What is homeowners insurance?
Homeowners insurance provides financial protection against disasters. A standard
policy insures the home itself and the things you keep in it.
Homeowners insurance is a package policy. This means that it covers both damage
to your property and your liability or legal responsibility for any injuries and
property damage you or members of your family cause to other people. This includes
damage caused by household pets.
Damage caused by most disasters is covered but there are exceptions. The most significant
are damage caused by floods, earthquakes and poor maintenance. You must buy two
separate policies for flood and earthquake coverage. Maintenance-related problems
are the homeowners' responsibility.
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What is in a standard homeowners insurance policy?
A standard homeowners insurance policy includes four essential types of coverage.
They include:
1. Coverage for the structure of your home.
This part of your policy pays to repair or rebuild your home if it is damaged or
destroyed by fire, hurricane, hail, lightning or other disaster listed in your policy.
It will not pay for damage caused by a flood, earthquake or routine wear and tear.
When purchasing coverage for the structure of your home, it is important to buy
enough to rebuild your home.
Most standard policies also cover structures that are detached from your home such
as a garage, tool shed or gazebo. Generally, these structures are covered for about
10% of the amount of insurance you have on the structure of your home. If you need
more coverage, talk to your insurance agent about purchasing more insurance.
2. Coverage for your personal belongings.
Your furniture, clothes, sports equipment and other personal items are covered if
they are stolen or destroyed by fire, hurricane or other insured disaster. Most
companies provide coverage for 50% to 70% of the amount of insurance you have on
the structure of your home. So if you have $100,000 worth of insurance on the structure
of your home, you would have between $50,000 to $70,000 worth of coverage for your
belongings. The best way to determine if this is enough coverage is to conduct a
home inventory.
This part of your policy includes off-premises coverage. This means that your belongings
are covered anywhere in the world, unless you have decided against off-premises
coverage. Some companies limit the amount to 10% of the amount of insurance you
have for your possessions. You have up to $500 of coverage for unauthorized use
of your credit cards.
Expensive items like jewelry, furs and silverware are covered, but there are usually
dollar limits if they are stolen. Generally, you are covered for between $1,000
to $2,000 for all of your jewelry and furs. To insure these items to their full
value, purchase a special personal property endorsement or floater and insure the
item for it's appraised value. Coverage includes ''accidental disappearance, '' meaning
coverage if you simply lose that item. And there is no deductible.
Trees, plants and shrubs are also covered under standard homeowners insurance. Generally
you are covered for 5% of the insurance on the house - up to about $500 per item.
Perils covered are theft, fire, lightning, explosion, vandalism, riot and even falling
aircraft. They are not covered for damage by wind or disease.
3. Liability protection.
This covers you against lawsuits for bodily injury or property damage that you or
family members cause to other people. It also pays for damage caused by your pets.
So, if your son, daughter or dog accidentally ruins your neighbor's expensive rug,
you are covered. However, if they destroy your rug, you are not covered.
The liability portion of your policy pays for both the cost of defending you in
court and any court awards - up to the limit of your policy. You are also covered
not just in your home, but anywhere in the world.
Liability limits generally start at about $100,000. However, experts recommend that
you purchase at least $300,000 worth of protection. Some people feel more comfortable
with even more coverage. You can purchase an umbrella or excess liability policy
which provides broader coverage, including claims against you for libel and slander,
as well as higher liability limits. Generally, umbrella policies cost between $200
to $350 for $1 million of additional liability protection.
Your policy also provides no-fault medical coverage. In the event a friend or neighbor
is injured in your home, he or she can simply submit medical bills to your insurance
company. This way, expenses are paid without their filing a liability claim against
you. You can generally get $1,000 to $5,000 worth of this coverage. It does not,
however, pay the medical bills for your family or your pet.
4. Additional living expenses in the event you are temporarily unable
to live in your home because of a fire or other insured disaster.
This pays the additional costs of living away from home if you can't live there
due to damage from a fire, storm or other insured disaster. It covers hotel bills,
restaurant meals and other living expenses incurred while your home is being rebuilt.
Coverage for additional living expenses differs from company to company. Many policies
provide coverage for about 20% of the insurance on your house. You can increase
this coverage, however, for an additional premium. Some companies sell a policy
that provides an unlimited amount of loss-of-use coverage -- for a limited amount
of time.
If you rent out part of your house, this coverage will also reimburse you for the
rent that you would have collected from your tenant if your home had not been destroyed.
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Are there different types of policies?
Yes. A person who owns his or her home would have a different policy from someone
who rents. Policies also differ on the amount of insurance coverage provided.
The different types of homeowners policies are fairly standard throughout the country.
However, individual states and companies may offer policies that are slightly different
or go by other names such as ''standard'' or ''deluxe''. The one exception is the state
of Texas, where policies vary somewhat from policies in other states. The Texas
Insurance Department ( http://www.tdi.state.tx.us
) has detailed information on its various homeowners policies. You should
consult with a professional insurance consultant to determine which coverages best
suit your needs
If you own your home
If you own the home you live in, you have several policies to choose from. The most
popular policy is the HO-3, which provides the broadest coverage. Owners of multi-family
homes generally purchase an HO-3 with an endorsement to cover the risks associated
with having renters live in their homes.
- HO-1: Limited coverage policy
This ''bare bones'' policy covers you against the first 10 disasters. It's no longer
available in most states.
- HO-2: Basic policy
It provides protection against all 16 disasters. There is a version of HO-2 designed
for mobile homes.
- HO-3: The most popular policy
This ''special'' policy protects your home from all perils except those specifically
excluded.
- HO-8: Older home
Designed for older homes, this policy usually reimburses you for damage on an actual
cash value basis which means replacement cost less depreciation. Full replacement
cost policies may not be available for some older homes.
If you rent your home
- HO4-Renter
Created specifically for those who rent the home they live in, this policy protects
your possessions and any parts of the apartment that you own, such as new kitchen
cabinets you install, against all 16 disasters.
If you own a co-op or a condo
- H0-6: condo/co-op A policy for those who own a condo or co-op, it
provides coverage for your belongings and the structural parts of the building that
you own. It protects you against all 16 disasters.
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Can I own a home without homeowners insurance?
Unlike driving a car, you can legally own a home without homeowners insurance. But,
if you have bought your home and financed the purchase with a mortgage, your lender
will most likely require you to get homeowners insurance coverage. That's because
lenders need to protect their investment in your home in case your house burns down
or is badly damaged by a storm, tornado or other disaster. If you live in an area
likely to flood, the bank will also require you to purchase flood insurance. Some
financial institutions may also require earthquake coverage if you live in a region
vulnerable to earthquakes. If you buy a co-op or condominium, your board will probably
require you to buy homeowners insurance.
After your mortgage is paid off, no one will force you to buy homeowners insurance.
But it doesn't make sense to cancel your policy and risk losing what you've invested
in your home.
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How and why it is important to take a home inventory!
Would you be able to remember all the possessions you've accumulated over the years
if they were destroyed by a fire? Having an up-to-date home inventory will help
you get your insurance claim settled faster, verify losses for your income tax return
and help you purchase the correct amount of insurance.
Start by making a list of your possessions, describing each item and noting where
you bought it and its make and model. Clip to your list any sales receipts, purchase
contracts, and appraisals you have. For clothing, count the items you own by category
-- pants, coats, shoes, for example - making notes about those that are especially
valuable. For major appliance and electronic equipment, record their serial numbers
usually found on the back or bottom.
- Don't be put off!
If you are just setting up a household, starting an inventory list can be relatively
simple. If you've been living in the same house for many years, however, the task
of creating a list can be daunting. Still, it's better to have an incomplete inventory
than nothing at all. Start with recent purchases and then try to remember what you
can about older possessions.
- Higher Value Items!
Valuable items like jewelry, art work and collectibles may have increased in value
since you received them. Check with your agent to make sure that you have adequate
insurance for these items. They may need to be insured separately.
- Take Pictures!
Besides the list, you can take pictures of rooms and important individual items.
On the back of the photos, note what is shown and where you bought it or the make.
Don't forget things that are in closets or drawers.
- Use a Video Recorder!
Walk through your house or apartment videotaping and describing the contents. Or
do the same thing using a tape recorder.
- Using your computer!
Use your PC to make your inventory list. Personal finance software packages often
include a homeowners room-by-room inventory program.
- Keep Your list, video and photos safe!
Regardless of how you do it (written list, floppy disk, photos, videotape or audio
tape), keep your inventory along with receipts in your safe deposit box or at a
friend's or relative's home. That way you'll be sure to have something to give your
insurance representative if your home is damaged. When you make a significant purchase,
add the information to your inventory while the details are fresh in your mind.
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What's the difference between cancellation and non-renewal?
There is a big difference between when an insurance company cancels a policy and
when it chooses not to renew it. Insurance companies cannot cancel a policy that
has been in force for more than 60 days except:
- If you fail to pay the premium.
- You have committed fraud or made serious misrepresentations on your application.
Non-renewal is a different matter. Either you or your insurance company can decide
not to renew the policy when it expires. Depending on the state you live in, your
insurance company must give you a certain number of days notice and explain the
reason for non-renewal before it drops your policy. If you think the reason is unfair
or want a further explanation, call the insurance company's consumer affairs division.
If you don't get an explanation, call your state insurance department.
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