When shopping for home insurance, remember this: Insure your house for the cost to replace it (meaning reconstruction costs), not its real estate “market value, and don’t factor in the value of your land.
The insurer should be able to give you an estimate for rebuilding your house in the event of a total loss. That estimate should be your dwelling coverage amount.
If you raise your deductible you will be able to lower your premium. You may be used to a flat-dollar amount deductible, such as $1,000. But recent years have seen the spread of percentage-based deductibles — for either all property-damage claims or for claims for certain perils, like windstorms.
These policies make you liable for 1 to 5 percent of your home’s insured value (not a percent of the amount of the claim) before the insurance company pays. So, if you have a 2 percent deductible and your home’s insured value is $250,000, you’re on the hook for $5,000.
Check your homeowners policy’s declarations page to make sure you know your current deductible.
TYPES OF HOME INSURANCE POLICIES
You may hear the term “standard home insurance policy.” Home insurance policies are often similar because there are two organizations that supply policy forms to insurers: ISO and the American Association of Insurance Services. Some home insurance companies choose to use their own policies. Whichever type your insurer is using, the policy has to be approved by your state insurance department.
What will vary will be premiums. You can find a wide range of rates among insurance companies for the exact same level of coverage. That’s why it’s important to shop around.
- Basic homeowners policy.
- Covers your house and possessions against 10 different perils.
- HO-1 policies have been discontinued in most states.
- Broad homeowners policy.
- Covers house and contents against 16 perils, which are named in the policy.
- Special form homeowners policy.
- Covers the structure for all perils except those specifically excluded by the policy.
- Contents are covered against perils named in the policy.
- Renters insurance policy.
- Covers contents for 16 named perils and includes liability coverage. It does not insure the dwelling itself.
- Also includes liability coverage for the renter.
- Premier homeowners policy, generally offered to newer, high-end homes that are well-maintained.
- Much like the HO-3 policy but contents are covered against all perils except those specifically excluded.
- According to the Insurance Information Institute, in some cases, depending the year of construction, the area where you live, your claims history, and other rating factors, you can buy an HO-5 for about the same cost as a traditional HO-3.
- Insurance for owners of co-ops or condominiums.
- Provides personal property coverage, liability coverage and specific coverage of improvements to the owner’s unit. Insurance provided by the owner’s association normally covers most of the actual structure.
- Policy for older homes.
- Covers the same perils as HO-2 but pays only for repair costs or actual cash value, since replacement cost could make the policy costly.
- Well-suited for older homes whose market value is considerably less than the cost to rebuild them.
KNOW WHICH TYPE OF HOME INSURANCE IS RIGHT FOR YOU?
Extended replacement cost for your house
In another twist to your policy choices, some companies offer coverage for your dwelling that goes beyond its insured value. In other words, your premium might be determined based on dwelling coverage for $200,000, but if your home is destroyed and it costs $215,000 to rebuild, you’re covered.
Guaranteed replacement cost coverage pays for the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit. You may have a tough time finding a policy with guaranteed replacement cost.
Extended replacement cost coverage pays a certain amount above the policy limit to replace a damaged home, generally 120% or 125%.
Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction.
Other insurance you may need for your home
There are many potential extras, such as coverage for sewer back-ups and building-code upgrades. Below are some important additional coverage types.
Homeowners policies do not cover flood damage. The National Flood Insurance Program (NFIP) offers flood insurance through home insurance companies nationwide.
If a mortgage lender determines your home is in a special flood hazard area, you might be required to purchase flood insurance.
If you are concerned about earthquakes, you can buy earthquake insurance with a separate policy.
In much if the country, damage for wind is already included in a homeowners policy. But in hurricane-prone areas like Florida, homeowners who want to insure against wind damage need to buy special windstorm coverage.
If you want more liability coverage than your home and car insurance policies provide, you can buy a separate umbrella insurance policy. This is a good idea if you have a lot of assets and would be open to a big lawsuit if you cause a lot of damage. The liability coverage gained through an umbrella policy is also relatively cheap.