From buying to claiming – everything you need to know about home insurance
- The standard homeowners insurance policy
- Different types of policies
- Options on levels of coverage
- Understanding deductibles
- Determining how much coverage you need
- The cost of homeowner's insurance
- Buying and saving money
- Filing a claim
- Payment process
A homeowners insurance policy indemnifies the policyholder against loses arising from damages suffered by his home as a result of a disaster. This policy also provides coverage against legal responsibilities for any property damage and injuries suffered by other individuals that are caused by the policyholder, or other members of the family including the family pets.
Homeowners insurance is not mandatory like auto insurance is in most states. However, if you are using mortgage financing to purchase a home, the lender will likely require you to get one. The home is the lender's security in the mortgage - if it gets damaged because of a disaster, the lender would lose its investment.
The standard homeowners insurance policy
Essentially, there are 4 coverage types under a standard policy and these are:
Home structure coverage
In case a home gets damaged or suffers destruction as a result of lightning, fire, hail, hurricane or other types of disaster provided in the policy, the cost to repair the home or rebuild it will be answered for by this coverage. Disasters like earthquakes, floods, and normal wear and tear are not covered but separate structures found in the same lot may be covered.
Personal items coverage
Items like clothes, furniture and similar personal items are covered by this portion of the policy when they are destroyed during a covered disaster or when someone steals them.
This coverage also indemnifies the policyholder for items damaged or stolen but which are found anywhere else in the world. In the case of luxurious and expensive personal items like furs and jewelry, many carriers put limits on amount they are willing to cover. The policyholder, however, may opt for full value coverage, which will cost more.
Aside from theft, the perils accepted by many carriers include lightning, vandalism, explosions, fire, etc.
This portion of the policy provides financial coverage in the event of a lawsuit arising from damages to properties or injuries suffered by other people. It indemnifies the policyholder for the cost to defend himself in court and also covers any awards the court may grant the other party.
Additional living expenses
The purpose of this part of a policy is to take care of expenses when the family has to transfer to another place in the event the home gets damaged. Aside from hotel bills, it takes care of restaurant meals as well as other expenses while rebuilding activities are done on the home.
Different types of homeowners insurance policies
The following classification is generally considered as the standard when it comes to homeowners insurance policies. Some states may follow a different classification.
- HO-1 policy - provides limited coverage, protection is for the first ten disasters. Not anymore available in majority of the states.
- HO-2 - so-called "Basic," coverage provided is for sixteen disasters.
- HO-3 - currently one of the best selling HO policies, this provides protection for all disasters with the exception of those perils that explicitly excluded.
- HO-4 - referred to as the renter's policy. Insures possessions, portions of the rented home that is owned by the policyholder against sixteen perils.
- H0-6 - for homeowners who live in condominiums insures possessions and portions of the condo owned by the policyholder against sixteen perils.
- HO-8 - specifically covers older houses. The policyholder gets reimbursed for expenses on damages. Reimbursement follows this formula: the cost to replace the items minus depreciation.
For a more detailed discussion on the disasters that are covered and not covered by each type of policy, go to: http://www.iii.org/articles/what-type-of-disasters-are-covered.html.
Options on levels of coverage
Actual cash value - replacement of the damaged possessions or the home itself by cash value less depreciation.
Cost of replacement - actual cost to replace or repair the damaged home or replacement of possessions without any deduction made for depreciation.
Guaranteed replacement cost - provides highest level of coverage. Indemnifies the policyholder for whatever the cost necessary to rebuild the house and make it the way it was prior to the disaster.
Extended replacement cost - an alternative to the guaranteed replacement policy, this type of coverage applies a percentage to the policy limit, which can be up to twenty five percent over the limit. For instance, your policy's coverage is $100,000, an extended coverage can increase this to $125,000.
A deductible is the homeowner's share of the risk in insuring the home against perils. When the house is repaired or the personal items are replaced, the deductible amount will be paid by the policyholder out of their own pocket.
Deductibles work in this manner, if the deductible is $500 and the insurance provider determines that the cost to repair a damaged home is $10,000, the policyholder will receive a check worth $9,500.
There are two types of deductibles: a specific amount in dollars (shown above), or an amount equivalent to a percentage of the whole insurance coverage. In general, if the policyholder agrees to pay a larger deductible amount, the less he pays on the premiums.
Determining how much coverage you need
How much coverage you need will depend on the following key factors:
Your home's structure
Use current costs to determine the level of coverage needed. Do not base it on the home's purchase price. Do not count in the cost of the lot.
Because home values can change, the cost of rebuilding may be greater or less than the original purchase price. To do a quick estimate, get the total area of the home (in square feet), then multiply this by the building cost (per local prices) per square foot.
A more comprehensive estimate will cover the following factors: the design of the house, the number of rooms, roof and roofing materials, exterior features, improvements or additions, custom built features, materials used in the home's exteriors, etc.
- Your personal items
- Additional living expenses
Liability to others
This part of the policy covers the cost of defending the policyholder or his family members in lawsuits filed by other people for injuries or damages suffered.
Many insurance carriers allow for $100,000 coverage as the minimum amount. It is recommended that between $300,000 to $500,000 amount of coverage be purchased. For individuals who have assets that are substantially greater than the amount of coverage on their policy, it is advised that they purchase an umbrella policy or an excess liability policy.
An excess policy can be handy once the liability coverage is used up. An umbrella policy, on the other hand, is a separate purchase as it expands its coverage to include slander, invasion of privacy and libel - things that a regular homeowner's insurance does not cover. Many providers set their minimum umbrella policy coverage at $300,000.
Providers are willing to cover personal items up to seventy percent of the coverage you have on the home's structure.
To be able to know if this is sufficient, make a detailed inventory of your personal possessions and get the total worth. If you think coverage is insufficient, you may consider getting higher limits.
Decide between actual cash value (value of item less depreciation), cost of replacement (actual cost to replace without any deduction for depreciation), extended replacement coverage or guaranteed replacement cost.
This takes care of the expenses that one will encounter when living temporarily away from a home damaged by a covered disaster. It may cover hotel bills, restaurant expenses and similar items encountered when rebuilding on the home is undertaken.
Insurance carriers may offer different ALE coverages. There are those whose coverage can be up to twenty percent of the amount of insurance on the home. Other carriers even offer policies that allow for unlimited coverage for a limited time.
For those who rent out portions of their homes, ALE coverage may reimburse them for the rental income that would have been collected if the home did not suffer from a disaster.
The cost of homeowner's insurance
How much your policy will cost you will be dependent on the following factors:
- Total area of the home plus any other structure added on the property.
- Building costs in the area.
- How the home is constructed, the features it bears and the materials used.
- Crime rate in the area.
- Whether the area is frequently visited by natural disasters.
- The distance of the home to a fire station or a fire hydrant.
- The state of the home's electrical, heating and plumbing systems.
- The condition of the plumbing, heating and electrical system.
For those who are renting or own condominiums, the provider will not factor in the size of the home nor the building costs. They will look into the factors that will make damage to the policyholder's possessions likely.
Buying and saving money on homeowner's insurance
There are many carriers to choose from. You may consider getting a trusted agent to help you come up with a short list of companies. To save money and get the best the best deal, look at the following factors:
- Deal only with state licensed insurers - the provider has to have the license to operate issued by state government.
- Compare prices - in some states, the local insurance department publishes a rate guide for consumers which show how much companies charge for their various policies. If the state you are in does not have this guide, do your own shopping via online or with the help of an agent.
- Look for sound financial standing - a favorable insurance company is one that has exhibited financial soundness. You would not want to deal with a company with questionable quality of service. Check how sound they are with rating agencies, customers, etc.
- Opt for ease of doing business - there has to be a certain feeling of comfort when dealing with a provider. Customer service has to reflect that. If you are having problems dealing with them at the onset imagine the stress you will have once you make a claim.
- Consider a higher deductible - the higher is the deductible the less you get to pay on the premium. For example if your deductible is $500 and you increase it to $1,000, your savings on your premium may reach up to twenty five percent.
- Purchase your car and homeowner's policies from the same company - most insurers will offer you a discount if you do this. In fact certain providers give up to fifteen percent reduction in premium to customers who buy more than one policy from them.
- Improve the home's resistance against disasters - there are a number of ways to do this - installation of shatter-proof glass, storm shutters, stronger materials for the roof. Your insurance company may give you a discount on your premium for doing this.
- Avoid confusion with the home's purchase price and the cost to rebuild it - when you buy a home, the price you pay includes the lot. When you rebuild a damaged home, you only rebuild the building. Hence, it is only the home's value that you include when buying a policy. Otherwise you will have to shoulder a higher premium.
- Install security devices - there are companies who will give you discounts if you install these devices. Some will even reduce your premium up to twenty percent. Be sure to check first with your agent as to which device will qualify for a price reduction before you install one.
- Get a group purchase discount - buying as a group of employees of the same company or as members of a business or professional organization may get you discounts. Ask about this from your agent.
- Being loyal can save you money - there are companies who give importance to loyal customers. If you stay with the same provider you may see a reduction in your premium. Some insurance carriers are known to reward their loyal clients with up to ten percent discounts on their policy payments.
- Assess the value of personal items yearly - the value of your possessions can change over time. An item worth $3,000 before may not carry the same value today. The difference can have an impact on how much you pay on the policy.
- Consider private insurance - if you purchased your policy via a government plan, you may want to compare this with what a private company can offer. Government plans are offered to those who reside in high-risk communities. Many consumers do not think about policies they can buy off the private market and maybe get them at a cheaper rate.
- Factor in homeowners insurance when purchasing a home - look at certain features that will get you a lower insurance rate when you shop for a home. For example, a home near a fire station or one that has had its structure strengthened against disasters, may cut insurance premiums by as much as fifteen percent.
Steps to filing a claim
- File a report with the police. Immediately contact the police after an incident where personal items were stolen from you or your house has been burglarized or vandalized. You need a police report about the incident and also the names of the police officers you spoke with.
- Get in touch with your agent or insurance provider. Call the agent or company right after the incident. This is critical because most policies have a limit as to when you are allowed to file a claim.
- Ask key questions. Once you are in discussion with your agent or a representative of the provider, pose the following key questions: Is the incident covered under the policy? Is the claim greater than the deductible? What is the duration for processing the claim? Is there a need for me to submit repair estimates?
- Prevent further damage to the property. Do what is necessary to prevent greater damage to the home. If you spent your money for temporary repairs, have a record of receipts.
- Make a list of damaged items. Documenting the damage and making an inventory will come in handy later. Pictures and videos can be invaluable.
- Record your expenses. The insurance company will not indemnify you right away. So, you need to shoulder your expenses while your claim is being processed. Keep a record of the items you spent on.
- File the required forms. Your insurance provider will send you the proper forms; you need to fill this out properly and submit it the soonest possible time.
- Get an adjuster to assess the damage. It is likely that the company will arrange this for you. However, you may want to be sure and check with the provider on how this is supposed to be carried out.
- After an adjuster conducts the inspection, he will give out a quote on the amount needed for the repairs. Based on this, the insurance carrier will issue a check representing advance money. This may not be the final payment.
- When an on the spot offer is made, the policyholder may opt to receive the check. If there is a need for an additional amount later on, the policyholder may request for the extra amount. Take note, there may be a limit as to the period wherein the additional claim can be filed.
- When damage is brought upon the house and also on the personal items, the insurance company will likely send out two checks for the home and the personal possessions. If the home has to undergo repairs, the insurance company may also issue another check for ALE or additional living expenses.
- If a mortgage is attached to the home, the provider will likely send out a check with both the lender's and policyholder's names on it. This is because lenders usually require that they be made party to a homeowner's policy and any claim made in relation to the home's structure. It is also to the lender's interest that the proper repairs are made to the damaged home. Usually, the lender will place the money in escrow and make partial releases - first upfront and then when the job is completed.
- When it comes to personal items, reimbursement may be by replacement cost or actual cash value. If you opt for the former, the insurance company may require you to purchase a replacement first then they will issue a reimbursement. If you opt not to get a replacement, the company may reimburse you an amount equivalent to the depreciated value of the item or its actual value.
- For damaged personal items in a home financed by a mortgage lender, the insurance company might issue two checks (one for repairs and one to cover the damaged items) to the lender. The policyholder should avoid this and ensure that he is issued a separate check for his personal possessions.
- Again, if a mortgage is attached to the home, a check for additional living expenses coverage should be made under the policyholder's name and not the lender. The ALE coverage is not for repairs on the home but for the homeowner's expenses while temporarily living away while the damage to the property is being fixed.