Homeowners’ Insurance Coverage
Homeowners’ insurance is an important purchase for many people. There are two major reasons to buy homeowners insurance:
• To protect your assets: Homeowners insurance covers the structure of your home and your personal property, as well as your personal legal responsibility (or liability) for injuries to others or their property while they’re on your property.
• To satisfy your mortgage lender: Most mortgage lenders require you to have insurance as long as you have a mortgage and to list them as the mortgagee on the policy. If you let your insurance lapse, your mortgage lender will likely have your home insured. Compared to a policy you would buy on your own, the premium might be much higher and the coverage will be limited to damage to the structure of your home. The lender can require you to pay this higher premium until you get your own homeowners insurance again.
Coverages in a Homeowners Policy
Most homeowners insurance policies provide a package of coverages. The main types of coverage are described below. Keep in mind that you’re covered only if the loss is caused by a peril your policy covers. For example, if your home becomes unlivable due to an earthquake and your homeowners’ policy doesn’t cover earthquakes, your policy won’t pay for loss of use of your home. Review your policy for the limits of your coverage.
- Dwelling: Pays for damage to your house and to structures attached to your house. This includes damage to fixtures, such as plumbing, electrical wiring, heating, and permanently installed air-conditioning systems.
- Other Structures: Pays for damage to fences, tool sheds, freestanding garages, guest cottages, and other structures not attached to your house.
- Personal Property: Reimburses you for the value of your possessions, including furniture, electronics, appliances, and clothing, damaged or lost even when they aren’t on your property, such as those at an off-site storage locker or with your child at college.
- Loss of Use: Pays some of your additional living expenses while your home is being repaired.
- Personal Liability: Covers your financial loss if you are sued and found legally responsible for injuries or damages to someone else.
- Medical Payments: Pays medical bills for people hurt on your property or hurt by your pets.
Limits of Coverage
Your insurance agent usually will help you decide how much dwelling coverage to buy when you first get homeowners insurance. Your coverage should equal the full replacement cost of your home. Note that replacement cost and market value are not the same. The market value, which includes the price of your land, depends on the real estate market.
You should review your dwelling coverage from time to time to be sure it doesn’t drop below the cost to replace your home. If it drops below 80% of the full replacement cost of your home, your insurance company may reduce the amount that it will pay on a claim.
The limits of your coverage for other structures, for personal property, and for loss of use of your home are expressed as percentages of your dwelling limit. The coverage is usually a set percentage. For example, if your dwelling coverage limit is $150,000 and your coverage for personal property is limited to 50% of your dwelling coverage, your coverage for personal property would be $75,000.
A typical policy includes the following coverage limits based on a percentage or a limit of your choice:
- Other Structures:10% of Dwelling Coverage Limits
- Personal Property: 50% of Dwelling Coverage Limit
- Loss of Use: 20% of Dwelling Coverage Limit
- Personal Liability: Your choice
- Medical Payments: Your choice
Check your policy, as coverage limits might be based on percentages different from the above. You choose your coverage limits for your personal liability and for medical payments.
A homeowner’s policy also includes a deductible. A deductible is the money you have to pay out-of-pocket on a claim before the policy pays the loss. The deductible applies to coverage for your home and personal property and is paid on each claim. Higher policy deductibles mean lower policy premiums. A policy with a $1,000 deductible will have a lower premium than the same policy with a $500 deductible. In some locations, there are also catastrophe deductibles, which are expressed as a percentage instead of a dollar amount.
Optional Coverages: You can add other coverages. Sometimes, you can add coverage by buying an endorsement; other times, you must buy another policy to cover a specific peril or a specific item of property. Some reasons you might want to add coverages are:
- To cover perils most homeowners policies don’t cover or
- To increase your current coverage