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A house means having a place to call home that’s a safe haven for every member of the family. For most Americans, owning a home is one of the biggest accomplishments and milestones they can ever have in their life. Their home is a physical, tangible proof of all their hard work and it’s a place where irreplaceable memories are made.

While many continue to rent, the United States has seen an immense growth in the number of homeowners. In the first quarter of 2017, homeownership rates in the country reached 63.6%. In 2016 there were approximately 125.82 million households all over the country.

A home is not just a place to live in, it is also an asset and a huge investment. It makes complete sense to protect it from potential losses. The nation’s residents understand this, which is why 95% of all homeowners carry homeowners insurance.

Contents

Specifics of homeowners insurance

Most mortgage lenders require their borrowers to purchase homeowners insurance. While one of its key roles is to protect the overall value of a home, it has a number of specific functions to play.

Lender-required

Mortgage loan lenders consider homeowners insurance as a major risk-mitigating tool, seeing as they basically act as co-investors in house purchasing agreements. Since their investment is huge they want the protection from various risks that may threaten the value of the property.

In this situation, a homeowners insurance policy acts as a security for lenders, since it provides coverage for repairing damages or replacing a destroyed/damaged home.

Repairs or replacement

From a homeowner’s standpoint, this type of insurance can save their finances in the event that their house sustains serious damages. For instance, a policy holder whose house was hit by a storm resulting in severe roof or wall damage have less expenses to worry about since the insurance will cover the costs of repairs and replacements.

Liability

Every time homeowners have people at their home, such as during an event or occasion, their guests’ safety and well-being falls into their responsibility. Accidents can happen and in the event that someone sustains severe injuries while visiting, the authorities can deem the property owner liable. In this case, homeowners insurance policy will provide protection from liability, as well as cover medical or even legal costs.

Protection of valuables

Home insurance also functions as a security for the overall value of a homeowner’s possessions and personal property the home contains. In most cases, insurers sell policies that come with an estimated value of the homeowner’s personal property; this part of a policy covers the insured against vandalism or theft. This option is not always included, always double check your policy or ask an agent to confirm what is included in the insurance agreement.

The 10 perils

To ensure purchasing an adequate coverage, consumers should equip themselves with the knowledge of what a standard home insurance policy covers. While coverages vary from policy to policy, most primary types of homeowners insurance cover the following perils:

  • Fire or lightning

  • Windstorm or hail

  • Explosion

  • Riot or civil commotion

  • Damage caused by aircraft

  • Damage caused by vehicles

  • Smoke

  • Vandalism or malicious mischief

  • Theft
  • Volcanic eruption

Note also that there are seven other perils that more extensive policies cover, which includes the following:

  • Falling object
  • Weight of ice, snow or sleet
  • Accidental water/steam discharge or overflow from plumbing, heating, air conditioning, automatic fire-protective sprinkler system, or household appliances
  • Sudden and accidental damages to water heaters, air conditioners, or automatic fire-protective systems, such as cracking, bulging, burning, or tearing apart
  • Frozen plumbing, heating, air conditioning or automatic, fire-protective sprinkler system, or household appliances
  • Sudden and accidental damage caused by artificially generated electrical current
  • All perils with the exception of war, flood, earthquake, landslide, mudslide, sinkhole, nuclear accident, and other perils indicated in the policy

The exclusions applicable to all homeowners insurance policies

A common mistake many people make is believing that their home insurance already covers everything that may happen that may damage or destroy their property. This isn’t the case though, as all types of policies actually have exclusions. These include the following:

  • War
  • Neglect
  • Water damage (can be covered in certain geographical regions)
  • Earth movement (can be covered in certain geographical regions)
  • Power failure
  • Ordinance or law
  • Intentional loss
  • Nuclear hazard

Primary types of homeowners insurance

A term that homeowners will often hear as they shop for coverage is “standard home insurance policy.” These policies often share many similarities since two organizations take part in supplying policy forms to insurance companies: the ISO and the American Association of Insurance Services. There are some insurers though that may use their own model when creating policies. However, they need to make sure that the state insurance department approves it.

Today, consumers can choose from seven different primary types of home coverage. These include the following:

  • HO-1: Basic homeowners policy: This provides coverage for the dwelling structure itself as well as its contents against the 10 perils enumerated above. However, most states have already discontinued it, primarily due to its minimal coverage.

  • HO-2: Broad homeowners policy: Covers the first 16 perils enumerated above.

  • HO-3: Special form homeowners policy: Covers the structure (the home itself) for all potential perils with the exception of those the policy specifically excludes. As for the contents, coverage depends on which perils the policy names.

  • HO-4: Renters insurance policy: Provides coverage for the dwelling’s contents for the first 16 perils, but not the structure itself. It also comes with liability coverage.

  • HO-5: Premier homeowners policy: Typically available for newer, more expensive, and well-maintained homes, this type of homeowner’s insurance policy is very similar to the HO-3, although it also covers the contents against all perils, unless otherwise specifically indicated as exclusions.

  • HO-6: Insurance for owners of co-ops or condominiums: Covers personal property and also provides liability coverage as well as coverage for specific improvements to structure. The association where the owner belongs to typically provides the insurance for the structure itself.

  • HO-7 — mobile home form: This type of form is just like a HO-3 but was created for  mobile or manufactured homes which are not included in a basic homeowners insurance coverage.

  • HO-8: Policy for older homes: Has the same coverage for the perils the HO-2 policy covers, although this only pays for the actual cash value or the repair costs.

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Optional types of coverage to consider

There are several other types of coverage that a homeowner can purchase as an optional part of the policy, including:

  • Extra Contents Coverage: Most coverages are a flat percentage of the actual insurance amount on the structure itself. For instance, 50% of the home’s insurance itself is for covering the contents. This means that when a policy holder insures the home for $150,000, the coverage for the contents is $75,000. Through purchasing Extra Contents Coverage, offered at a minimal additional charge, policy holders can increase the coverage just for the contents alone without raising the home insurance amount itself.

  • Replacement Cost: For an additional premium, insurers can include the “Guaranteed Replacement Cost Coverage” in a policy. There are several advantages to obtaining this broader coverage, but arguably the biggest is full replacement cost coverage on the structure’s roof.

  • Personal Property Extensions of Coverage: Insurance companies place certain limits on special types of personal property, such as jewelry, fur, computers, firearms, and other expensive items. Since homeowners policies follow a model designed for an average person, it follows that most coverages don’t pay out for extremely costly items. For those who have such valuable possessions, they can increase coverage on certain areas through purchasing a “Scheduled Personal Property Endorsement” and adding it to their base policy.

  • Flood Insurance: Of all the exclusions in homeowner’s insurance policies, arguably the most important is flood. Also, in some parts of the country where flood is extremely common, insurance for this type of peril is mandated. And even if a homeowner doesn’t reside in a flood-prone community, they still shouldn’t go without flood insurance, since it comes with too big of a risk.

  • Earthquake Insurance: No standard or basic home insurance policy comes with coverage for the catastrophic damage earthquakes can cause. This is why homeowners should consider purchasing earthquake insurance coverage, especially for those who live in areas where this naturally-occurring phenomena frequently takes place.

Consequences of going uninsured

Homeownership can become a costly ordeal. The mortgage alone already consumes a huge portion of a consumer’s housing budget. Add to this furnishings, home essentials and property taxes, and a homeowner’s financial responsibilities can grow big quickly. Because of all these expenses, some people find themselves wondering whether they should still purchase home insurance. The simple answer is yes.

Skipping this type of insurance can come with very costly consequences, including the following:

1. Extremely high out-of-pocket expenses for home repairs or replacements.

One of the key purpose of homeowners insurance is to provide coverage for costs related to repairing or rebuilding a residential property’s structure. The insurer will pay out, given that the damage falls under the policy’s scope. How much the coverage indicated in the policy determines the amount the insurer pays out, so policy holders should ensure that the listed amount is accurate.

Without insurance, homeowners can face extremely high repair or replacement expenses that they would have to shoulder on their own.

2. Risk of losing valuable possessions.

A lot of people think that they no longer need insurance just because they don’t own a lot of belongings. This is yet again another huge misunderstanding, since replacing even just the basic home necessities can already add up really quickly.

Leaving valuables uninsured will only just result in a household having to go without the necessities, amenities, and luxuries that the household members enjoyed previously.

3. Vulnerability to liability lawsuits.

Even if it’s completely an accident, someone getting hurt while inside someone else’s property can result in major medical or hospital bills. Slips, trips, and falls are very common accidents that can take place in a house, and can even lead to a homeowner receiving a lawsuit.

Lawsuits don’t just put a huge financial stress on people, they can also cause serious health issues, what with the pressure, worries, and anxiety they bring. And this can happen to any homeowner who doesn’t have liability insurance.

4. Rejection of mortgage loan application.

Mortgage loan lenders consider homeowners insurance as a must-have. Most of them require their borrowers to purchase coverage because they also have to protect their investment.

Foregoing homeowner’s insurance can mean rejection of mortgage application.

Owning a home without homeowner’s insurance

Unlike car insurance, the government doesn’t legally require homeowners to purchase home insurance. But then again, mortgage lenders require them, so those who plan to buy a house through a financing service would have to insure their home in order to satisfy this part of their agreement. Some lending institutions may allow their borrowers not to have homeowners insurance but this may lead to higher mortgage interest rates.

Once homeowners complete payments towards their mortgage, no one will require them to continue insuring their home and belongings. However, with all the risks involved with going without insurance, it isn’t advisable to cancel one’s policy.

Compare and save

Home insurance is too important and valuable to overlook. However, this doesn’t automatically mean consumers should spend thousands and thousands of dollars on it every year. There are many different ways to lower costs associated with this type of insurance and comparing offers while still ensuring one purchases adequate coverage are two of the most important.

Always remember that a home is the biggest, most expensive investment one can ever make, so protecting it from the many different potential perils that threaten it should remain a top priority. With sufficient homeowner’s insurance coverage, property owners can protect their finances from major losses that these perils can bring.

References:

https://fred.stlouisfed.org/series/RHORUSQ156N

https://www.census.gov/housing/hvs/files/currenthvspress.pdf

http://www.iii.org/insuranceindustryblog

http://www.iii.org/article/can-i-own-home-without-homeowners-insurance

http://www.iii.org/article/which-disasters-are-covered-by-homeowners-insurance

https://www.usa.gov/property-insurance#item-36587

http://www.iii.org/fact-statistic/homeowners-and-renters-insurance

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