Homeowners Insurance | What Does It Cover?

It’s easy to complain about insurance prices, but homeowners insurance is a pretty good deal.

For a couple thousand dollars a year, a homeowners policy could replace your entire home if a fire or severe storm destroyed it.

Homeowners coverage starts to get more expensive when you add extra coverage or if you use your policy unnecessarily.

So in this post, let’s explore how to avoid common coverage mistakes and how to get enough homeowners insurance without paying too much.

Why Do You Need Homeowners Insurance?

Homeowners insurance protects the money you have invested in your home. Your policy will not keep bad things from happening to your home. It will not pay to maintain your home, and it won’t and shouldn’t pay for every home repair you need.

If you want protection against large repair bills, consider a home warranty.

Home insurance will provide a safety net in case something external — a fire, high winds, crime, a personal injury lawsuit — threatens your home investment.

Without this type of insurance, you’d be personally on the hook for major repairs or for replacing your entire home. You’d also be responsible for all liability if someone got injured on your property.

This is why your mortgage company will require you to buy homeowners coverage. Your lender doesn’t want you owing money on a home that no longer exists or has lost significant value.

When purchasing a policy, you should compare quotes from the best homeowners insurance companies in your area.

What Does Homeowners Insurance Cover?

Homeowners coverage combines several different kinds of protections that work together to protect your home investment.

Here is what’s covered with home insurance:

Dwelling: This part of your policy protects your home itself. Your dwelling coverage amount usually has an impact on your other kinds of protections.

Other Structures: Your detached garage, fences, driveways, gazebos — any permanent construction on your property — will be covered separately, usually as a percentage of your dwelling coverage.

Personal Property: This includes items you can remove from your home such as small appliances, electronics, collectibles, tools, musical instruments, and jewelry. These items have their own coverage within your policy in case someone breaks in and steals your stuff, or in case they’re damaged or destroyed by a covered peril. Your personal property coverage amount tends to be set as a percentage of your dwelling coverage.

Additional Living Expenses: If a kitchen fire makes your house uninhabitable for a few months, your insurance policy can help you pay for a hotel, food, or other accommodations.

Other Medical Expenses: Many insurance companies let you add coverage to help pay a guest’s medical bills if he or she got injured in your home.

Liability: This is a big one. If someone were injured on your property and a civil trial judge or jury found you liable, your homeowners coverage could help protect your home or other property from being seized by court action.

You should have some control over how much of these coverages you buy, and you can save by opting for lower coverage amounts.

But protecting your investment from these perils is important. The amount you’d save each year in premiums by short-changing your coverage could cost you a lot more later if something bad happened to your home.

Do I Need Home Insurance AND a Home Warranty?

There’s some natural confusion about homeowners insurance compared to home warranties.

Homeowners Insurance protects your home investment in case a fire, storm, burglary, or lawsuit threatens your home’s value.

Home Warranties provide a service contract for the systems in your home — AC, plumbing, electrical, dishwasher, clothes washer, garage door opener, and so on — in case they break from normal wear and tear. A warranty could insulate you from unexpected repair bills.

These products have distinct uses, but only a homeowners insurance policy is essential.

You could skip the warranty if you can pay for unexpected repairs some other way.

What Homeowners Insurance Does NOT Cover

Homeowners policies do not cover every possible scenario that could damage your property and harm its value.

Regular homeowners insurance will not protect your property against flooding, for example. You’d need special flood insurance for this.

Other common exclusions for home insurance are:

• Damage from frozen pipes when the home is unoccupied.
• Losses from theft while the home is under construction.
• Damage from the weight of snow or ice if left uncleared.
• Losses from vandalism in a vacant home.
• Damage from acts of war or terror.
• Damage from gradual, long-term leaks left unrepaired.
• Termite damage.
• Damage from a shifting foundation or ground swells.

To find out exactly what your policy would not cover, look carefully into the details of your policy.

What Factors Affect Homeowners Insurance Rates?

Named peril or open peril, cash value or replacement value — these decisions will affect your premiums.

Here are the main factors that affect home insurance rates and how you can save on your premiums:

Open Peril vs. Named Peril

An open peril policy covers anything not excluded in your policy’s language. A named peril policy will list the specific situations in which it will pay claims.

Homeowners policies, which name the perils from which they will protect your property’s value, tend to cost less than open-peril policies.

Open-peril policies will cover any peril unless it’s specifically excluded in the policy’s language, so they cost more.

Replacement Value vs. Cash Value

This difference seems trivial at first, but it has a significant impact on premiums and your policy’s performance, especially if you lose a lot of valuables:

• Replacement Value: Your policy could replace damaged, destroyed, or stolen items with their new equivalents, even though the new items cost more than the value of your stolen or damaged items. You could buy a new TV, even though your stolen TV was five years old.
• Cash Value: Your insurer would pay the value of your items at the time of the peril. You’d receive funds to buy a 5-year-old TV but not a new TV, for example.

Replacement value policies cost more, and the policy may not pay the replacement value right away.

Instead, you’d get the cash value first and then be reimbursed for the extra costs you paid to close the gap between cash value and replacement value.

The Value of Your Property

A $750,000 house costs more to insure than a $250,000 home; this is just the way insurance works, and you can’t do much about it.

Building costs in your state or county could also affect your premiums. If it costs a lot to build, your insurance company will compensate for the potential extra costs by charging you higher premiums.

Limiting Claims

I recommend using your homeowners insurance the way you’d use a catastrophic health insurance plan — only when you really need to.

Homeowners who get into the habit of filing claims for minor repairs eventually pay more in premiums.

If a tornado tears shingles off your roof, by all means, file a claim. That’s what insurance is for. But if your dishwasher leaked and you need to replace a few square feet of floor tiles, consider paying for the repair yourself.

Reducing Un-needed Coverages

A home with very few detached buildings shouldn’t need a policy with maxed-out detached buildings coverage.

The same is true for your personal belongings coverage. If you don’t have very many valuables, you probably won’t need to maximize this coverage.

Even if your insurer let you, I wouldn’t recommend eliminating an element of your coverage. You may need some detached building coverage, for example, if a tree fell on your fence.

Coverage for Special Valuables

Homeowners insurance can fall short when you have collectibles, antiques, or rare items — property whose value to collectors exceeds its practical or material value.

For example, if you have a collection of rare, first-edition vinyl albums or the original set of Star Wars figurines from 1977, a standard homeowners policy may not be able to provide the coverage you need.

Instead, you may want to opt for additional coverage or buy a separate policy for your collectibles. Or check with your home insurer to arrange for more coverage.

Is Property Insurance the Same as Homeowners Insurance?

You’ll hear the terms property insurance and homeowners insurance used interchangeably, and that’s fine. But there is a difference between the two, and knowing the difference may help as you shop.

• Property Insurance: Includes a variety of products such as homeowners insurance, renters insurance, earthquake insurance, flood insurance — anything that protects your property’s value from outside perils.
• Homeowners Insurance: Includes coverage a homeowner buys to protect the value of his or her home in case of damage from a covered peril.

While we’re talking about subtle differences in insurance terminology, you should also know dwelling coverage isn’t the same as homeowners coverage.

Dwelling coverage will cover only your home itself and will not include the other elements we’ve discussed, such as personal property, liability, and detached structure coverage.

Other Insurance for Homeowners

This is also a good time to bring up some other kinds of insurance new homeowners hear a lot about, some of which are necessary even though they don’t protect you.

Private Mortgage Insurance: Your lender will require PMI unless you paid 20 percent or more down on your home. You’ll pay the premiums, but the coverage protects your lender in case you default. In many cases, you can cancel the coverage once you’ve paid your mortgage down to 80 percent of the home’s value.

Mortgage Life Insurance: When you buy a new home, you’ll start getting tons of offers in the mail about this kind of coverage, which would pay off your mortgage if you died unexpectedly. It sounds like a great idea, but a standard term life insurance policy will do more for less.

How to Shop for Homeowners Insurance

When you’re buying a house, there’s so much to do, and it’ll be easy to push aside decisions like homeowners coverage. A lot of people just ask their auto insurance company to add a homeowners policy.

In many cases, this can lead to savings because of bundled policy discounts. But if you’re serious about protecting your new investment, set aside some time to consider several options.

Compare Insurance Ratings

Unless your insurance company has an A or better from A.M. Best, Moody’s, and the other independent ratings agencies, I’d suggest looking somewhere else. These ratings reflect the financial health of your insurer.

Review Customer Service Ratings

TrustPilot, Consumers Advocate, and even Facebook can hook you up with customer reviews, which could tell you what to expect from your insurance’s customer service and claims departments.

Look for Discounts

Insurance premiums should reflect the risk your insurance company takes on with your policy. If you’ve spent time and money updating and improving your home, making it safer and less likely to be damaged, your premiums should reflect this.

Policy discounts usually provide the best way to claim your savings. Ask your insurer about:

• New Roof Discount: New roofs lead to fewer claims for wind damage, so many insurers will discount your policy.
• Home Security Discount: Got a nice new alarm system? You’ll be less likely to file a personal property claim, and your premiums should reflect this.
• Gated Community Discount: Another security measure that can lead to lower premiums.
• Non-Smoker’s Discount: Smoking leads to fires, which leads to claims. If you have a non-smoking home, you’re less of a risk to the insurance company’s bottom line.

Many insurers offer their own specialized discounts, so be sure to ask about other ways you can save.

Keeping an Inventory Prevents Headaches

Nobody needs more clerical work, but you’d be surprised how helpful a simple home inventory could be after a fire or break-in.

When you have pictures of your valuables and a list of serial numbers and other details, your insurance company can adjust more quickly, which means you can get back on your feet faster.

Years ago, our parents and grandparents would have kept a box of pictures and a pad of serial numbers. I recommend an app like Nest Egg, MyStuff, or Sortly to make this process part of your life.

Homeowners Insurance Is Worth It

I’m all about finding and claiming savings you’ve earned as a customer. But be sure you’re choosing your insurer based on its ability to protect your property and not only its ability to save you some cash.

Eventually, you should be able to sell your home for more than you’ve paid into it — that’s why we call it an investment. Damage left unrepaired because your policy won’t pay the claim can wreck your home’s ability to pay off for you financially.

And haggling with insurance adjusters is just a pain. So get good homeowners coverage, keep an updated inventory of your stuff, and then start hoping you’ll never need to use your coverage.