Home Insurance 101

The Basics

Homeowner’s insurance provides protection against calamities that affect the structure of your home and your possessions.

A standard policy has two main functions:

1. Protects your home and its contents from damage or loss
2. Protects you and your family members from legal damages that may arise from someone who’s been injured on your property

Your policy will also provide you with additional living expenses if you are temporarily unable to stay in your home after a damage or loss. Without these protections, you leave your home and your most valuable possessions at risk for loss—a risk most homeowners can’t afford to take.

Policy Types

There are different types of home insurance available to you, with varying protections and premium amounts. Knowing what you need from a policy before you buy will help you select the right policy and help you to avoid purchasing more than what you need.

The three main types of home insurance policies are HO-1, HO-2 and HO-3:

HO-1: A bare-bones policy that covers basic perils like fire and smoke; wind and hail damage; and theft and vandalism. Because of its limited coverage, however, many states are discontinuing the HO-1 policy, and your agent will almost certainly encourage you to purchase a policy that covers more perils.

HO-2: A basic policy that protects against the same perils covered under an HO-1 policy, plus six more. Additional coverages include water damage from plumbing and home appliances; falling objects; and damage from the weight of snow or ice.

HO-3: A broad policy that covers against all perils except for exclusions such as damage from earthquake, flood, war or landslides. Its extensive coverage makes the HO-3 coverage the most commonly purchased policy.

Other homeowner’s policies are available for condos, mobile homes and older homes. Your homeowner’s insurance agent will discuss special types of policies with you if they apply to you.

Level of Coverage

After you’ve chose a policy type, you’ll need to determine the level of coverage you want.

Generally speaking, you have three options:

Actual Cash Value: This level of coverage pays to replace your home and possessions minus the cost of depreciation. This means you may receive less for your home or items than you originally paid for them.

Replacement Cost: This level of coverage pays whatever it costs to repair or replace your home and possessions without a deduction for depreciation.

Guaranteed Replacement Cost: This level of coverage pays whatever it costs to rebuild your home and replace possessions before the damage took place, even if it exceeds your policy limit. This can protect you from increases in construction costs and other such variables.

While replacement cost policies often cost more money, the level of protection will be well worth it if you ever experience a significant loss or damage to your home.

A Word about Additional Coverage

Flood and earthquake coverage is not covered under standard home insurance policies, much to the surprise of many homeowners. Additional coverage can be purchased through your home insurance agent, as well as through federal programs like the National Flood Insurance Program (NFIP).

While homeowners living in high-risk areas may be required to purchase these types of additional coverage, you may want to purchase some level of additional coverage to boost your protection. Be sure to ask your agent about extra coverages and how you can adequately protect your home from calamities not covered in a standard policy.