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.
Home insurance protects much more than your home; it protects your livelihood should you ever face a personal lawsuit. Today’s lawsuits can easily total tens or even hundreds of thousands of dollars or more for property damage, medical bills, lost wages, emotional trauma, punitive damages, and legal fees. If you are at-fault for a third-party’s loss, how much would you stand to lose to litigation?
Who is at Risk?
Unfortunately, everyone is at risk of being sued – including you. Personal liability insurance can help protect you against the financial responsibility of accidents that occur on your property, as well as many types of damages you, your pet, or a household member cause while away from home. Examples include:
- Dog bites
- Damages to a hotel room
- Bicycling accidents
- Slip-and-fall accidents
- And more
In fact, home insurance liability generally covers most accidental losses, with exceptions for certain events, such as boat and car accidents.
How Much Coverage Do You Need?
Instead of putting your income, assets, and savings at risk, we encourage our customers to choose adequate personal liability coverage limits that will help safeguard against a possible loss. Many of our clients opt for at least $100,000 to $300,000 of coverage, although one of our team members can help you determine how much liability protection may be right for you.
The next section of your home insurance policy – medical payments coverage – helps pay for medical bills stemming from third-party injuries on your property. Unlike personal liability coverage, medical payments benefits do not require establishment of fault. However, this coverage also comes with much lower limits – usually between $1,000 and $5,000. If someone is injured, this should be enough to help cover a doctor’s office visit, co-pays, or perhaps even a health insurance deductible. Medical payments coverage does not eliminate personal liability or the possibility of being sued, but it may help prevent litigation for a minor injury.
To help keep home insurance affordable for everyone, a standard policy comes with broad coverage designed to meet the needs of the general population. However, this may not be adequate to meet the needs of an individual homeowner. In these cases, endorsements can provide more comprehensive protection by increasing compensation for certain types of losses and broadening coverage to include more events.
For example, we often recommend that homeowners purchase a water backup and sewer endorsement to protect against the high cost of water damages due to a backup in the home. Likewise, many homeowners opt for an inflation guard endorsement that protects against the rising cost of rebuilding, as well as a replacement cost endorsement that compensates homeowners for the full replacement value of damaged belongings. Other common endorsements include coverage for home-based businesses, daycare, and to extend coverage for valuable collectibles and jewelry.
Beyond Home Insurance
In addition to the personal liability coverage on your home insurance policy, your family may also benefit from an umbrella insurance policy that provides supplemental liability protection against major lawsuits. This type of coverage is designed to protect your income and assets when a legal fees and judgments exceed the limits of your primary liability coverage. With an umbrella policy, you can have an additional $1 million or more of liability protection – all for an average of just $200 per year.