When you purchase home insurance, you are not just purchasing a simple policy; you are getting a broad range of coverage types, each of which plays an important role in protecting you against financial loss. These important coverages come standard in the HO-3 and HO-5 policies, which represent the majority of homeowners policies in the U.S. In this article, we will explain what a typical insurance policy will cover and help you better understand how much home insurance is enough for you.
Dwelling insurance is the foundational component of all insurance policies. Policy-holders select a coverage limit and a deductible (usually between $500 and $2,000), and the insurer commits to covering the home’s structure against a wide range of perils. Under HO-3 and HO-5 policies, Dwelling coverage pays for damages caused by any risk – not just named risks – so long as they are not specifically excluded in writing on the policy.
Contrary to popular belief, the price you paid for your home has very little to do with your coverage needs. Likewise, the land your home does not affect your coverage since it is not insurable. To calculate an accurate coverage limit, we recommend speaking with an agent here at Van de Hey Insurance. We use a special tool called a ‘Home Cost Estimator’ to calculate the estimated cost to remove debris from your property and rebuild your home based on local construction estimates.
By sufficiently insuring your home, you ensure adequate funding to rebuild your home after a total loss, and you also avoid ‘Co-Insurance Rule’ enforcement in the event of a partial loss. When homeowners purchase too little coverage for their homes, insurance companies can underpay for partial loss claims at a ratio equivalent to that which the home is under-insured. If therefore, your home dwelling is under-insured by 20 percent, your insurance company may only pay 80 percent of benefits for all claims.
This is why we at Brian Van De Hey Insurance want to be sure your home, one of your largest assets, will be fully replaced.
Other Structures Coverage
Most homeowners have extra structures on their properties besides the primary dwelling. This might be a pole barn, a detached garage, a fence, or several different structures. However, none of them are covered under Dwelling coverage. Instead, you must insure these buildings under the ‘Other Structures’ section of your coverage. Most insurers provide default coverage for other structures, usually in an amount equal to 10 percent of the total Dwelling coverage. If you have multiple structures or one very expensive structure, however, you may need additional coverage added to your policy.
Personal Belongings Coverage
Personal Belongings coverage is protection for the things you own if they are damaged, destroyed, or stolen due to a covered event. HO-3 insurance policies cover damages stemming only from perils named in the policy. However, those with an HO-5 policy are covered for losses caused by all types of events except for those listed in the policy exclusions.
Personal Belongings coverage helps reimburse you for contents inside your home, as well as items you own that are stored away from your home. Keep in mind, however, that limits and exclusions may apply. For example, trees and shrubs may not be covered against wind damage, and there are typically dollar coverage limits on very expensive items, such as jewelry or fine art. If you own high-value possessions, you may need a special endorsement to cover those items on your policy fully.
Most insurers have a default limit they use to cover homeowners – usually between 50 and 80 percent of the Dwelling coverage limit. However, we recommend using a home inventory to calculate your actual coverage needs. Also, a home inventory, such as those available through several mobile apps, can help you keep track of your belongings and more easily declare a loss after disaster strikes.
Loss of Use Coverage
If a tree falls through your living room, you may not be able to live in your home for a few weeks. Until your home is repaired and livable, Loss of Use coverage can help pay for your extra living expenses, such as hotel fees, laundry service, the cost of meals, and more. In most cases, homeowners are sufficiently insured with Loss of Use limits equal to 20 percent of the Dwelling coverage.
Continue reading part two of “How much home insurance is enough?”