Learn how you can make better choices when choosing your homeowners insurance…
It is important that you realize that there are a number of factors that are considered by insurance companies when it comes to pricing insurance for homeowners.
In this discussion, TheWealthIncreaser.com will focus on the importance of selecting homeowners’ insurance in a manner that will serve your best interest in the short and long-term. If you purchased your home in which you used financing–or you anticipate doing so, the lender will require that you have homeowners (hazard) insurance.
If you pay all cash or now own your home outright, homeowner insurance is optional, however it is generally wise to purchase unless your net worth allows you to “effectively self-insure” and the risks of loss are mitigated by your net worth.
As a homeowner or renter, it is imperative that you are protected against the risks of financial devastation that can result from an uninsured loss.
Major provisions in homeowner insurance policies include property coverages (dwelling, other structures, personal property, loss of use), peril insured against–and exclusions that are found in Section I.
Section II provides coverage for personal liability and medical payment to others.
Prior to choosing your homeowners insurance policy you want to at least read the following paragraphs so that you can get a better feel of what homeowner insurance products are all about.
Make a good choice up front for homeowners’ insurance by knowing what you are looking for
There are a number of policies to protect homeowners that are designed for 1, 2, 3 or four family dwelling used exclusively for private residential purposes, and they include:
HO-2 (broad form) insures the dwelling (varies by company), other structures (normally 10% of dwelling coverage), and personal property (normally 50% of dwelling coverage) against loss from certain listed perils–and covers additional living conditions (normally 30% of dwelling coverage) if dwelling is uninhabitable.
In Section II coverage personal liability is generally $100,000 and medical payments to others is generally $1,000 per person for all HO policies.
HO-3 (special form) insures the dwelling and other structures of direct physical loss to property–also covers personal property and is very popular and widely used coverage. The coverage is similar to HO-2 except certain losses specifically excluded are not covered. Personal property is covered only on a named peril basis.
HO-3 insures the dwelling (varies by company), other structures (normally 10% of dwelling coverage), and personal property (normally 50% of dwelling coverage) against loss from certain listed perils–and covers additional living conditions (normally 30% of dwelling coverage) if dwelling is uninhabitable.
HO-4 (contents broad form) designed for tenants who rent apartments, houses or rooms —covers tenants’ personal property against loss or damage and “also” includes personal liability insurance.
Because it is tenant coverage, dwelling or other structures does not apply, and the minimum amount of personal property coverage varies from insurer to insurer. Also provides personal liability insurance. Loss of use is normally 30% of your personal property coverage.
HO-5 (comprehensive form) provides all risks coverage on buildings and personal property–and insures the dwelling, other structures, and personal property against the risk of direct physical loss to property.
HO-5 insures the dwelling (varies by company), other structures (normally 10% of dwelling coverage), and personal property (normally 50% of dwelling coverage) against loss from certain listed perils–and covers additional living conditions (normally 30% of dwelling coverage) if dwelling is uninhabitable.
The coverage is similar to HO-2 except certain losses specifically excluded are not covered for dwelling and personal property.
HO-6 (unit-owners form) designed for owners of condominium (the condo association carries insurance on the building) units and cooperative apartments—covers personal property of the unit owner for the same named perils listed in HO-2.
Covers dwelling for a minimum of $5,000 and other coverages are included in the dwelling coverage. Personal property amounts covered varies from insurer to insurer and loss of use is normally 50% of your personal property coverage. Covers personal property of the insured on a named perils basis.
HO-8 (modified coverage form) modified coverage that covers loss to the dwelling and other structures based on the amount required to repair or replace using common construction materials and methods–and payment is not based on replacement cost. It is often selected as coverage for older homes–losses are covered based on the amount required to repair or replace the property using common construction materials and methods.
HO-8 insures the dwelling (varies by company), other structures (normally 10% of dwelling coverage), and personal property (normally 50% of dwelling coverage) against loss from certain listed perils–and covers additional living conditions (normally 10% of dwelling coverage) if dwelling is uninhabitable.
The covered perils are listed and normally are not as comprehensive as those of HO-2, HO-3, HO-4 and HO-5.
Homeowner Insurance Resources:
Landlord Insurance Options (designed primarily for investors)
Know the details of your coverage
You can go to the declarations page to determine the type of policy and coverage you now have to further determine where you now stand insurance coverage wise–with your homeowners’ policy.
You can find the type of coverage and policy limits along with endorsements that you may or may not have. You can also determine if your policy has a percentage deductible or a straight deductible as there may be increased costs associated–depending on the type of deductible you have for covered perils along with the type of claim you make.
It is important that you know the details of your conditions on your policy in the case of loss and those details can be found under the “conditions” section in your policy.
The “conditions section” of homeowner policies impose certain “duties on the insured” after a covered loss occurs and they include:
- the insured must give immediate notice of the loss
- the property must be protected from further damage
- the insured must prepare an inventory of the damaged personal property
- the insured may be required to show the damaged property to the insurer as often as is reasonably required
- proof of loss must be filed “within 60 days after the insurer’s” request
Also keep in mind that endorsements (riders) or by scheduling–your coverage can be modified on most policies!
You must know your deductible type–percentage (percentage of loss) or straight deductible (dollar amount) and whether you have a replacement cost provision.
With a replacement cost provision losses on “dwelling and structures” are paid on the basis of replacement cost if the insured carries insurance at least equal to 80% of the replacement cost at the time of loss.
Losses to personal property would be paid on the basis of actual cash value. However, an endorsement (rider) can be added that covers personal property on a replacement cost basis.
Also, almost all policies will have an appraisal provision that is designed to resolve disputes over the amount paid. Each party (the insurer and the insured) selects its own appraiser, and the appraisers then select an umpire–and an agreement by 2 of the 3 would be binding on all parties.
The “mortgage clause” is also important as it protects the mortgagee.
The mortgagee (company in which insured received home loan from) is entitled to receive a loss payment from the insurer regardless of any policy violation by the insured.
The mortgagee is also entitled to a 10-day cancellation notice if the insurer decides to cancel the insurance policy.
As an insured policyholder you can cancel your policy at any time by returning the policy or notifying the insurer in writing when the cancellation is to become effective!
Other conditions and technicalities in section I and section II also apply; however, they are beyond the scope of this discussion. However, they include among others a liberalization clause, waiver of change of policy provisions, cancellation clause, non-renewal of the policy, assignment of the policy, subrogation and death of the named insurer clause– and possibly more depending on your state and policy issuer.
Plan in advance for a successful home ownership period
By planning in advance for a successful home ownership period you will make it a point to know about homeowners’ insurance and make the wisest choice when it comes to selecting the policy that best fits your and your family’s needs.
Section II personal liability (coverage E) and medical payments (coverage F) provide liability limits and also include coverage if your dog bites someone and you are liable and when others are injured on your property in other ways.
Personal liability protects the named insured (along with family members) against legal liability arising out of their personal acts.
On almost all HO policies in the United States you will find that section I and section II provides:
Coverage A covers your dwelling
Coverage B covers other structures
Coverage C covers personal property
Coverage D covers loss of use
Coverage E covers personal liability (normally $100,000 but for a small additional premium higher limit is available)
Coverage F covers medical payments (normally $1,000 but for a small additional premium higher limit is available)
Personal liability coverage protects the insured when a claim or suit for damages is brought because of bodily injury or property damage caused by the insured’s negligence.
The insurance amount is a single limit that applies to both bodily injury and property damage liability on a per-occurrence basis.
Liability coverage would cover losses if you were burning leaves and your neighbor’s house caught fire, you break an expensive item at a store, you injure a pedestrian while riding your bike, someone slips in your home–along with coverage for other areas in which you were personally liable.
Before your insurer will pay anything for damages, you must be legally liable.
On the other hand, medical payments to others “are not” based on negligence or legal liability!
Medical payments coverage is a small accident policy that is part of a homeowner’s policy, and it pays reasonable medical expenses of another who is accidentally injured on an insured location, or by the activities of an insured, resident employee or animal owned by or in care of an insured and even while the insured is playing basketball at a public facility and injures someone.
Medical coverage payments do not apply to the insured or regular residents of your household, other than a residence employee.
Always be aware that liability loss exposures arising out of the personal activities of an insured are covered anywhere in the world under coverage E, and not just at an insured’s location.
Also realize that there are numerous exclusions under Section II coverage E and F that you want to be aware of in your policy.
Additionally, there are additional coverages that you can add to your policy under section II, and you want to be aware of them (ask your potential or current insurance agent about them)!
As a homeowner or renter, it is imperative that you are protected against the risks of financial devastation that can result from an uninsured loss!
By learning about the HO policies that are available “prior to” your home purchase you are making a good decision and a successful home ownership period for you and your family is more likely to happen and continue well into your future as a result of you being proactive at this time.
Prior to your home purchase you must consider homeowners insurance and make a selection prior to closing. Even so, you want to be aware of the rising cost of homeowners insurance among many companies.
Therefore, you may want to shop for your homeowner’s policy prior to closing on your home–and periodically shop the homeowner’s insurance market on occasion once you become a homeowner to see if you can find a company that is highly rated and offers better premiums and coverage.
Because your home purchase has the potential to help you build wealth efficiently and ensure a more prosperous future for you and your family–you want to position yourself to avoid common home buyer mistakes–including the selection of homeowners insurance in this economic environment, as well as future economic environments.
Always remember that you can add many endorsements to your policy such as inflation guard, earthquake coverage, replacement cost coverage, personal injury (umbrella policy), personal property endorsement, watercraft, home business endorsement and coin, jewelry, paintings and other valuables coverage endorsements–among others.
The cost of your homeowner’s policy is based on a number of factors including construction, location, fire protection class (ISO rates the quality of public fire departments from 1 to 10–the lower the better), construction costs, age of home, type of policy, deductible amount, specific insurer, how close your home is to the nearest fire station and in many cases even your credit score.
The key when shopping for “homeowners’ insurance” is to choose a highly rated company, carry adequate insurance, add needed endorsements (or riders) that are appropriate for you and your family–along with finding the best premium based on the coverage that you desire.
You may want to consider higher deductibles and take advantage of all discounts that may be offered by a particular insurer. Furthermore, you want to determine if you need earthquake, flood or other additional protection upfront–as after the disaster it is too late to get the coverage that would have protected you from substantial loss.
You want to shop various companies as premiums can vary–sometimes dramatically from company to company for the same type of coverage!
Be sure to consider purchasing an “umbrella insurance policy” to provide additional coverage (provides more coverage on your boat, cars and recreational vehicles) and it is a must if you are a high net worth individual.
In addition, be aware that if you file certain homeowner insurance claims once you become a homeowner you will go into a database (CLUE) that other insurers can see that could increase your insurance rates. If a fire occurred at your premises, it would go in a database and potential buyers, or insurance companies could see that data.
If you have a fixed rate mortgage your payment will remain relatively stable over time. However, increases in homeowner insurance costs and increases in taxes could push your monthly payment up–sometimes rather significantly.
Also be aware of this “other type of insurance that you may have on your home” that you may be unaware of!
If you put less that 20% down when you purchased your property you will normally pay PMI/MIP (Private Mortgage Insurance–conventional loan/Mortgage Insurance Premium–FHA loan) for a number of years until you reach an equity position required by your lender–at a time which “you can request” that it be removed.
By considering what homeowner insurance products are available and analyzing them in a careful, critical, analytical and accurate manner–you can make your home purchase more enjoyable at this time and you can live with “joy at the center” well into your future.
You want to definitely ensure up front that you have full replacement cost if that is what you desire for your dwelling, you want to ensure that you have the needed coverage for your expensive items by adding a personal property endorsement or floater that will be based on the appraised value of the items in question–and you want to ensure that you have the needed coverage for liability protection (umbrella policy) to protect your assets and net worth–and by doing so you will be a savvy homeowner whether you plan on purchasing in the future–or you are already a homeowner.
All the best as you are now better prepared for your home ownership success…
Thomas (TJ) Underwood (the creator TheWealthIncreaser.com) is a long-time financial planning professional who has been an innovator in the personal finance industry as he has shown ordinary individuals from all walks of life how to achieve lasting wealth building success in an efficient manner so that they can enjoy life in a more bountiful manner.
He has written over 700 articles on the world wide web and is the author of a number of results-oriented books that are designed to act as a “springboard to success” for all who are sincere in achieving lasting success and have decided to leave all excuses behind.
You can learn more about him and how his writing style came about by visiting https://www.thewealthincreaser.com/who-is-the-creator-of-thewealthincreaser-com/
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