8 Concepts to Understand on How Homeowners Insurance Works

Homeowners insurance is one of the most basic expenses you should pay when you own a home but it’s very different than car insurance. Home insurance comes in many varieties with a broad range of coverage options you can choose to get the protection you need. Here are eight important concepts you should understand about how home insurance really works. 

#1. Many Factors Determine Your Premium
There are many factors that determine how much you pay for home insurance including some factors you may not expect. One important factor is the replacement cost of your home, or how much it would cost to build the same home as it stands today. This can be very different than your home’s market value. Your home’s age, square footage, construction type, roof type, and more are considered. Your insurance rate is also based on your deductible, which is how much you pay when you make a claim. 

There are also a huge variety of other factors your insurance carrier may consider such as: 

  • Your credit score
  • Your insurance score and personal claim history
  • The claim history in the area, such as whether many homeowners have had claims for hail
  • Whether you have a security system, fire alarms, and deadbolt locks
  • Your roof type and other factors that can mitigate your risk of fire and hail damage
  • Crime rates in the area
  • Pets. Some dogs may be prohibited by your insurance carrier and others may come with higher premiums because they are associated with a higher claim risk for personal liability

#2. Homeowners Insurance Comes in Many Forms
There are many types of homeowners insurance policies. The most basic is an HO-1 policy which covers just ten named perils like theft, fire, and hail or wind. This type of policy may cover belongings in your home but usually only items specifically named when you buy the policy and it doesn’t cover personal liability if you’re sued. HO-2 coverage is more common. This broad coverage protects you against even more perils like freezing AC systems, accidental discharge of water, and the weight of snow or ice. It covers not just your home but also your personal belongings and it may cover personal liability as well. The most comprehensive policy is HO-5 which covers everything except specifically named perils. 

#3. Home Insurance Doesn’t Cover Everything
Some things are never covered by homeowners insurance. One of the most important is flood damage, which is sold as a separate policy. Earthquakes are also not covered and can only be covered with specialty insurance. Policies usually only cover sudden, accidental damage to your home which means damage that occurs from a lack of maintenance, such as a leaking pipe that was neglected for months, will not be covered. 

#4. Insurance Provides Liability Protection
A home insurance policy doesn’t just protect your home and belongings; it can also come with personal liability protection to pay for property damage and bodily injury to other people that occurs on your property. The most common causes for these cases are slip and fall injuries and dog bites. 

#5. There Are 3 Types of Coverage
Regardless of the type of policy you buy, there are two main coverage options you can choose. The most affordable option is cash value coverage which pays to replace or repair the home and belongings up to the policy limit after a deduction for depreciation. This is also called market value coverage and it means the payout usually isn’t enough to rebuild the home or replace belongings. The second option is replacement cost coverage which pays to replace or repair your home and belongings up to the policy limit with no depreciation deduction. This coverage fully protects you from loss and it’s typical with an HO-5 insurance policy. 

#6. You Pay a Deductible When You Make a Claim
If you suffer covered damage to your home or belongings, one of the first steps is making a claim with your homeowners insurance for coverage. Depending on the deductible you choose, this may be $500 to $1,000 or more. What you may not know is there can be hidden costs to filing a claim and it may not be worth it. Your insurance premium can rise by up to 30% after a claim. As a general rule, don’t file a claim unless the damage is significantly higher than your deductible. 

#7. There Is a Deadline to File a Claim
If you need to make a claim for major damage to your home, it’s important to do it as quickly as you can. Most home insurance policies give you up to 14 days to file your claim to make sure damage to your home doesn’t get worse. This also gives the insurance adjuster enough time to investigate the cause and extent of the damage. If you miss your deadline, you may need to cover repairs out of pocket. 

#8. A Home Inventory Can Make Claims Easier
Don’t count on the claims process being easy if you ever need to use your homeowners insurance. After making a claim, an insurance adjuster will typically visit to inspect the damage to your home. You will need to provide a list of items that were damaged or lost in the covered event and a home inventory makes this much easier. By maintaining an accurate home inventory, you can speed the claims process and get the maximum possible value for your belongings because you will know the purchase price and/or model number of your belongings rather than a vague description. 

There are many ways to make a home inventory to prove what you own. You can stand in each room and take a video of your belongings or you can maintain a list. Focus on the valuable and large items first like your appliances, jewelry, furniture, and electronics before moving on to other items. Don’t worry too much about small items as an insurance adjuster will probably make a bulk estimate of many items like what’s in your closet. 

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