Your Complete Guide To Homeowner's Insurance

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Q: My mortgage lender is requiring me to take out a homeowners insurance policy before I close on a new home. What do I need to know about this process?

A: Homeowners insurance is designed to protect you and your family members from liability and to cover your home and possessions in the event of a disaster or theft.

Read on for all your questions about homeowners insurance answered.

What types of plans are available for homeowners insurance?

There are several types of homeowners insurance policies offering a wide range of coverage options. When researching a plan, try to find the sweet spot that offers you enough coverage without overpaying for more protection than you need.

Here are the most common types of homeowners insurance plans:

HO-2 – A policy that only protects against 16 specified perils.
HO-3 – A broad policy that protects against all perils with the exception of those specifically excluded in the policy.
HO-5 – A premium policy that usually protects newer homes in excellent condition and covers all perils except the few that are specifically excluded by the policy.
HO-6 – Insurance for co-ops/condominiums, which includes personal property coverage, liability coverage and coverage of improvements to the owner’s unit.
HO-8 – A policy similar to an HO-2 but created specifically for older homes. This policy only covers the actual cash value of the home plus the possessions.

Each type of plan will also include some extent of liability coverage, which pays for medical treatment or legal bills if someone is hurt on your property or by you or a member of your family.

Is every kind of catastrophe covered by my insurance?

Most policies will only cover events if they are sudden and accidental. This rules out any structural problems that have been building up for months, as well as any damage you intentionally do to your home and belongings.

In addition, while most natural disasters, like windstorms, tornadoes and hurricanes are covered by homeowners insurance, some are not and require a separate policy for coverage. Specifically, earthquakes and floods are rarely covered by a standard policy.

Also, insurance plans in areas that are prone to a peril included in standard policies may have a separate deductible for that particular catastrophe. For example, in many areas, homeowners insurance will have a separate hurricane deductible at 1-5% of the property’s insured value.

Aside from natural disasters, some kinds of damages, like mold and sewer backups, may not be covered by your policy unless you add them separately.

Should I choose a cheaper policy or a plan with a lower deductible?

As with any insurance, you’ll need to pay a monthly, annual or bi-annual premium to your insurance provider.

Your plan will also include a deductible, or the amount of money you’ll pay out of pocket if you make a claim. A lower deductible means your insurance coverage will kick in sooner, but you’ll also have a higher premium. When choosing a plan, it’s best to find one that offers a deductible you can comfortably afford along with the lowest possible premium.

Will insurance cover all of my belongings?

Every policy will have a cap on payouts, and there are also sub-limits at play. For example, an insured dwelling that’s valued at $400,000 will typically have a 50% sub-limit. That means, in cases of major catastrophe, the insured will only see up to $200,000 in payouts.

Most policies will also have a maximum amount of coverage on specific items. If you own valuables, like pricey jewelry, expensive athletic equipment, firearms, electronics and artwork, consider purchasing a rider to cover these items separately.

Should I choose a replacement-cost plan or an actual cash-value plan?

When purchasing a plan, you’ll have the option of one of these types of coverage:

Replacement cost – A generally more expensive kind of coverage that pays for the full cost of replacing a damaged dwelling or belongings up to a predetermined cap.
Actual cash value – Less expensive coverage that offers payouts only covering what the damaged item was worth at the time of the disaster.

A replacement-cost plan will help you get back on your feet sooner after a disaster, but the premiums can be a lot higher. The perfect plan for you will depend on your financial standing, the value of your home and belongings and the price you put on having true peace of mind.

Will all of my claims be honored?

Insurance providers will only offer coverage when the insured is not at fault. For your claims to be honored, your property and home must be well-maintained. For example, if you’ve forgotten to shut off your outdoor faucets before the winter and a pipe froze and burst, your insurance is likely to deny the claim on the basis of neglect.

Be careful to have your roof inspected regularly, tend to all repairs promptly, clean your gutters, prepare your home properly for winter, trim your trees and take the necessary measures to ensure that your home is in excellent condition.

Should I use the insurance company my lender recommends?

Your mortgage lender may suggest an insurance provider for you, but you’re under no obligation to use that company. It’s best to shop around and get at least three different quotes before making a decision.

When choosing between plans, remember to get one that offers adequate coverage, a deductible you’re comfortable with and a premium you can afford.

Once you have your policy in place, think three times before making a claim; every honored claim will drive your rates up dramatically.

Also, let your provider know about any safety features you add to your home, including alarm systems, deadbolts and upgraded roofing and doors. Every improvement to your home’s safety can net you a discount on your premiums.