Homeowners Insurance

Proper home insurance coverage consists of buying the right type of policy, having the proper levels of protection within that policy, and supplementing the plan with protections against natural disasters.

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The Basics of Home Insurance
Home insurance usually boils down to two crucial concerns — protection and price. Although regulated at the state level, home insurance is more of a national product than is auto insurance, meaning you will find fewer local variations.

The proper home insurance coverage consists of buying the right type of policy, having the proper levels of protection within that policy — including special provisions for jewelry, your computer stuff, and other particularly valuable possessions — and supplementing this coverage with special protection against natural disasters that are not covered in your basic policy.

Homeowners with mortgages are required by their lenders to have home insurance. Many people may think that the policy terms required by their lenders represent "OK" levels of insurance, but this may not be true. Lenders want to make sure their exposure is covered, but that can happen without you being fully protected. Thus, it's important that you calculate your needs as well and make sure they are reflected in your coverage.

Six Basic Policies
There are six basic kinds of home insurance policies and they're pretty much the same regardless of where you live (except for Texas). They tend to be defined by the perils they cover:

HO-1. Basic homeowner stuff. Covers your dwelling and personal property against losses from 11 types of perils: fire or lightning; windstorm or hail; explosion; riot or civil commotion; aircraft; vehicles; smoke; vandalism or malicious mischief; theft; damage by glass or safety glazing material that is part of a building; and, volcanic eruption.

HO-2. Basic homeowner stuff plus some. Covers dwelling and personal property against 11 perils plus six more: falling objects; weight of ice, snow or sleet; three categories of water-related damage from home utilities or appliances; and electrical surge damage.

HO-3. Extended or special homeowner stuff. Covers 17 stated perils plus any other peril not specified in your policy, except for flood, earthquake, war, and nuclear accident.

HO-4. Renters coverage. Covers only personal property from 17 listed perils.

HO-5. All risk coverage for building and personal property. This policy form isn't sold very often anymore.

HO-6. Condominium owner coverage. Covers personal property from 17 listed perils along with certain building items in which the unit owner might have an insurance interest.

There are variations on these policies as well. For example, landlords can buy coverage that insures only their dwelling and not its personal property (which is what a tenant's renter's policy would cover). And you can get special policies to cover mobile homes (a.k.a. manufactured housing). Most homes are covered by HO-2 and HO-3 type policies.

Coverage Levels
There are many special coverage provisions offered by insurers, but here are some basic questions that you should answer as part of the home insurance process:

In the event of a serious loss - let's say it's a fire that destroys the house - how would I fare?

In most cases, you want to insure your dwelling and its contents for their replacement values, which will likely differ from the dwelling's market value and your personal property's depreciated cash value. You also should probably get a policy with automatic inflation adjustments so that the replacement cost keeps pace with the general level of price increases. (Homes insured under HO-8 policies are only covered for repair costs or actual cash values, since replacing them would be so costly. Owners of such homes could always get replacement insurance under another type of policy, but they'd probably pay astronomical annual premiums.)

Standard coverage normally insures your possessions at 50 percent of the value of your dwelling. Many people boost this coverage to 70 or 75 percent with additional protection. But there are still individual limits on certain types of personal property (see below).

Free-standing structures on your property (garages, gazebos, tool sheds) are also covered, with standard protection equal to 10 percent of your dwelling. Trees and shrubbery normally can be replaced up to a limit of 5 percent of your dwelling coverage. As is the case with your personal property, you should assess your needs to determine if you want to pay extra amounts to increase these levels of protection.

Also, pay attention to what might happen if you were to lose the use of your home for an extended period. Loss-of-use provisions are important elements of homeowners' policies, and coverage levels equal to 30 percent or more of your dwelling's insurance aren't unusual.

If someone who is not covered on my health insurance were to suffer a serious injury in my home, and I was found liable, how would I fare?

The standard level of liability protection in homeowners policies has been $100,000 but it's rising all the time. Today, $300,000 is not an uncommon amount, and even higher levels are recommended for affluent homeowners with lots of assets to protect. In this situation, "umbrella" policies have become popular. These policies provide liability coverage on both your homeowners and automobile policies, and are not that expensive (you normally need to carry both underlying policies with the same insurer).

Do I have certain possessions - computer equipment, cameras, jewelry - whose replacement values far surpass normal coverage limits in my policy?

Standard policies may not come near covering the replacement costs of even moderate amounts of home electronics hardware or expensive possessions. For relatively small amounts, you can purchase "floaters" that will add protection to certain types of personal property.

In addition, equipment related to a home-based business may not be satisfactorily covered unless you obtain additional protection.

Can I afford a high deductible, say $1,000, in order to save money on the policy?

The differences in annual premiums between policies with deductibles of $250 (you pay the first $250 of damage, the insurer pays the rest), $500 and $1,000 may easily be worth 20 to 30 percent of the annual premium. So, if you can afford the expenditure, and want to place a small bet that you won't face a home-related loss, consider a larger deductible.

What other protections does my policy provide?

Homeowners policies regularly provide other types of coverage, including off-premises theft protection and unauthorized use of your credit cards. Make sure you understand which provisions are included in the standard coverage you elect to purchase and which may require supplemental premiums.