Your home is likely your most valuable asset, and a homeowners insurance policy is an important part of protecting your home and your belongings. If you have a mortgage on your home, your lender probably required you to get a homeowners policy. Even without a mortgage, homeowners insurance is still your best bet to protect your investment.
But do you even know what’s in your policy? Would you know your coverage in the event of an emergency? Are you underinsured? About two-thirds of American homes are underinsured, estimates Nationwide, some by up to 60 percent. Experts say three out of five American homes are underinsured by an average of 20 percent. Don’t wait until you file a claim to find out you either lack coverage, or are underinsured and responsible for paying a lot of money out-of-pocket.
Despite how important it is, many of us haven’t taken the time to properly review this contract, but here’s how you can finally tackle that chore.
Understand the basics of homeowners insurance
The basic job of a homeowners policy is to protect your home and possessions from certain perils, such as wind, hail, fire damage and theft. It also offers liability protection, which protects your assets from liability claims, medical expenses and other damages if people are injured on your property.
Most common types of homeowners policies
The type of home you own will usually dictate the coverage type you have. You can read more about the usual eight types of homeowners policies, but here are the three most common options:
Review the declaration page
While the majority of insurers use fairly standard forms to compile their homeowner policies, there can be differences. Each policy will spell out certain things that are covered and others that are excluded, but they can vary from company to company. The forms can vary, but in most cases, the layout of a policy is fairly consistent. The declaration page should be reviewed carefully. It summarizes your coverages, as well as your personal and home information.
Information included on the declaration page:
- Policy number
- Policy period – the period of time the policy covers
- Name and address of the policy owner
- Address of the insured premises
- Name of mortgagee – usually your mortgage company
- Coverage types and policy limits that apply to your policy
- Deductible amount for the policy
- Home-rating information
- Discounts received
- Premium amount
Give the declaration page a thorough reading. Review the personal information for errors, and check that it reflects the proper coverage levels, as well as any additional riders you may have added.
Overview of your property coverage
When it comes to homeowners coverage, you need enough insurance in the event that you need to cover the cost of the following after a disaster:
- Rebuilding the structure of your home
- Replacing your personal property
- Paying for the cost of additional living expenses (if you need to live somewhere else while your home is repaired or rebuilt)
- Covering the cost of personal liability claims
Section I coverage A – Dwelling
A homeowner policy is broken into two parts; section I details your property coverage, and section II describes the liability coverages offered by your policy.
When it comes to the structure of your home, you should carry enough insurance to cover the cost of rebuilding your home, not the market value of your house.
An insurance agent can help you determine appropriate coverage levels in your area, but here’s a quick calculation:
(Total square footage of your home) X (local per foot building costs) = Approximate coverage amount.
You can get your local costs by contacting a real estate agent or a building association. The cost of the land is not added into your calculations, but you do need to factor in current construction costs.
Also, add in the cost of any upgrades you have made (that would cost more than the average per square- foot costs) or any unique materials you have used and would want to replicate.
Section I coverage B – Personal property
In most cases, personal property coverage is a percentage of your policy limits. The majority of policies cover personal property at 50 to 70 percent of the amount of structure coverage you have.
Do a detailed home-inventory list to determine if this will be enough. High-value property, such as jewelry, art, guns and coin collections, are usually limited to $2,500. If your items exceed this amount, it’s wise to purchase a rider to up the limit on these types of items.
Section I coverage C – Loss of use
This component of a homeowners policy will pay for additional costs that you incur when it is necessary to live away from your home due to damage from a covered peril. The coverage will pay for up to 12 months of the necessary difference in living expenses required to maintain your family’s current standard of living.
For example, if you normally spend $1,000 of groceries and dining each month, but your displacement causes the grocery and dining bills to increase to $1,400, your insurance will pay the additional $400.
This coverage will vary by insurer, but most policies offer 10 percent of your home coverage with additional coverage available for a price.
Additional information in Section I
After reviewing these sections in detail, have a look at the additional information that is included.
- Additional coverage: This spells out any additional coverages that are included with a policy. Examples of these are temporary repairs, landscaping replacement amounts and even debris removal. Carefully review this section to make sure it includes everything you might need.
- Losses insured: This section spells out exactly what perils are covered, as well as any other conditions that must apply for a loss to be covered.
- Losses not insured: Review this section in detail, and ask questions if you don’t understand something. Common exclusions include mold, fungus, flooding, earth movement, acts of war/terrorism and nuclear hazard.
Section II – Liability
The liability portion of a homeowners policy protects you against lawsuits for property damage or bodily injury that you or members of your family cause to other people. Examples of this would be a guest slipping on an icy sidewalk, tripping down your stairs or being bitten by your dog.
The liability portion of your policy covers the following:
- Injured party’s medical bills
- Legal fees
- Any damages awarded to the injured party
Most homeowners policies offer a minimum of $100,000 worth of liability coverage, but this is often not enough to cover all expenses. Industry experts recommend carrying at least $300,000 to $500,000.
If you’re in a position when you think it would be beneficial to have additional personal liability insurance, you can look into an umbrella policy. Umbrella insurance provides extra liability protection above the limits of your car and home insurance policies. It covers damage claims that you, your dependents or your pets cause to others, and it kicks in once claims exceed your home insurance and auto insurance liability limits.
Because insurance policies are written in a legal language, all homeowner policies come with a section dedicated to defining certain words. Here are just a few definitions you should be aware of when reading your policy:
Replacement cost: Not understanding this term can be an expensive oversight. This simply means that your policy pays for the full amount to replace your dwelling or property, up to a maximum dollar limit. In other words, it doesn’t matter if your TV is 15 years old, you are getting reimbursed for the cost of a brand new one.
Actual cash value: This is the flipside of replacement cost. This type of coverage takes depreciation into account when calculating your payout. This means you are getting a much smaller check for that 15-year-old TV. Actual cash value does result in lower premiums, but it could end up leaving you with a large gap between the amount of the check you receive and how it costs to refurnish your home.
Deductible: While most of us understand the concept of deductibles, homeowner policies can have specialty deductibles.
In some states the wind or hail deductible can be a percentage of your coverage instead of a set amount. As an example, a 10 percent wind deductible on a home insured for $300,000 puts the deductible at $3,000.
Insured: This spells out who is covered by your policy. If you have a pet, verify that the pet falls under this definition. This can be important if Fido bites someone, as the victim could sue. Many insurers exclude certain breeds, so verify your pet is covered.
If you have further questions, please don’t hesitate to call our office (920) 388-2890. we hope this explains how to read your Homeowners Insurance Policy better.