may not offer it in these areas.
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Deductibles on Your Policy
Every homeowner’s policy lets you decide what size deductible you want. The larger the deductible you choose, the less you will pay for coverage. The most common deductible is $1,000, but you can also choose $500, $2,000, or more.Whenever you make a claim you will need to pay this amount to fully cover the loss. This makes it important to always have this amount on hand—just in case it is needed.
Precautions You Must Consider
The biggest precaution you need to be aware of is what happens in the event of a temporary or complete loss. A temporary loss means that your home (or part of it) becomes unusable until repairs are made. Coverage can include the cost of temporary lodging while needed, as well as food, and travel. Some of your bills may also be paid—but may not pay other ones—such as your mortgage.Some items are automatically not covered by a homeowner’s policy. Money.com says this exception includes art, jewelry, musical instruments, and antiques. Getting coverage on these items requires that they be appraised first, and then you can obtain a personal property endorsement (rider).
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If you are required to carry homeowner insurance because your mortgage company requires it, be aware of the deductible, says Investopedia. They warn that a mortgage company may offer you the lowest rates, but they may do this by raising your deductible to $10,000. This amount could prevent you from rebuilding unless you have that much on hand.
You also need to watch out for insurance policies that only cover the value of your mortgage. This could prove to be a serious financial risk because it would not enable you to rebuild if your home is lost.
How to Lower Your Insurance Cost Safely
Before you consider trying to reduce the cost of your homeowner insurance, be sure that you have enough in the first place. It ought to be enough that you could have a loss and get enough from the insurance company to replace your loss. Remember that the cost to rebuild could be considerably more than what it initially cost.The Insurance Information Institute says that you can reduce your insurance cost by doing the following:
- Shop around—insurance companies will vary in their costs—perhaps by hundreds of dollars a year.
- Get your home insurance and auto insurance from the same company. They often offer discounts for multiple policies.
- Add disaster-resistant features to your home. If you live in a hurricane area, you can add storm shutters and stormproof glass to your windows. Your roof can also be reinforced. If you are in an area that is prone to earthquakes, your home’s foundation can be strengthened to reduce damage.
- Install home security devices. Talk to your insurer to see what kind of devices would lower your rates before installing.
- Get fire and burglar alarms. These systems can automatically call the police or fire department. Check with your insurer for approved devices first.
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Ensuring that you have the coverage you need is more important than getting the lowest-cost homeowner insurance. Talk with your agent to see how you might improve your coverage if needed.
The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
