If you’re a first-time homeowner, one of the expenses you will face is paying premiums on your homeowners insurance. While your lender will most likely require you to maintain insurance on the property, it is in your best interest to shop around. Each insurance provider offers different types of insurance, and coverage packages can vary, so it’s helpful to understand a little more about what this type of insurance entails.
Understand the Different Types of Policies1
People tend to talk about homeowners insurance in general terms, but there are actually several distinct types of insurance you can purchase for your home. For instance, the majority of homeowners end up purchasing an HO-3 policy, which protects against all disasters. This is also known as open perils coverage. Unless the policy specifically states that a certain type of disaster is not covered, you can assume you will be protected from those disasters. Under an HO-3 policy, your personal possessions are also protected, but only by disasters specifically named in the policy. Typically, belongings will be covered in cases of fire, theft, or tornadoes.
Alternatively, an HO-5 policy will offer open perils coverage for your home and for your personal belongings. So, any damage caused by disasters not specifically precluded in the policy will be covered. As might be expected, the HO-5 policy is a more expensive type of homeowners insurance, but it may be worthwhile if you own valuable items that won’t be easily replaced. This type of policy is also harder to find, so you may have to search around for an HO-5 insurance provider.
If you own a condo or have interest in a co-op building, an HO-6 insurance policy will provide the specialized coverage you need. This type of homeowners insurance will specifically cover only the parts of the building you own. It will also provide coverage for your personal possessions. Your HO-6 will also include personal liability coverage in the event someone gets injured on your property.
You Must Choose the Amount of Coverage You Will Receive
Another factor to consider is the amount of coverage you’ll receive when you do need to file a claim. There are three main ways to receive payment on a claim for damages and the option you choose will determine how much money you will receive as compensation.
Cash Value – This is the cheapest option. It will pay out to help you recover or repair damaged property or possessions, but you will only receive current market value for the destroyed items. Since this means making deductions for depreciation, you likely won’t receive enough money to rebuild your home or fully replace your belongings.
Replacement Cost – Although this is a more expensive option, it will provide enough to replace your personal belongings or rebuild your home. You can only receive compensation up to your predetermined limits, but you won’t have to worry about depreciation affecting your settlement amount. This type of coverage is often included with an HO-5 policy.
Extended Replacement Cost – This is the most expensive type of coverage, but that’s because it offers the most protection. If your home is destroyed, this type of coverage pays to restore your home to the condition it was in prior to the disaster. This holds true even if the cost to restore the home exceeds your policy limits. Some insurance providers will put a cap on this type of coverage, however. Usually, they will pay up to 25% over your coverage limits.
You Can Drive Down Your Premiums
While your monthly insurance premiums do represent an extra payment in your household budget, there are things you can do to lower your rate. For instance, installing deadbolts on your doors can result in a 5% drop in your premiums. You’ll benefit from a 15-20% drop for installing a burglar alarm, especially if you subscribe to a monitoring system. You can also receive discounts for installing smoke alarms, fire extinguishers, and other safety devices. In general, anything you do to minimize risks that could result in a claim will be rewarded by the insurance company.
You Have a Short Time to File a Claim
There is a limit on how long you have to file a claim after damage occurs to your home or belongings. In some cases, this window may be as short as two weeks, but you should ask your homeowners insurance provider to be sure. If you delay for too long and try to file a claim later, your claim will likely be declined. For the best results and for efficient service, a claim should be filed as soon as you observe the damage.
Keep Detailed Records
It’s surprising how often getting a settlement processed quickly relies on speaking to the same representative. For that reason, you should document every phone call by writing down the agent’s name and extension number. This will help you if someone else from the insurance company contacts you. It’s also wise to save every letter, email, or other messages you receive. Even messages from contractors and skilled laborers should be saved, so you can verify any statements you make to the insurance company.
You May Need Additional Coverage
If you live in an area prone to hurricanes, your policy may not include this type of coverage with your basic policy. It’s important to review your policy with your insurance agent to be sure. If your policy excludes a certain type of coverage, this doesn’t mean you can’t get coverage for that type of disaster. In most cases, you should be able to request additional coverage for that type of disaster, which will be reflected in your total monthly premium.
Understand How Your Policy Protects You
While you may know that your laptop computer is protected by your homeowners insurance policy while it’s in the home, it will also be covered in other circumstances. For instance, if it’s stolen from your vehicle, you should file a claim immediately. Another way that your policy will help you is in the event of a natural disaster. If your family is forced to vacate your home as a result of damage, your policy may provide compensation for temporary lodging, meals, and other related expenses. By reviewing your policy with your insurance agent, you can ensure you understand just what types of coverage you’re entitled to receive.
Finding the right homeowners insurance policy for your home requires patience and a willingness to explore all of your options. While you do need to maintain a policy, you will want to be sure that your policy provides you with the type of protection you’ll need. Depending on what part of the country you live in, your coverage needs will vary, so take the time to assess which providers offer the best insurance coverage for your home.