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Home Insurance

An Easy Introduction to Buying Home Insurance

Don’t even think about buying a homeowners insurance policy until you know the basics of coverage options, limits, deductibles, and losses covered.

Homeowners insurance offers a variety of coverage plans to protect not only the physical framework of your home.


Policies can be customized to include coverage for your personal belongings, structures, and any injuries taking place on your property that you may be held liable for.


Types of Home Insurance Policies


There are a number of different home insurance policies that cover specific home styles including single family, condo, etc. Most insurance companies offer a variety of home insurance options to fit customers living situations.


The "HO" in the title of these policies stands for "homeowners."


HO-3 insurance policy


The HO-3 policy is often referred to as the special policy. It's appropriate for most single-family homeowners who wish to have coverage for their home and personal property.


HO-3 is known as a hybrid policy because it covers your home with an open perils policy and your personal belongings with a named perils policy.


Open Perils Policy


With a HO-3, an open perils policy specifically lists the damages your insurance does NOT cover.


Any damages to your home that were caused by something on the open perils list will NOT be covered.


Open perils usually include:



  • Earthquake

  • Flood Damage

  • Power Failure

  • Neglect

  • War

  • Nuclear Disaster

  • Intentional Loss

  • Government Action

  • Collapse

  • Theft to a Dwelling Under Construction

  • Vandalism or Malicious Mischief (only if property is vacant for more than 60 days)

  • Mold, Fungus, or Wet Rot

  • Deterioration

  • Mechanical Breakdown

  • Smog, Rust & Corrosion

  • Smoke from Industrial Operations

  • Discharge, Dispersal of Pollutants

  • Settling, Shrinking, or Expanding

  • Birds, Vermin, Rodents, Insects

  • Animals Owned by Insured


As an example, your dog chewing a hole through your wall would not be covered by your homeowners policy and therefore you'd have to pay for it out of pocket.


Named Perils Policy


With an HO-3 policy, your provider will explicitly name the damages to your belongings that are covered.


Any damage to your personal property outside of this list will NOT be covered.


Named perils usually include:



  • Fire

  • Lightning

  • Windstorm

  • Hail

  • Explosion

  • Riot or Civil Commotion

  • Aircraft

  • Vehicles

  • Smoke

  • Vandalism

  • Theft

  • Volcanic Eruption

  • Falling Objects

  • Weight of Ice, Snow, or Sleet

  • Accidental Overflow of Water

  • Sudden & Accidental Tearing Apart, Cracking, Burning, or Bulging

  • Freezing

  • Sudden & Accidental Damage from Artificially Generated Electric Current


HO-1 Insurance Policy


The HO-1 policy is called the basic form. It covers against 10 named perils:



  • Fire or smoke

  • Explosions

  • Lightning

  • Hail and windstorms

  • Theft

  • Vandalism

  • Damage from vehicles

  • Damage from aircraft

  • Riots and civil commotion

  • Volcanic eruption


This type of policy is less popular because it doesn't offer a significant amount of coverage. In fact, many mortgage companies won't allow basic forms.


HO-1 policies do not cover against earthquakes or floods AND they do not offer liability or personal belonging coverage unless purchased in addition.


HO-2 Insurance Policy


The HO-2 policy is called the broad form. It covers all the same perils as a HO-1, and a few other named ones including:



  • Falling objects

  • Weight of ice, snow, or sleet

  • Freezing of household systems like AC or heating

  • Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems

  • Accidental discharge or overflow of water or steam

  • Sudden and accidental damage from artificially generated electrical current


As a named peril, HO-2 only covers the damages on this list. However, it provides coverage for the structure of your home, your belongings, and sometimes your personal liability.


HO-4 Insurance Policy


The HO-4 policy, commonly known as "renter's insurance," is called the tenant's form.


It specifically covers renters' personal belongings and liability--not the building's structure which is insured by the owner of the building.


The renter's belongings are usually covered for the same perils as the HO-2 policy.


Renter's insurance will also cover temporary living expenses should you need to live somewhere else while your apartment is undergoing repairs.


HO-5 Insurance Policy


A HO-5 policy is known as a comprehensive form. It's an open peril policy that can protect you from any damages unless explicitly excluded in the writing of the policy.


This policy usually EXCLUDES damages to your home caused by:



  • Earth movement (like an earthquake, landslide, or mudslide)

  • Floods

  • Water damage

  • Damage from or infestation of birds, vermin, rodents, and insects

  • Neglect, deterioration, and general wear-and-tear

  • Settling, shrinking, bulging, or expanding of your home's foundation

  • Your pets and other animals

  • Mold, fungus, and rot

  • Intentional loss

  • War, government action, and nuclear hazard

  • Ordinance or law, the cost of bringing your home up to current building codes

  • Smog, rust, and corrosion


Because a HO-5 policy offers coverage and personal liability up to the limits you choose, it's more expensive than a HO-3 policy and not offered by as many insurance companies.


HO-6 Insurance Policy


A HO-6 policy is a condo form, but more commonly known as condo insurance.


It's designed to protect condo owners' personal belongings and liability from walls, to floors, to ceilings of their unit.


It usually covers the same damages of a homeowner's policy (HO-3).


HO-7 Insurance Policy


A HO-7 is mobile home insurance for specifically mobile or manufactured homes that do not fall under HO-3 policies.


This policy covers similar damages as a homeowner's policy.


HO-8 Insurance Policy


A HO-8 policy is known as an older home form. It's designed to protect registered historic homes and landmarks.


Individual Home Insurance Coverage Options


Homeowners insurance policies can be customized with a number of different coverages to fit your specific situation.


Dwelling protection covers your home and any attached structures, like a deck or connected garage.


Personal property protection covers things like furniture and electronics. It can help replace certain belongings that are stolen or damaged under a covered loss.


Extended personal property protection covers expensive items in your home like jewelry, watches, furs, and other antiques that are worth more than your coverage limits.


Other structures protection repairs or replaces structures on your property that aren't attached to your home, like a fence, garage or shed.


Family liability protection covers you if someone is injured on your property and you're found legally at fault for damages.


Guest medical protection covers resulting medical expenses if a visitor is injured at your home.


Additional living expenses covers temporary increased living costs, such as hotel bills, if your home is uninhabitable after a fire or cover loss.


Not every homeowner's policies cover all of these risks. It's important for you as the policyholder to understand your needs and customize a coverage around them.


Homeowners Insurance Losses By Cause, 2011- 2015


On average, 1 in 15 homes a year must file a property damage claim with their insurance company. That's about a 6.6% chance your home will suffer damages.


Of these damages, there are some that occur more often than others.


To give you an idea of the most common kind of losses that occur to homeowners, these are the total percent of losses incurred from the years 2011 and 2015.
































































































Cause of Loss 2011 2012 2013 2014 2015
Property Damage 96.90% 96.70% 95.30% 96.20% 97.10%
Fire and ligtning 18.30% 22.90% 28.20% 24.10% 23.80%
Wind and hail 45.70% 48.80% 30.50% 28.70% 20.30%
Water damage and freezing 22% 17.50% 26.70% 33.40% 45.10%
Theft 2.40% 2.90% 3.40% 2.40% 1.80%
All other damage, including vandalism and mischief 8.60% 4.50% 6.50% 7.60% 6.10%
 
Liability 3.10% 3.30% 4.70% 3.80% 2.90%
Bodily injury and property damage 2.90% 3.20% 4.40% 3.60% 2.70%
Medical payments and other 0.10% 0.20% 0.20% 0.20% 0.20%


Within the 5 year period, 6.8% of insured homes had made a claim.


Wind and hail damage made up the largest percentages of these claims over the past 5 years, making it the most frequent cause of damage.


That is about 1 in 35 homes a year make wind and hail damage claims.


While wind and hail damage insurance claims are the most frequent, the most expensive claims are those related to fire and lightning damages.


Fire and lightning damages have cost an average of $43,983 between the years 2011 and 2015.


While more costly, only 1 in 290 homes a year file a claim for fire and lightning damages.


For even further perspective, about 1 in 50 insured homes a year has a property damage claim caused by water damage or freezing.


And about 1 in 235 insured homes a year file a property damage claim due to theft.


As for liability claims, 1 in 1,015 homeowners filed a claim related to the cost of lawsuits for bodily injury or property damage that the policyholder or family members cause to others.


How much home insurance coverage do I need?


When it comes to protecting your home, it's safe to purchase coverage for 90-100% of your home's replacement cost.


This ensures you'll never have to pay out of pocket repair costs, even if your house is deemed a total loss.


There are 3 coverage levels to chose from:


Actual Cash Value pays for replacement costs while factoring in depreciation value.


So, if you bought your home for $400,000, but your home is only valued at $375,000 at the time of damage, you will only receive $375,000 from your insurance company.


Home insurance policies are defaulted to Actual Cash Value unless otherwise states.


Replacement Cost pays for replacement costs without factoring in depreciation. However, the payback is limited to a maximum dollar amount you have decided and written on your policy.


Replacement cost is NOT the market value of your home, the home's purchase price or the cost of the land, or an outstanding amount of a mortgage loan.


Rather, the replacement cost is an estimate of how much money would be needed to rebuild the entire home.


For example, if you and your insurance agent estimated the rebuild cost of your home to be $500,000


Guaranteed Replacement Cost pays the full cost of replacement with NO depreciation or dollar limit.


This coverage option isn't available in all states and if it is, it's usually limited to 120% of the cost to rebuild your home.


Guaranteed coverage allows you to account for construction cost and other inflations.


Home Insurance Deductibles


An insurance policy deductible is the amount of money you will have to pay upfront, out of pocket before your insurance coverage pitches in.


For example, if you have a $1,000 deductible on your policy and you're facing $4,000 in damages after windstorm damages your home, you will have to pay your insurance company $1,000 before they cover the remaining $3,000.


When choosing a deductible for your policy (if a deductible has not already been set by your provider), keep in mind that the higher your deductible amount the lower your premium payments will be.


Home Insurance Limits


Insurance policy limits are the maximum amount your provider will pay for a covered loss.


The higher the coverage amount, the higher you can expect your premium payments to be.


Coverage limits should not be chosen based on what is cheapest, but facts like:



  • how much it would cost to rebuild your home at current construction cost (known as dwelling protection)

  • the value of your belongings like electronics, appliances, jewelry (known as personal property protection)

  • the amount of coverage that would pay for medical bills in the event a guest is injured in your home (known as liability coverage)


Home Insurance Premium Rates


An insurance premium is the amount you pay monthly, quarterly, or annually in order for your coverage to stay in effect.


The facts that affect the price of your homeowner's insurance premium include:



  • Your coverage limits

  • Your deductible amounts

  • Optional coverages

  • Your home's age and condition

  • Your claims history

  • Your credit score


Average homeowners insurance premiums by state, 2014


United States homeowners pay an average of $1,132 a year for their home insurance policies.



























































































































































































































State Average Annual Premium
Alabama $1340
Alaska $976
Arizona $765
Arkansas $1252
California $974
Colorado $1273
Connecticut $1337
Delaware $736
Florida $2055
Georgia $1089
Hawaii $1018
Idaho $590
Illinois $987
Indiana $944
Iowa $853
Kansas $1431
Kentucky $1023
Louisiana $1847
Maine $811
Maryland $942
Massachusetts $1314
Michigan $865
Minnesota $1219
Mississippi $1447
Missouri $1199
Montana $1003
Nebraska $1226
Nevada $704
New Hampshire $905
New Jersey $1092
New Mexico $937
New York $1256
North Carolina $1056
North Dakota $1136
Ohio $797
Oklahoma $1772
Oregon $574
Pennsylvania $893
Rhode Island $1398
South Carolina $1240
South Dakota $995
Tennessee $1139
Texas $1947
United States $1132
Utah $634
Vermont $844
Virginia $946
Washington $695
Washington, D.C. $1151
West Virginia $877
Wisconin $686
Wyoming $1021

Florida has the most expensive homeowner's insurance premiums in the United States, with an average annual premium of $2,055.


The next most expensive states for home insurance premiums are:



  1. Texas, $1,947

  2. Louisiana, $1,847

  3. Oklahoma, $1,772

  4. Mississippi, $1,447


These states experience some of the most severe weather in the United States and therefore their homes are considered to be in high risk areas.


Southern states experience hurricanes, tornados, flooding, thunderstorms, hail, and other serious weather that cause thousands of dollars of property damage every year.


On the other hand, Oregon is the cheapest state for homeowner's insurance in the United States, with an average annual premium of $574.


The other cheapest states for home insurance premiums are:



  1. Idaho, $590

  2. Utah, $634

  3. Wisconsin, $686

  4. Washington, $695


The majority of these states are in the Pacific Northwest and have some of the most reliable weather in the United States, mostly rain and mist.


Conclusion


Get the most affordable and appropriate homeowners insurance coverage by discussing your needs with your agent and comparing premium quotes from 3 or more companies.


Your home is most likely your largest investment and coverage types should be thoroughly researched to avoid paying for repairs out of pocket.