Homeowners Insurance Basics
Buying a house is a significant milestone. Insuring the new home is a less exciting, but essential part of the process. The Illinois Insurance Hotline, an industry-sponsored consumer resource, outlined tips for first time home buyers. Seasoned homeowners may benefit from the information as well.
Homeowners insurance is a package policy combining coverage for the dwelling, detached structures, personal belongings, additional living expense, and personal liability protection. An insurance policy is a legal contract that defines terms, describes what is and is not covered, outlines policyholder rights and responsibilities following a loss, and more. Homeowners insurance is not required by law, but lenders insist on it.
Insurers offer different kinds of policies, with the HO-3 most popular among home owners. The HO-3 is an all-risk policy covering sudden and unexpected dwelling loss like fire, lightning, vandalism, and more. The contract also identifies situations not covered such as earthquake, flood, sewer back-up, mold, and home business injuries. Exclusions are losses that present more risk than the insurer is willing to accept.
An overview of coverage provided by homeowners insurance follows.
- Dwelling and Detached Structures. This section insures the house, shed, garage, or fence. Traditional HO-3 policies provide dwelling replacement cost coverage, which means partial losses are settled according to how much it takes to repair or replace damages.
- Contents. This section covers personal belongings. The insurance limit on contents can range from 50 to 70-percent of the dwelling limit depending on the insurer. An HO-3 policy covers personal property for specific losses like theft, vandalism, fire, and more. Homeowners insurance contracts include restrictions limiting loss settlement on business equipment, computers, theft of high value jewelry, and more. Depreciation affects contents claim settlements.
- Additional Living Expense. This is an important coverage if your house is uninhabitable following a covered loss. It pays extra costs associated with hotels, meals, transportation, and more if you need to relocate while the house is repaired.
- Liability. This section is split into personal liability and medical payments. Liability pays if the policyholder, a resident family member, or even a pet is legally responsible for another person’s injury or property damage. It also pays for a legal defense if necessary. Medical payments covers medical expenses if someone is accidentally injured on your property or injured by you, a resident family member, or a pet. Fault is not a factor.
Finding the best homeowners insurance for your unique needs takes time. The Illinois Insurance Hotline offered the following tips to help shoppers prepare for the task.
- Pricing, eligibility, and policy features vary by insurer. Get quotes from 3 – 5 different homeowners insurance companies, but do not make a buying decision on price alone. Compare coverages, limits, and policy terms for each option.
- Consider how much dwelling, personal property, and liability coverage you need. It is best to insure the home for its full replacement cost, which is different from the property’s purchase price. Replacement cost refers to rebuilding the home using materials of like kind and quality, without subtracting for age or wear and tear. Square feet, construction materials, and special features are among the factors that affect replacement cost. Confirm the policy’s co-insurance requirement if you plan to insure the house below its replacement cost. You will be penalized for insuring below this figure if there is a claim. A personal property home inventory is the best way to know how much contents coverage you need. Make a room-by-room list of belongings that includes brand names, model information, serial numbers, receipts, and values. Total the inventory and compare this figure to the policy’s contents limit. Choose a liability limit according to your financial assets. Homeowners insurance policies typically offer $100,000 liability protection. Look into raising coverage or adding an umbrella policy if this is not enough protection.
- Explore optional endorsements. Insurers offer a variety of buy-back endorsements that allow policyholders to individualize coverage. Some dwelling-related endorsements to consider include extended replacement cost coverage, inflation guard, and building ordinance protection. Homeowners insurance policies exclude damage caused by flood and earthquake. Flood insurance is available as a separate, stand alone policy. FDIC-insured lending institutions require flood insurance if the house is in a 100-year flood plain. Many insurers offer coverage for earthquake-related damage by endorsement. There are a variety of policy add-ons for personal belongings. Among these are contents replacement cost coverage, personal property floater, sewer back-up/sump pump overflow, and more.
- Request deductible options. The deductible is how much you pay out-of-pocket before the insurer takes on the claim. A high deductible lowers the premium and is a good idea for policyholders that can set this money aside.
- Ask about discounts. You may be able to lower the premium by placing home and auto insurance with the same company, installing an alarm system, updating wiring and plumbing, or replacing the roof. Insurers may also offer a senior discount.
- Check each insurance company’s financial strength, complaint record, and licensing status before proceeding with a policy. Insurers not licensed to operate in Illinois are not subject to state rules and regulations.
Finally, keep in mind that homeowners insurance needs change over time. Examine your policy every year. A higher dwelling limit may be in order due to a room addition or remodel project. Update your personal property inventory to assess contents coverage needs. Adjust liability protection to accommodate growing assets, a new home business, swimming pool, etc. Ask a homeowners insurance agent to help you identify coverage gaps and add protection if necessary. Avoid coverage surprises by confirming adequate insurance is in place before a loss occurs.
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