Homeowners have multiple choices when it comes to home insurance. Options differ based on how coverage is provided for the owner’s property. For example, a basic policy might provide limited protection that satisfies the requirements of mortgage lenders, but it could leave the homeowner at risk of a major loss. In this article, we will explore the package of coverages available in two of the most commonly purchased policies – the HO-3 and HO-5. We will also help you evaluate your individual needs to determine how much home insurance is enough for you.
Dwelling coverage is protection for your home’s structure. It helps pay to repair or rebuild your house after a covered event. Whether you purchase an HO-3 or HO-5 insurance policy, this part of the policy protects against all types of risks except the ones excluded in writing.
Both policies will require that you choose a deductible, which could range between $500 and $2,000. Selecting a deductible on the lower end of that spectrum reduces your financial burden after a loss. On the other hand, a higher deductible can offer immediate savings in the form of lower annual premiums.
Choosing Your Coverage
Many homeowners make the mistake of insuring their homes based on the balance of a mortgage, the price paid for the home, or the cost to build the house several years ago. Doing so could be a mistake since the cost of rebuilding your home has no correlation to these factors. Furthermore, under-insuring your home could give your insurer the right to underpay your claims – even the ones for less than your total Dwelling coverage limit. That’s because the ‘Co-Insurance Rule’ allows for penalization of partial claims if you are underinsured according to your policy.
Instead, your home should be insured for its full replacement value; that is, the cost to rebuild your home with similar quality materials and finishes. Also, since the construction costs may rise over time, we recommend talking to your agent about the ways you can automatically increase your Dwelling coverage to account for inflation.
The additional structures on your property, such as your detached garage and your fence, need coverage, too. Since they are not included as a part of dwelling coverage, insurers typically provide separate coverage by default – usually in an amount equal to 10 percent of your Dwelling limit.
Over the years, you’ve probably accumulated a lot of personal belongings. As a homeowner, you have filled your home with furnishings, décor, appliances, electronics, and perhaps even some toys and sporting goods for the kids. Imagine replacing all of your home’s contents at once – how much would that cost? Standard home insurance includes coverage for personal belongings, reimbursing you for their actual cash value at the time of loss. However, many homeowners opt to add a replacement value endorsement that pays for replacement of losses with brand new items.
Chances are your insurer includes default coverage for personal belongings with a limit between 50 and 80 percent. However, you may need additional coverage beyond those limits, as well as scheduled coverage for high-value items that exceed dollar limits in your policy. Taking a home inventory is a simple and convenient way to ensure you are adequately insured for your possessions. You can download an app on your phone that helps calculate the value of your goods and reminds you to update your inventory periodically. A home inventory can also provide simplicity and ease if you need to declare losses for a claim.
HO-3 vs. HO-5
HO-3 and HO-5 insurance policies both include coverage for personal belongings, although the latter provides more comprehensive protection against a wide range of risks. Conversely, HO-3 limits coverage to only the perils listed by name in the insurance policy. Talk with an agent here at Heinen Insurance for help determining which policy is right for you.
Loss of Use
If disaster strikes your home, it could become uninhabitable during the repair or rebuilding process. During that time, look for your Loss of Use coverage to help fund the extra living expenses you may incur, such as rent or hotel charges. Your policy probably includes Loss of Use coverage for up to 20 percent of your Dwelling coverage limit by default, which is typically more than enough needed to weather several months away from home.
Continue reading part two of “How much home insurance is enough?”