What Is Covered by Homeowners Insurance?
Standard homeowners insurance covers several things in four main areas:
The structure of your home and outbuildings
The contents of your home
Additional living expenses
Personal liability coverage
Your home’s structure is protected by dwelling coverage, including from perils like fire, hail, vandalism, theft, rainstorms, and lightning. But not every type of natural disaster is included. For catastrophic natural disasters like hurricanes, tornadoes, and flooding, you will need your insurance agent to add a rider that covers each specific type.
Personal property coverage covers the belongings in your home, mobile home, or condominium. The amount of coverage you have is roughly 50 to 75 percent of the coverage of your structure. Make a home inventory so that you can determine whether this is enough. You may need to consider an umbrella insurance policy for extra coverage.
Additional living expense coverage is when you need to stay at a hotel while your home is being fixed due to a covered event, such as severe water damage or destruction from a fire. Or if you suffer lost rental income because your home is damaged and your tenants cannot stay in the house.
This loss of use coverage offers reimbursement for the costs of staying in a hotel while you wait to return to your home. It also covers some living expenses like food.
Personal liability insurance protects you if a guest gets injured or hurt on your property and sues you for damages and medical payments. It also covers you and your family away from home if one of your family members accidentally injures somebody else or damages another person’s property.
Your coverage does not cover damage done to someone in your family or their medical bills. If your child jumps off the swing set and breaks their arm, your homeowners insurance will not cover this, but if it’s your neighbor’s child, they will. And if the neighbor sues you over this, your liability insurance picks up the legal fees and any court-ordered compensation.
Understanding the Home Insurance Policy Coverage Options
There are three types of coverage that your policy covers: actual cash value (ACV), replacement cost, and guaranteed cost. Here’s a breakdown of how these compare.
Actual cash value coverage accounts for depreciation and inflation when adjusting the payout amount, so this type of policy is cheaper. You will get less money for your items when you make a claim.
Replacement value coverage will give you enough money for the covered loss to replace the item with a comparable one. It does not take depreciation into account, so it has a higher premium than ACV.
Guaranteed coverage means that the insurance provider guarantees they will pay the costs to get your house back to its original condition, even if that number exceeds the policy limit. This is good to have if you have a lot of customization in your home, like ornate tiling, woodwork, or granite countertops.
Let’s say that you had a refrigerator that cost $1,500 brand new. Two years later, it was damaged when a tree fell in your kitchen. The actual cash value is going to account for the depreciation of your refrigerator over the past years, as well as inflation. So getting a check for $1,000 or less would not be unreasonable.
But if you have replacement cost coverage, you’re going to get a check that will buy you a comparable item. If that refrigerator is still on the market and now costs $1,550, your insurance company will pay out $1,550 to buy it.
Replacement cost insurance is more expensive than actual cash value because it pays out more per claim since depreciation isn’t included. You need to remember that over time, the cost to repair property damage goes up. You could not rebuild your home for what it cost when it was built 20 years ago.
Remember, your homeowners insurance policy doesn’t cover ordinary wear and tear or accidents. When your kids accidentally toss a toy through the picture window, that repair cost is on you. Nor can you make a claim on a roof that’s 25 years old just because it needs new shingles.
For collectible items and valuables, you need to get a rider, which is additional insurance that’s attached to your home insurance policy. This gives you specific compensation for your jewelry, artwork collection, or whatever it is you need extra coverage on. You don’t need a rider for the $30 department store earrings, but you do for the $3,000 diamond ones from the jeweler.