- If your home was destroyed by fire or damaged by a natural disaster, you’d need money to repair or replace it.
- If a guest in your home is injured, liability protection and medical coverage help pay expenses.
- If you are a victim of theft and vandalism, it can reimburse you for your loss or pay for repairs.
- If you are still paying for your home, your lender will require insurance.
How Much Homeowners Insurance Do I Need?
You need enough insurance to cover the following:
- The cost to rebuild your home.
- To replace your personal possessions.
- The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
- The cost to defend a lawsuit if someone sues you personally.
You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don’t include the cost of the land. And don’t base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.
Factors that will determine the cost of rebuilding your home:
- Local construction costs
- The square footage of the structure
- The type of exterior wall construction — frame, masonry (brick or stone) or veneer
- The style of the house (ranch, colonial)
- The number of bathrooms and other rooms
- The type of roof and materials used
- Other structures on the premises such as garages, sheds
- Fireplaces, exterior trim and other special features like arched windows
- Whether the house, or parts of it like the kitchen, were custom built
- Improvement to your home – adding a second bathroom, enlarging the kitchen or other additions that have added value to your home
Standard homeowners policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance.
Please note all homeowners policies are not alike. They may vary greatly from one policy to another. Some policies may be basic or limited like a HOA or some policies may be broader HOA Plus, HOB, HO-3 or HOC. Please see below for some differences and please contact your agent for a further explanation.
Types of Homeowners Policies & Coverage Options
There are two types of policies: all risks and named perils. A named perils policy covers losses that are due to only those perils listed in the policy. The perils typically covered include fire, windstorm, hail, and other direct physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. It is important to note the all risks policy provides broader protection than do named perils policies.
The types of homeowner packages offered to owners of single family owner occupied homes are HOA, HOB, HO-3 and HOC.
HOA Basic Homeowner
Insures your property against the following 11 basic named perils: fire/lightning, loss of property removed from premises endangered by fire or other perils, windstorm/hail, explosions, riot/civil unrest, aircraft, vehicles, smoke, vandalism/malicious mischief, theft, and breakage of glass constituting a part of the building.
HOB Broad Basic Homeowner
Insures your property against the 11 basic named perils in HO-1 plus 7 additional named perils: falling objects, collapse of roof due to weight of ice or snow or sleet, collapse of building(s) or any part thereof, bursting of steam/hot water system , leaking of plumbing or heating system, freezing of pipes, sudden and accidental damage from artificially generated currents to electrical appliances or devices or fixtures or wiring. This is one of the most comprehensive policies as some HOB policies cover foundation water damage and constant seepage. We have HOB policies to offer you.
HO-3 Special Extended Homeowner
Provides for comprehensive coverage (all risks) on your home and the 18 (HO-2) broad named perils coverage on your contents. This is the most popular of all homeowner policies.
Replacement Cost Policies
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation — the decrease in value due to age, wear and tear, and other factors.
If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis.
Guaranteed or Extended Replacement Cost Coverage
After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowners policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.
An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.
Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowners insurance policies (even a guaranteed replacement cost policy) won’t pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)
Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.
Most homeowners insurance policies provide coverage for your personal possessions for approximately 50% to 70% of the amount of insurance you have on the structure or “dwelling” of your home. The limits of the policy typically appear on the Declarations Page under Section I, Coverages, A. Dwelling.
To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire. If you think you need more coverage, contact your agent or insurance company representative and ask for higher limits for your personal possessions.
Replacement Cost or Actual Cash Value
You can insure your possessions in two ways. You can either insure your belongings for their actual cash value or their replacement cost.
A cash value policy pays the cost to replace your belongings minus depreciation. A replacement cost policy, on the other hand, reimburses you for the cost to replace the item.
Suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to you.
Generally, the price of replacement cost coverage is about 10% more than actual cash value. If you need a flood insurance policy, you can purchase flood insurance for your belongings. It is only available, however, on an actual cash value basis.
Insuring expensive items with floaters/endorsements for worldwide coverage and no deductibles. This allows you to insure these items individually or as a collection. You can determine the value by providing your agent with a recent receipt or getting the item or collection appraised.
Additional Living Expenses After a disaster
This is a very important feature of a standard homeowners insurance policy. This pays the additional costs of temporarily living away from your home if you can’t live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.
Liability To Others
This part of your policy 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 pets if you have animal liability. It pays for both the cost of defending you in court and for any damages a court rules you must pay.
Umbrella or Excess Liability
You should buy enough liability insurance to defend and pay damages if sued in a lawsuit. If you own property and or have investments and savings that are worth more than the liability limits in your policy, you may consider purchasing an excess liability or umbrella policy.
Umbrella or excess liability policies provide extra coverage. They start to pay after you have used up the liability insurance in your underlying home (or auto) policy. An umbrella policy is not part of your homeowners policy. You have to purchase it separately.
The cost of an umbrella policy depends on how much underlying insurance you have and the kind of risk you represent. The greater the underlying liability coverage, the cheaper the policy. This is because you would be the less likely to need the additional insurance. Most companies will require a minimum of $300,000 on your home and your car, if you own one.