What is important to know about home insurance? There are many things to consider. Some are obvious, like which coverages are included in a standard homeowners policy. Other policy details aren’t as obvious, yet still good to know.
What’s covered by homeowners insurance
All standard homeowners insurance policies include these basic types of coverage:
| Standard Coverage Type | Also Known As |
| Dwelling | Coverage A |
| Other Structures | Coverage B |
| Personal Property | Coverage C |
| Loss of Use | Coverage D |
| Personal Liability | Coverage E |
| Medical Payments | Coverage F |
Dwelling – Covers your home’s structure if the damage was caused by fire or another covered peril. This includes all parts of your home’s structure, from the walls and roof to permanently installed fixtures like attached appliances and cabinetry.
Check your home insurance policy to see how much Dwelling coverage you have. It should be enough to cover the cost of repairing or replacing your home from scratch.
Other Structures – Pays to repair or rebuild any structures on your property that are detached from your main dwelling. Examples include garages, sheds and fences. Your Other Structures coverage limit is usually 10% of your Dwelling coverage limit.
Personal Property – Helps you replace your personal possessions if they’re stolen or damaged during a covered event. Examples include furniture, appliances, TVs, computers, clothing and some jewelry. How much coverage you need depends on how much your possessions are worth.
Loss of Use – Also known as Additional Living Expenses, this coverage pays for your hotel bills, meals and other temporary living expenses if you’re forced from your home after a covered loss.
Personal Liability – Your insurer will defend you or a member of your household if you’re responsible for a loss suffered by another person. For example, you could be protected if your letter carrier falls and injures themselves on your walkway.
Medical Payments – Helps protect you if others are injured on your property. This coverage will take care of their medical bills whether or not you are responsible for your guest’s injuries.
What isn’t covered by homeowners insurance
Homeowners insurance only covers your property or belongings if they are damaged by a covered loss or peril, such as fire, hail, wind, fallen trees and theft. Here are some things that a standard homeowners policy typically won’t cover:
- Flood damage
- Water backup damage
- Cyber and identity crimes
- Poor maintenance or neglect
- Earthquake damage
Flood Coverage
You don’t have to live along the coast to be affected by flooding. If you live in a low-lying area that is prone to floods or rising water, you may want to purchase a separate flood insurance policy, as homeowners insurance does not cover damage caused by flooding.
Water and Sewer Backup Coverage
Most home insurance policies exclude water damage losses that are a direct result of overflowing sump pumps or backed-up sewer lines or drains. To protect yourself, you can purchase an optional water and sewer backup coverage.
Cyber and Identity Protection
In today’s highly connected world, home cyber threats are more pervasive than ever. However, cyber and identity protection is not part of your standard homeowners insurance policy. As such, it’s a good example of a worthwhile add-on coverage. It will keep you and your family one step ahead of cyber criminals.
Poor Maintenance or Wear and Tear
Generally speaking, a standard home policy won’t cover damage that results from neglect or a failure to maintain the property. For example, if your 20-year-old water heater fails and leads to water damage in your basement, your home policy will pay to fix the water damage, but it won’t pay to replace your water heater.
Termite damage is considered a maintenance issue, and therefore wouldn’t be covered by your home insurance.
Earthquake Coverage
If you want to protect yourself against earthquakes, you’ll need to buy a separate policy for that too, as it is not included in a standard home policy.
How rates are determined
What types of things affect your homeowner insurance rate? Generally speaking, almost anything that an insurer sees as a potential risk may impact your annual premium. Here are some examples:
- Your home’s location
- History of past claims
- Your credit score
- Your coverage
Your Home’s Location
Customers who live in high-crime areas will typically pay more for their insurance coverage. The same thing holds for people who live close to the coast, as their property is more likely to be damaged by high winds and flooding.
History of Past Claims
Home insurance carriers give significant consideration to past home claims submitted by the homeowner. The more claims that you file, the higher your insurance rate will be. A carrier may even bump up your premium if the previous owner submitted a claim.
Credit Score
Personal attributes, like your credit score, can also affect your home insurance rate in some states. If you have a good credit score, your insurance rate may be lower.
Your Coverage
How much coverage you have also factors into the amount of an annual premium. For example, you may decide to add extra coverage for particularly expensive items like jewelry or art. Or you may decide to increase your personal property and liability coverage limits.
Your policy’s deductible
Your deductible is a big part of your home policy. But what is it exactly? Understanding how a deductible works helps you make informed decisions when purchasing insurance and filing claims.
The deductible on a home insurance policy is the out-of-pocket amount that you’re responsible for paying before your insurance kicks in. Many home insurance policies carry a $1,000 deductible. That means if you file a claim involving $5,000 in damages, you would be responsible for the initial $1,000 and your insurance company would pay the remaining $4,000.
The amount of your deductible directly affects your premium. Generally, the higher your deductible, the lower your premium. For example, raising your deductible from $1,000 to $2,000 could lower your premium, while lowering your deductible tends to raise your premium.
The only time you won’t be charged a deductible after a loss is if your policy specifies that no deductible is applicable.
Exclusions
Exclusions are specific types of losses or damages that aren’t covered by your home insurance policy. Examples include damage caused by floods, earthquakes, and wear and tear.
It’s a good idea to read the exclusions on your homeowners insurance policy to know which damages aren’t covered. Fortunately, you may be able to buy coverage for those things separately.
EXAMPLE
Damage caused by rising water isn’t covered by a standard home insurance policy. However, you can purchase a separate policy for flood damage. You can either:
- Purchase a flood insurance policy through FEMA’s National Flood Insurance Program (NFIP), or
- Purchase a flood insurance policy through a private provider, such as Neptune Flood.
Learn more about flood coverage.
Replacement cost vs. actual cash value
If your property or personal belongings are damaged or stolen due to a covered loss, your insurance company will pay to repair or replace the damage. But how much they pay out depends on whether your policy provides for replacement cost value or actual cash value. The difference is important:
- Replacement cost value – Pays you to replace the item with a new, similar item
- Actual cash value – Pays you what the item is worth at the time of the loss
EXAMPLE
Let’s say the sofa you purchased for $1,000 several years ago is damaged in a fire. If your policy provides for actual cash value, you’ll receive what your sofa was worth at the time of the fire—which may only be $500 due to depreciation.
If you have replacement cost value, you’ll receive the value of a new sofa of the same size and quality. In this case, you may receive $1,200 due to inflation.
