How Does Homeowners Insurance Work?
Homeowners insurance pays to fix or rebuild your house after things like a fire, smoke damage, theft, vandalism, a tree falling on it, or damage from lightning, wind, or hail.
Most standard homeowner insurance policies also cover furniture, clothes, and other belongings. Also, they pay for medical bills and legal fees for people who get hurt on your property who don’t live with you, your family, or anyone else who lives there. In general, the same rules apply to renters insurance, condo insurance, and mobile home insurance.
Most standard policies also cover outbuildings like a garage, barn, or shed on your property, as well as outdoor grills or fireplaces, swing sets, walls, and fences. A swimming pool or other recreational equipment could also be covered, but higher-risk items like these might need extra insurance.
Artwork, jewelry, and other collectibles that are worth more than the standard coverage limits may not be covered by a standard policy. This is one reason why it’s important to read and understand the limits of any policy you’re thinking about getting, and to buy extra coverage if you need it.
Most standard home insurance plans don’t cover damage from earthquakes or floods. Most insurance companies offer these types of coverage for an extra fee, but not all of them may do so everywhere.
If your homeowners insurance company doesn’t cover floods, you may be able to get coverage through the National Flood Insurance Program, which is run by the Federal Emergency Management Agency. Policies from the NFIP are sold all over the country by independent agents.
Costs and requirements can be very different depending on how dangerous your area is. On the FEMA website, you can use an interactive flood map to find out how likely flooding is in your area.
Depending on your job, hobbies, and other factors, you may want to get extra coverage for a home office, specialized equipment or musical instruments, or high-end audio, video, or computer systems. You can also choose to cover identity theft or data loss.
Start with the most obvious things to figure out if you need more coverage than what’s included in a standard homeowners insurance policy. If you live in or want to buy a home in an area where earthquakes, wildfires, or bad weather are common, look for a policy that covers these things.
Next, figure out how much it would cost to replace big things like your furnace, water heater, roof, or even your whole house. Talk to an independent insurance agent, call insurance companies directly, or look at the companies’ websites to find out what their rules are.
Make a list of everything you own, like your cars, artwork, and other valuables. Think about how much it might cost to stay with family, in a hotel, or in a rented place while your home is being fixed or rebuilt.
A good rule of thumb is to make sure you buy enough coverage to replace your home and its contents, as well as to cover extra living costs if you have to move out. Be honest in your evaluations and make sure any policy you think about is enough.
What are the different kinds of home insurance?
There are two main types of homeowner’s insurance: policies with a cash value and policies with a replacement cost. With an actual cash value policy, depreciation and inflation are taken into account.
For example, kitchen appliances and upgrades made 10 years ago would be reimbursed at a certain percentage of their original cost. A replacement cost policy makes sure that old things are replaced with new ones that are the same or similar, without taking inflation or depreciation into account.
If your home was totally destroyed, you might not have enough money from an actual cash value policy to rebuild it. Doug Ommen, the Iowa Insurance Commissioner, says that the cost to rebuild your home could change over time due to rising construction costs and other factors that cause inflation.
This depends on a lot of things, like how long you’ve owned your home, how much its value has changed, and how building codes and the costs of materials and labor have changed.
For example, if the value of your home goes up, it could be worth several times more than when you bought your policy. At the same time, the cost of materials and labor will also go up. Because building codes are getting stricter, your home may need more and more expensive materials than it did when it was first built.
Also, some older homes may have been built with materials and techniques that aren’t used as much anymore and, as a result, are more expensive to copy. Plaster and lath walls, for example, take more time and materials to build than modern drywall. If you want to make your home look like it did before, you’ll have to pay for these extra costs.
Because of these things, every insurance expert we talked to said that if you can afford it, you should buy a replacement cost policy.
How do I get insurance for my home?
There are many ways to get home insurance, such as through company websites, toll-free phone numbers, and independent or specialized local insurance agents.
The websites of big home insurance companies are a good place to start your search because they usually have a lot of information about standard and extra coverages. Many also have tools that can give you an idea of how much your premiums will be after you enter some basic information about yourself and your home.
Even though it’s a good idea to use these tools to compare coverage and rates from different companies, insurance experts we talked to suggested doing more research online. For example, most state insurance departments have websites with useful information like state requirements, licensing rules, buying tips, and consumer complaints.
Another great source is the National Association of Insurance Commissioners. Its website has tips for consumers and an interactive map with rules and other information for each state, as well as contact information for local insurance agents.
Even though there are a lot of resources online, it’s still a good idea to work with a local insurance agent or professional. Details of a policy can be hard to understand, and it’s important to get the right coverage to avoid making a costly mistake. Ommen says,
“We always tell people to get help from a professional when choosing coverage.” He also said that you should check your agent’s credentials with the insurance department in your state. You can easily find most state insurance departments online, and they have tools to help you find a licensed agent in your area.
You can tell if an agent is in good standing by looking at their license number and expiration date. On the NAIC site, you can choose an insurance company and then click on your state to see complaints and actions against agents in your area. This is another helpful tool.
Robert Hunter of the Consumer Federation of America says that using an agent is a good idea, but you shouldn’t take their advice at face value. He says that 95% of agents are good, but not all of them will look out for your best interests. Even though an agent can help you figure out what your policy covers and what it doesn’t, you still need to do your research and ask the right questions to make sure you have enough coverage.
Amy Bach, the executive director of the consumer group United Policyholders, says that hidden coverage limits are things that can hurt you. The more you know, the better, and that might mean imagining what could go wrong and asking, “Would that be covered?” One example is sump pumps. Most insurance policies won’t cover water damage from a broken sump pump, but you might be covered if a pipe bursts.
