Complete Guide to Home Insurance
Many homeowners worry about the future of their property investments; after all, buying a home is one of the biggest purchases that most people will ever make, so choosing the right property and maintaining it over the years is vitally important. However, there are certain events that no one can predict, such as natural disasters, inclement weather, fire, and similarly destructive events.
This is why many homeowners turn to home insurance providers for assistance. But what exactly is home insurance? What does it cover? And what does a good home insurance plan cost? Let’s breakdown the basics of homeowners insurance to help you understand who it’s for and how it can help:
The Basics of Home Insurance
Essentially, home insurance is an agreement between a homeowner and an insurance provider. The homeowner agrees to pay a set amount per year in exchange for coverage of their property and its contents. Policies can replace or repair damages done to a house, personal belongings, and even medical costs for people injured on the property.
Types of Home Insurance
There are a variety of insurance plans for homeowners to choose from, depending on their individual needs. These vary not only in cost, but also in what they can and cannot cover. Here are the most common types of home insurance:
- Basic Homeowners Policy (HO-1) – As the name implies, this is the most basic insurance plan available to homeowners. HO-1 policies do not generally cover personal items, unless specified beforehand. However, they will cover many of the most common events that can cause property damage, like:
- Theft or vandalism
- Vehicular damage
- Fire or smoke
- Hail or windstorms
- Broad Form Policy (HO-2) – HO-2 policies are more common and popular than HO-1 policies, because they cover a broader spectrum of damage-causing incidents. The Broad Form Policy covers all of the same events as an HO-1, plus:
- Weight of ice or snow
- Falling objects
- Damage caused by low temperatures
- Damage to pipes
- Damage caused by electrical currents
- Special Form Policy (HO-3) – Even more common than HO-2 is the HO-3 policy, which covers everything in the Broad Form Policy, plus a few extras. The Special Form Policy is so named because it doesn’t limit coverage to particular named events. In fact, it covers just about any kind of property damage, unless specifically excluded in the policy. This one is especially popular because it can provide the greatest level of financial protection to homeowners.
- Tenant’s Form Policy (HO-4) – This type of policy is commonly referred to as “Renter’s Insurance.” This policy is meant for renters in apartments or houses. Typically, the property owners will have insured the property itself, so HO-4 helps protect against damage to personal property. In some cases, if an apartment is rendered unlivable due to damages, HO-4 policies can also cover additional living expenses while the property is being repaired.
- Comprehensive Form Policy (HO-5) – Much like the HO-3 policy, HO-5 is an open-form policy, where named events are not specified. This means that you are covered for most events, unless your policy specifically excludes them in writing. The following events are generally covered under a Comprehensive Form Policy:
- Earthquakes, landslides, and mudslides
- Water damage
- Damage caused by animals
- General wear-and-tear
- Mold or fungus
- Rust or corrosion
- Condo Form Policy (HO-6) – Needless to say, this policy is specific to condominium owners. HO-6 covers belongings, personal liability, as well as certain parts of the interior structure of the property (walls, floors, etc).
- Mobile Home Form Policy (HO-7) – HO-7 is similar to the HO-3 policy, but it is designed specifically for mobile homes. Standard homeowners insurance does not generally apply to mobile homes.
- Older Home Form Policy (HO-8) – Older homes have specific issues related to aging material, foundation, rot, and other kinds of wear-and-tear that are not as common among newer homes. An HO-8 policy helps cover these issues that related to older homes. Most historical and landmark houses carry this kind of policy.
While there are other policies that cover specific events, like the Dwelling Fire Form Policy, the policies listed above are the most common and comprehensive home insurance packages available on the market.
Is Home Insurance Obligatory?
In short, no, home insurance is not obligatory in the United States. Unlike owning a car, owning a home does not require insurance. However, in many cases, homeowners are required to obtain insurance, but not by law.
For example, if you took out a mortgage while purchasing a home, your mortgage lender may require you to obtain home insurance before the loan can be finalized. This protects both you and the lender in the event of unforeseen circumstances, such as a fire or theft. This signals to the lender that, in the event of property damage, you will not be on the hook to replace or repair all of the damages, making it easier for you to continue making your mortgage payments. It is also good for you, because you can rest easy knowing that you will be partially reimbursed on your investment in the event of major damages.
Additionally, your location may also necessitate insurance to cover certain events. In areas where floods or tornadoes are extremely common, your mortgage lender may require you to obtain insurance that covers these kinds of events.
What Home Insurance Does NOT Cover
Naturally, insurance providers cannot afford to be responsible for every little thing that happens to your property. Over time, your property will incur damages, and they will not all be eligible for compensation under your insurance policy. A lot of what your insurance does and does not cover will depend on the type of policy that you acquire.
However, your geographic location can also have an impact on what kind of damages your insurance provider is willing to cover. For example, certain regions are very prone to events like floods, tornadoes, or earthquakes, making it difficult for insurance providers to cover all or even some of the costs related to these events.
Generally, unless a policy specifically says otherwise, home insurance does NOT cover the following types of property damage:
- Normal wear and tear – The longer you own a home, the more you will find damages whose cause is unknown. Materials weaken over time, and houses inevitably take damage over a span of many years. As this kind of damage is difficult to classify and common in every household, most insurance policies do not cover it. However, many Comprehensive Form Policies do cover general wear and tear, within certain limitations.
- Flood or sewage damage – Generally, home insurance covers the costs of water damage when there is an event that happens within the confines of the property. For example, if a pipe bursts or a water heater malfunctions, the resulting damages would probably be covered. However, if there is a flood or the sewer backs up into the house, most policies will not cover it. In order to protect yourself against these kinds of events, you should consider obtaining Flood Insurance through the National Flood Insurance Program.
- Deliberate property damage – If you cause deliberate damage to your own home, it is not covered by home insurance. This most often occurs when a homeowner wishes to do renovations, and ends up causing more damage than they had intended. In any event, home insurance will not cover it.
- Land events – This can include earthquakes, mudslides, and landslides. However, some policies will cover damages from ancillary events. For example, if an earthquake causes a fire that then causes damage to your home, your insurance policy may be able to help.
- Pollution damage – Damage caused by pollution is not covered by almost any homeowners’ insurance policy. Generally, homeowners will need to seek reimbursement through legal action, if the pollution damage was directly caused by a third party.
- Damage by pets or insects – Pets and insects can cause a lot of property damage, but they are not generally covered under home insurance for a variety of reasons. First and foremost, pets are a choice made by the homeowner, and therefore insurance providers do not take responsibility for any damages that may result. Insects, like termites, can also do a lot of damage, but they can also be prevented through regular home maintenance and extermination services, which are also the responsibility of the homeowner. However, some home insurance policies do cover damages caused by non-rodent wild animals like racoons or possums.
How Much Does Home Insurance Cost?
As with most kinds of insurance, the answer to this question will vary. Different policy types incur different premiums, as do different property types. Additionally, two different insurance providers may charge completely different rates for the exact same insurance (which is why it is so important to shop around before making a final decision). However, there are certain specific factors that can affect your insurance premiums:
- The cost to repair or replace your home – It is important to note that this metric is very different from your home’s purchase price. However, your insurance provider will need to consider the purchase price, as well as the cost of materials, labor, and even the contents of your house when making this calculation.
- Materials – The type of materials used in your house will also affect how susceptible it is to certain kinds of damage. Brick houses are more resilient to fire damage than wood houses, for example.
- Proximity to emergency services and resources – If your home is relatively far from the nearest fire station or water source, this could end up raising your premiums.
- Age and condition of the property – Older homes often incur higher repair costs, and may even require a special kind of insurance policy, whereas newer homes are more resilient to damage and incur fewer costs, on average.
- Neighborhood – If your neighbors have a history of frequent claims, your premiums will probably go up. Rates will also be higher for neighborhoods with a history of high crime rates.
- Pets – Homeowners with pets may have higher premiums, and even the type of pet can have an affect.
However, this still doesn’t give you a good idea of what to expect. As stated previously, rates will vary by company and property, but there are still several ways for you to estimate your insurance costs.
On average, you can expect to pay about $3.50 per $1,000 of your home’s value annually. So, if your home is valued at $400,000, you can expect to pay about $1,400 per year. Of course, this is a rough estimate, and the type of insurance you need (as well as many other factors) could cause this number to go up or down.
The average homeowner pays a little less than $100 per month on home insurance. However, it is important to note that home insurance functions much like any other kind of insurance. In addition to your premiums, you will also be expected to cover the cost of damages up to a certain point (this is known as the “deductible”) before your insurance provider begins contributing to the costs. The average deductible in the United States falls between $500 and $1,000.
Obtaining Home Insurance
Now that you have an understanding of what home insurance is and how to estimate the costs, you will need to understand how to obtain it. Thankfully, the days of calling around to different insurance providers to obtain individualized quotes are over. Many companies, such as Allstate, Liberty Mutual, and Progressive, offer applications and online portals that allow you to quickly compare rates. All you need to do is put in some information about yourself and your property, and let the insurance providers take care of the rest. You can compare rates and choose a policy that best fits your needs within minutes!
For more information on home insurance regulations, consult this link. If you would like to learn more about the process for obtaining home insurance or go ahead and get a quote, you can contact Esurance (run by Allstate), Progressive, Liberty Mutual, or another company of your choice today!
June 10, 2019
Matthew is an experianced FiGuides writer and researcher. He holds B.A. in Philosophy from the University of Georgia and enjoys taking a deep dive on personal finace projects.