Home insurance, also known as homeowners insurance, is an insurance policy that provides financial protection against certain types of losses. Policies will often name covered losses or named the excluded losses depending on the type of policy.
Home insurance provides protection, called coverages, that protect the structure, your belongings, and more.
Home Insurance Coverages
Standard homeowners insurance policies will have a set of standard coverages. This is important because so much more than just the house itself is covered by home insurance. But how the coverage is applied for what price can differentiate good policies from great policies.
The standard coverage components of a homeowners insurance policy include:
- Dwelling: This pays to repair or replace your actual home construction – all the lumber, drywall, carpet, and cabinetry that makes your house a complete structure.
- Other Structures: This pays to repair or replace other constructed areas on your property that include fences and walls, sheds, patios, and pool houses.
- Personal Property: This pays to repair or replace everything you put in your home – whether it’s in your home or not at the time of loss as when a laptop might get stolen while at an airport.
- Loss of Use: This provides you with an allowance for additional living expenses such as hotel, transportation, and eating out when your home is uninhabitable during a claim.
- Personal Liability: Pays any claims or defends you legally if you are accused of causing another party’s property damage or injuries like if your dog bit someone.
- Medical Payments: This is limited coverage for small medical bills incurred by someone visiting you on your property.
While coverage for things like your structure are set by internal calculations, you can adjust coverage for things like liability or personal belonging to customize a policy and get more protection.
Types of Losses Covered
There are typically 16 different types of losses, called perils, that are covered in your home insurance policy. Most home insurance policies are named peril policies, meaning that if the policy names the peril it is covered with everything unnamed being excluded or not covered.
The 16 named perils of a home insurance policy are:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles
- Vandalism or malicious mischief
- Volcanic eruption
- Falling object
- Weight of ice, snow, or sleet
- Accidental discharge of water
- Sudden and accidental tearing apart, cracking, burning, or bulging of a steam or hot water system, air conditioning unit, or automatic fire-protection system
- Freezing of a plumbing, heating, air conditioning, or automatic sprinkler or household appliance
- Sudden and accidental damage from an artificially generated electrical current
These are the named perils found in the most common home insurance form, the HO3. The HO3 is a named peril policy while an HO5 is the broadest coverage form there is protecting homeowners against all perils except those named in the policy as exclusions.
What Isn’t Covered By Home Insurance?
Additionally, policies won’t cover losses due to normal wear and tear or neglect. Policies won’t cover damages from infestations or mold. And most policies will not provide coverage for nuclear hazards, government action, war, and power failure.
Types of Home Insurance Policies
We’ve focused on talking about the HO3, the most common type of home insurance policy form. There are 8 home insurance policy forms that apply to different needs:
- HO1: Basic home coverage of named perils
- HO2: Home coverage with more named perils than HO1
- HO3: Most common home insurance coverage; named peril policy
- HO4: Renters insurance
- HO5: Broadest home insurance coverage, all perils except those named as exclusions
- HO6: Condominium owners insurance
- HO7: Mobile home insurance
- HO8: Limited coverage for older homes (uncommon)
Replacement Cost vs. Actual Cash Value
It’s important to understand the difference between replacement cost and actual cash value. Both represent how much the insurance company will pay to replace your stuff. Replacement cost is more comprehensive, covering you for what it takes to get a similar home or item based on current purchase values. Actual cash value is the depreciated value.
For example, if your homeowners policy covers your belongings for actual cash value and your $2,000 television is stolen, the insurance company may only give you a check for the depreciated value, maybe $1,200. This won’t be enough to replace the stolen television. Replacement cost would cover the $2,000 value.
What Is Your Deductible?
Every home insurance policy has a chosen deductible. This can range from $250 to 10% or more of your dwelling’s replacement cost. For example, if the dwelling’s replacement cost is $200,000, a 10% deductible is $20,000.
A deductible is the amount you agree to pay during a loss; it’s your self-insurance. So in the example of a 10% or $20,000 deductible, the insurance carrier wouldn’t pay a dime in the claim until you cover the first $20,000. Make sure the deductible is something you are comfortable with – you need to have the ability to cover that amount during a loss.