Online banking is a fantastic innovation. You can sit on your sofa at midnight, check your balance, pay your bills, and wonder why you are paying, in my case, an annual $1,250 premium for homeowners insurance. On this occasion, before hitting that “Pay” button, I thought I’d take a look at homeowners insurance and see if it was really worth it.
Is Homeowners Insurance Worth It? Yes, the cost of a homeowners insurance policy is worth it. However, it is critical that you look into the details such as; the types of damage covered, exclusions, and whether the policy offers full replacement value, market value, or a fixed amount in the event of a claim before you purchase your coverage.
Saving a chunk of change today may be an attractive option. Yet, having to pay repair or replacement or rebuilding costs out of pocket is a lot less appealing.
Why Should You Buy Homeowners Insurance?
If you have a mortgage, then it is probably a condition of your loan that you carry homeowners insurance. Lenders want to ensure that if anything happens to the property, you will be able to repair, restore or rebuild your home. They want to make sure that it is worth the same as it was before the damage occurred.
When you purchase a condo, a townhouse, a dwelling in a gated community, a property covered by a homeowners association, or a home in a co-op your board may require you to purchase a minimum level of insurance as a condition of ownership. This can be the case whether you make your purchase with a mortgage or with cash. In some cases, the board will have, or HOA will have a master policy which covers communal areas and the main structure, and you can purchase a minimal coverage policy or contents only insurance.
If you have purchased your home in cash, and do not have any external organizations that require you to buy homeowners insurance, do you still need to buy a policy?
Legally speaking there is nothing that says you have to have an insurance policy to cover your home. However, are you in a position to find thousands of dollars at the drop of a hat if lightning strikes your house and the roof burns? How about if a visitor trips and hurts themselves? Are you able to cover their medical bills?
While the short-term savings may seem appealing, you could easily be one of the 7% of homeowners who file a claim each year. If you live in an area that is at high risk for flooding, earthquakes or other natural disasters then the likelihood that you will have to make a claim could be as high as 29%.
What Kind Of Policy Should You Buy?
When deciding what kind of homeowners insurance policy you are going to buy, there are two things to look at – coverage and cost. Realistically, most of us are hampered in some way by our budget, so you should look at how much you can afford to pay and then shop around for the best possible bang for your buck.
Some people will claim that, no matter what you do, never skimp on your insurance, and to some degree this is correct.
There may be times when it is a smarter decision to cut back on your insurance coverage in order to save yourself from excessive financial strain.
For example. If you are not in a high-risk zone, you could look at historical data for flooding in your area and decide whether or not you needed that particular extra coverage. You could reduce the amount of personal liability coverage you carry, especially if you do not have many visitors to your property, and you can consider raising your deductible.
So, as long as you have enough coverage to afford a rebuild of your home should you need one, anything else can be weighed up against your current financial situation.
While there are eight basic kinds of homeowners insurance policy coverage to choose from, most people choose between three – broad form, special form, and comprehensive form. Before looking at these, you should know about the most basic of basic insurance policies, which can be challenging to find these days – basic form.
HO1: Basic form
This is, as the name suggests, the most basic level of homeowners insurance you can buy. It is known as a “named peril” policy because it only covers you for 10 listed events which are:
- Fire or smoke
- Hail and windstorms
- Damage from vehicles
- Damage from aircraft
- Riots and civil commotion
- Volcanic eruption
These policies do not usually cover any personal belongings or personal liability and have become quite rare due to the fact that many mortgage companies no longer accept them as adequate.
HO2: Broad form
This is a more common form of “basic” insurance, and it covers everything that the previous kind of insurance does plus:
- Accidental discharge or overflow of water or stream
- Falling objects
- Freezing of household systems like AC or heating
- Sudden and accidental damage from an artificially generated electrical current
- Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
- The weight of ice, snow, or sleet
HO2 policies usually cover personal belongings but only some cover personal liability. Because it is, like HO1, a “named peril” policy, you will only be covered for any damage or loss caused by an event named explicitly in the policy.
HO3: Special form
This is the most common form of the homeowner’s insurance policy and offers what is known as “open peril” coverage. This means that you will be able to make a claim for any damage or loss caused by any event except those listed in the policy.
These exclusions are usually:
- Earth Movement
- Ordinance of law
- Water damage (except sudden and accidental water damage)
- Power failure
- Nuclear hazard
- Intentional lossGovernment action
- Collapse (some coverage may be provided in your policy)
- Theft to a dwelling under construction
- Vandalism or “malicious mischief”
- Mold, fungus, or wet rot (some coverage may be provided in your policy)
- Wear & tear, deterioration
- Mechanical breakdown
- Smog, rust & corrosion
- Smoke from agricultural smudging and industrial operations
- Discharge, dispersal, seepage of pollutants
- Settling, shrinking, bulging, or expanding
- Birds, vermin, rodents, insects
- Animals owned by the insured
The exact details of what is, or is not, covered will vary from company to company and policy to policy. It is important to read the details of the insurance you are buying. One thing to be aware of is that events such as floods, earthquakes, and mudslides are rarely covered by this kind of policy.
The coverage is also usually for the cash value of the items lost or damaged. The cash value is calculated as the original cost of the item minus depreciation – basically the second-hand value.
Also, an HO3 policy will have “open peril” coverage for the building and “named peril” for personal property. This makes it especially important to go into the detail of what does and does not come under the protection of your policy.
HO5: Comprehensive form
As the name suggests, this is the most comprehensive type of homeowners insurance policy. It will have all of the benefits of a “Special form” policy but will usually pay replacement value for the property, enabling you to replace everything you need to, brand new, and will be “open peril” for both the building and for personal property.
Comprehensive form insurance also covers the homeowner’s personal liability for any medical costs incurred to a visitor or tradesperson, should they meet with an accident while on the premises.
Other Kinds Of Policy
There are also four other types of policy available, which are specific to particular kinds of home. These are:
- Older home policies
- Tenants insurance
- Condo insurance
- Mobile home policies
What Additional Exclusions Should I be Looking For?
There was a time when our homes were just that, homes: simple places where we lived and nothing else. Nowadays it is not unusual to have a workplace in the home. You may also have expensive hobby equipment, a live-in nanny, or to rent out our home for short periods.
While our lifestyles have changed, homeowners insurance has remained relatively basic, so there are many explicit exclusions or even unnamed uncovered situations for which you should be on the lookout.
Live-in and regular day workers
If you have domestic staff who come to your house every day, live in your home, or who work in your home based business, it is essential to ensure they are correctly covered by applicable employment insurance as, in this case, your homeowner’s policy will not provide coverage.
Short term rentals
Renting out your home or a part of your home to another person will impact your insurance coverage. Be sure to check with your insurance agent before you take on any tenants or open your home up on a platform such as Air B&B.
Home-based businesses, offices, and studies
If you have an office in your home, it is critical to making this clear to your insurance agent. Home-based businesses do not typically come under the umbrella of homeowners insurance. They must have separate coverage through an additional policy. The reason it is so important to let your agent know the exact nature of your work at home is that a home claim may be met with a denial if something happens in a room you consider to be your study but that an adjuster would consider a home-based business office.
Leaving your property unattended
Because an unattended property is considered to be at a much higher risk from fire, theft, or other events, then an insurance company may cancel your coverage if the house is left vacant by a specified period. This is usually a 60 day period. If you are going to be leaving your home vacant, even if you have somebody checking in on it, you have to let your insurance company know.
What Is The Average Cost Of Homeowners Insurance?
The cost of your homeowner’s insurance will depend on a wide range of details. Including your square footage, the appraised value of the home, your zip code, the natural disaster risk factors in your area, crime figures, and much more.
The average annual cost for comprehensive insurance on a $200,000 dwelling with a $1,000 deductible and $100,000 liability in the US is $1,228. However, the same level of insurance will cost an average of $3,575 in Florida but only $337 in Hawaii.
What Are The Most Common Mistakes Homeowners Make With Insurance?
There are some common mistakes that homeowners make when choosing and buying their insurance.
Underinsuring the home.
Many people buy the cheapest insurance they can get away with, usually just enough to cover their mortgage. This is often less than the amount that it would take to rebuild their home, especially if the house is an older one, or the homeowner is approaching the end of their mortgage.
Overestimating your coverage
When choosing a policy, homeowners frequently pay attention to the cost of premiums but spend little time reading through the details of exclusions. This is especially true for comprehensive insurance where the policyholder often assumes they have coverage for every kind of natural disaster.
Earthquakes, floods, and mudslides are common exclusions from even the most comprehensive policy. So too are items such as mold damage or losses due to, for example, a break in the sewage line. Choosing a policy based on price
It is important to spend the most you can reasonably budget for on homeowners insurance. However, this doesn’t mean you should just choose a policy by price. Spend some time shopping around, and make sure you get the best bang for your buck.
Assuming your deductible is a flat rate
Not all homeowners insurance policies have deductibles which are flat rates. Some of them have percentage deductibles. This can come as a shock to some people when they make a claim. They discover that instead of paying a set dollar amount they are required to pay 5%, 10%, or even 15% of the repair or replacement costs incurred
Not updating your insurer
Whenever you, your family, or the structure of your home go through any changes, you should let your insurer know. You should do this because changes can have an impact on your coverage or premiums. Believe it or not, I know of claim refusals due to changes to landscaping. Even, on one occasion, after one family acquired a pet dog.
Neglecting property maintenance
Negligence is a frequent reason for a claim denial.
One homeowner had their roof torn off in a hurricane. When the claims adjuster inspected the property, they found evidence of termites. This was used by the insurance company to suggest that termite damage may have contributed to the loss. This absolved the company of any responsibility to pay.
I Have A Home Warranty Do I Also Need Homeowners Insurance?
A home warranty is a contract between a homeowner and a warranty company to cover the costs of repairs or replacement for certain appliances and systems within the home. Having a home warranty will not meet your obligations for home insurance. Neither will it cover any of your structure, personal belongings, or personal liabilities.