Understanding Home Insurance: Everything You Need To Know

October 14, 2019

Did you know that 60% of American homeowners are underinsured? With so many coverage options out there, it’s hard to keep up with what each insurance policy does.

Coverage helps you feel safe in an uncertain world, but it can sometimes be misleading. You may not have all the coverage you think you do.

Understanding home insurance can be confusing. To help you make sense of it, and pick what is right for you, we have created a user-friendly guide.

What Is Homeowners Insurance?

Homeowners insurance does what you would expect, it protects your home. It can cover disasters, loss, damages and liability.

There are three big reasons to have homeowners insurance. These include getting coverage for your property, protect you from liability and to meet the requirements of your mortgage lender.

Most policies will include damages from the elements (e.g. lightning, fire), fallen trees, as well as theft.

What Are The Different Coverages?

There are many forms of coverage that you can get for your home. Below we will briefly review each type. For many of these policies, you can get endorsements or riders for added coverage.

Basic Homeowners Policy (HO-1)

This policy protects your home against several perils, including elemental damages such as fire, lightning and volcanic eruptions. Non-natural coverage can include internal explosions and damage caused by aircraft.

Some HO-1 policies don’t cover damage or loss to your personal belongings.

As this policy doesn’t offer much coverage, it’s no longer available in most states.

Broad Form Policy (HO-2)

This policy covers specific perils (it includes those in HO-1 plus a few more).

It covers your personal property, but it’s for your most basic needs. It includes coverage against theft, vandalism, wind, fire, lightning, ice and snow.

Special Form Policy (HO-3)

This is the most common coverage package. It covers everything in the previous policies and more.

It includes liability coverage should you injure a third party, and covers damage to a third party’s property.

Tenant’s Form (HO-4)

This policy for anyone who is renting a home or apartment.

It offers protection for your personal property, and includes liability coverage should someone get injured in your home.

Comprehensive Form (HO-5)

This policy covers you against most perils, which include floods, intentional loss and war.

The policy you choose will state what it does and doesn’t include as a peril.

Condominium Unit Owners Form (HO-6)

This policy is for anyone who owns or occupies a condominium unit.

It protects your home and personal property against perils and damages, and will cover any alterations or additions made by the owner.

Mobile Home Form (HO-7)

This policy mimics HO-3, but it’s designed with mobile homes in mind, which include trailers, trailer homes and caravans.

Older Home Form (HO-8)

If your home would cost more to rebuild it than it would be to sell it, this insurance is for you. It also offers basic HO-1 coverage.

Dwelling Fire Form

This policy covers your home against specific perils (e.g. fire, lightning, explosions).

It doesn’t cover personal property damage/loss or personal liability. As it doesn’t offer much coverage, people often use it for their vacation homes.

What Doesn’t It Cover?

If you want basic coverage, some obvious options won’t be included and will require specific upgrades and add-ons. Examples include flood insurance, animal damage (pets, rodents, insects) and earthquakes.

Depending on your geographic location, you may not require these specific coverages. For example, you’re not likely to get hit by a hurricane in the midwest, but along the coastline, it’s a guarantee.

What Amount of Coverage Do You Need?

To better understand home insurance, ask yourself…

Do you live somewhere where you will be in contact with natural disasters on a more frequent basis? What type of neighborhood do you live in? Do you live in the countryside or a city?

What is your home built out of? Can it withstand the damage done to it, or will it take heavy damage?

What security measures do you have in place (e.g. smoke detectors, alarm systems)? How many valuables do you have and what are they worth? This can include jewelry, wine, firearms, swimming pools and sporting equipment.

Consider every factor before deciding on which coverage is best suited to your needs.

What’s the Cost to You?

When thinking about how much coverage you need, you need to consider how much it will cost. Will the cost of the insurance be more than it would cost to replace what is damaged?

You also need to consider the market value of your home (and the land it’s on) and whether it will increase or decrease. If your market value drops your insurance company may reduce how much they will pay.

Think about everything each form of coverage offers and doesn’t offer and weigh the costs.

Typically, a standard homeowner insurance policy will cost around $1,000.