What is homeowners insurance?

Homeowners insurance provides financial protection against disasters. A standard policy insures the home itself and the things you keep in it.

Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets.

Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners' responsibility.

What is in a standard homeowners insurance policy?

A standard homeowners insurance policy includes four essential types of coverage. They include:

• Coverage for the structure of your home.
• Coverage for your personal belongings.
• Liability protection.
• Additional living expenses in the event you are temporarily unable to live in your home because of a fire or other insured disaster.

The structure of your house

This part of your policy pays to repair or rebuild your home if it is damaged or destroyed by fire, hurricane, hail, lightning or other disaster listed in your policy. It will not pay for damage caused by a flood, earthquake or routine wear and tear. When purchasing coverage for the structure of your home, it is important to buy enough to rebuild your home.

Most standard policies also cover structures that are detached from your home such as a garage, tool shed or gazebo. Generally, these structures are covered for about 10% of the amount of insurance you have on the structure of your home. If you need more coverage, talk to your insurance agent about purchasing more insurance.

Your personal belongings

Your furniture, clothes, sports equipment and other personal items are covered if they are stolen or destroyed by fire, hurricane or other insured disaster. Most companies provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home. So if you have $100,000 worth of insurance on the structure of your home, you would have between $50,000 to $70,000 worth of coverage for your belongings. The best way to determine if this is enough coverage is to conduct a home inventory.

This part of your policy includes off-premises coverage. This means that your belongings are covered anywhere in the world, unless you have decided against off-premises coverage. Some companies limit the amount to 10% of the amount of insurance you have for your possessions. You have up to $500 of coverage for unauthorized use of your credit cards.

Expensive items like jewelry, furs and silverware are covered, but there are usually dollar limits if they are stolen. Generally, you are covered for between $1,000 to $2,000 for all of your jewelry and furs. To insure these items to their full value, purchase a special personal property endorsement or floater and insure the item for it's appraised value. Coverage includes “accidental disappearance,” meaning coverage if you simply lose that item. And there is no deductible.

Trees, plants and shrubs are also covered under standard homeowners insurance. Generally you are covered for 5% of the insurance on the house—up to about $500 per item. Perils covered are theft, fire, lightning, explosion, vandalism, riot and even falling aircraft. They are not covered for damage by wind or disease.

Liability protection

Liability covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by your pets. So, if your son, daughter or dog accidentally ruins your neighbor’s expensive rug, you are covered. However, if they destroy your rug, you are not covered.

The liability portion of your policy pays for both the cost of defending you in court and any court awards—up to the limit of your policy. You are also covered not just in your home, but anywhere in the world.

Liability limits generally start at about $100,000. However, experts recommend that you purchase at least $300,000 worth of protection. Some people feel more comfortable with even more coverage. You can purchase an umbrella or excess liability policy which provides broader coverage, including claims against you for libel and slander, as well as higher liability limits. Generally, umbrella policies cost between $200 to $350 for $1 million of additional liability protection.

Your policy also provides no-fault medical coverage. In the event a friend or neighbor is injured in your home, he or she can simply submit medical bills to your insurance company. This way, expenses are paid without a liability claim being filed against you. You can generally get $1,000 to $5,000 worth of this coverage. It does not, however, pay the medical bills for your family or your pet.

Additional living expenses

This pays the additional costs of living away from home if you can't live there due to damage from a fire, storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt. Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. You can increase this coverage, however, for an additional premium. Some companies sell a policy that provides an unlimited amount of loss-of-use coverage, but for a limited amount of time.

If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.

Are there different types of policies?

Regardless of whether you are an owner or renter, you have the following three options:

• Actual cash value: This type of policy pays to replace your home or possessions minus a deduction for depreciation.
• Replacement cost: The policy pays the cost of rebuilding/repairing your home or replacing your possessions without a deduction for depreciation
• Guaranteed or extended replacement cost: This policy offers the highest level of protection.
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A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was before the fire or other disaster–even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situations. It generally won't cover the cost of upgrading the house to comply with current building codes. You can, however, get an endorsement (or an addition to) your policy called Ordinance or Law to help pay for these additional costs. A guaranteed replacement cost policy may not be available if you own an older home.

Some insurance companies offer an extended, rather than a guaranteed replacement cost policy. An extended policy pays a certain percentage over the limit to rebuild your home. Generally, it is 20 to 25 percent more than the limit of the policy. For example, if you took out a policy for $100,000, you could get up to an extra $20,000 or $25,000 of coverage.

Even though a guaranteed/extended replacement cost policy may be a bit more expensive, it offers the best financial protection against disasters for your home. These coverages, however, may not be available in all states or from all companies.

Does my homeowners insurance cover flooding?

Standard homeowners policies do NOT cover flooding. You can purchase flood coverage directly through your homeowners insurance agent. However, the policy is provided by the Federal Flood Insurance Program.

Can I own a home without homeowners insurance?

Unlike driving a car, you can legally own a home without homeowners insurance. But, if you have bought your home and financed the purchase with a mortgage, your lender will most likely require you to get homeowners insurance coverage. That’s because lenders need to protect their investment in your home in case your house burns down or is badly damaged by a storm, tornado or other disaster.

If you live in an area that is likely to flood, the bank will also require you to purchase flood insurance. Some financial institutions may also require earthquake coverage if you live in a region vulnerable to earthquakes. If you buy a co-op or condominium, your board will probably require you to buy homeowners insurance.

After your mortgage is paid off, no one will force you to buy homeowners insurance. But it is not advisable to cancel your policy and risk losing what you’ve invested in your home.

What is renters insurance?

Renters insurance provides financial protection against the loss or destruction of your possessions when you rent a house or apartment. While your landlord may be sympathetic to a burglary you have experienced or a fire caused by your iron, destruction or loss of your possessions is not usually covered by your landlord’s insurance. Because in most cases, renters insurance covers only the value of your belongings, not the physical building, the premium is relatively inexpensive.

By purchasing renters insurance, your possessions are covered against losses from fire or smoke, lightning, vandalism, theft, explosion, windstorm and water damage (not including floods). Like homeowners insurance, renters insurance also covers your responsibility to other people injured at your home or elsewhere by you, a family member or your pet and pays legal defense costs if you are taken to court.

Renters insurance covers your additional living expenses if you are unable to live in your apartment because of a fire or other covered peril. Most policies will reimburse you the difference between your additional living expenses and your normal living expenses but still may set limits as to the amount they will pay.

Should I have identity Theft Coverage?

Absolutely. While the Federal Government has passed legislation intended to protect consumers, identity theft has become a multi-million dollar black market industry. Identity theft insurance is intended to cover you against any financial lose you may suffer, as well as provide a means to recover your identity.

How do I keep my home safe?

Many people do not follow simple procedures that could help deter burglars from attempting to break into your house. For example, many people let their absences be obvious and/or do not remember to lock doors and windows, both of which are signals to experienced thieves. Read below to find tips for homeowners on how to protect your home and family.

• It is usually a good idea to change the locks on your new home when you move in. You never know who might have keys to your house. If your new home does not have deadbolts on all ground level doors, think about installing them. If a sliding glass door is easily accessible, it is a good idea to put a strip of wood in the lower tract to keep outsiders from getting the door open.
• You may also want to install an alarm if the house doesn’t already have one. If you move into a new house with an alarm, make sure you get accurate (written) directions on how to operate it.
• Keep your doors locked, even if you step out for just a few minutes. Especially remember to lock all doors at night and when you go on vacation. Similarly, keep your windows locked. Check that all windows have locks when you move into a new house. If they don’t, install them or replace the window.
• Leave a key with a trusted neighbor in case anything happens to your house while you are away, or in case you get locked out. It’s usually not a good idea to leave a key hidden outside your house, especially in more urban areas. It is also a good idea to leave at least one visible light on, if not more.
• Don’t give repairmen a key, and don’t give people fixing your car your whole set of keys. Your house keys can be easily duplicated and your address can usually be obtained from your license plate number.
• Don’t let strangers into your home; always check through a peephole or via intercom. If you question someone’s identity, ask to see ID. Deliverymen and people on legitimate business will not have a problem showing you their ID. This is especially important to remember when you are home alone.
• Report broken street lights to the city or to your homeowner’s association. Well-lit areas mean less hiding places for burglars. Similarly, report any strangers you notice loitering in your neighborhood without one of your neighbors or any apparent purpose.

Can I protect my home's value?

Maintaining your home and yard can be costly and time-consuming. But it rewards on many fronts. There is the obvious benefit of increasing your property value - a serious matter since a home is the biggest investment most of us will ever make.

There's also the less tangible matter of preventative medicine: The trees you prune now will not yield large branches that crash through your window in a storm next winter, for example. And reinforcing a deck or railing now could save you from tremendous heartache - and potentially devastating liability - if it fell apart and someone was injured later.

The summer months are the time of year when people spend the most time enjoying patios, decks, yards and pools, and the time when friends, relatives and children are most likely to be around. As welcome as that is, the more people you have traipsing through your home, the more likely the chances are of damage or injury.

As a homeowner, your assets need protection - for you, your family, your future and your security. And to guard against the uncertainty that is a fact of life, you need coverage to take care of dependents and loved ones. Homeowners can guard against financial disaster by carrying homeowners, mortgage, and term life insurance policies - all of which ensure your home is paid off in the event that something happens to you or your ability to pay your mortgage.

In addition to adequate coverage, homeowners can take steps to protect themselves by doing a walk-through of their entire home and property with a notepad, pen, and one question on their minds: What could possibly happen here?

Can I insure my home Business?

An estimated 12 million Americans operate a full-time or part-time business from their homes, and that number keeps growing. Although savvy and creative in their own specialties, these entrepreneurs can be unsure about how to protect their business against theft, fire and liability. Some believe their homeowners policies cover all their home business insurance needs. As a result, many are uninsured. Here are some guidelines to help

If you're a businessowner, you need property insurance in case you're robbed or a fire breaks out and destroys equipment and inventory, and liability insurance in case someone gets hurt using your product or services or gets hurt while visiting you.

The first tip is: Don't assume your homeowners policy covers your home business. It may, but probably only to a maximum of $2,500 for business equipment in the home and $250 away from the premises. It usually doesn't cover business-related liability, such as if a customer or supplier is injured on your property, at all. Your homeowners policy also doesn't insure your ability to collect your accounts receivable if your business records are damaged, and it won't replace lost income if you can't operate your business due to damage to your home.

There are three ways to buy the home business insurance coverage you need:

Depending on the type of business you operate, you may be able to add an endorsement to your existing homeowners policy. Some insurance companies offer a home day care coverage endorsement for people who operate a home day care service for pay in their home. Some companies will offer property and liability insurance for "incidental" businesses operated from your home. However, each company may define incidental differently. For example, some companies consider an incidental business one that grosses less than $5,000 per year.

You can buy several individual business insurance policies to provide the coverage you need, such as business property, general liability and business income insurance.

Or you can buy a package policy designed for smaller businesses, which combines the necessary property and liability insurance coverage you need in a single policy.

Because home businesses keep popping up all over the country, some insurance companies have begun to offer what amounts to a mini-business owners package policy. Some of these policies cover loss or destruction of business property on or off premises; loss of valuable papers and important business information; personal injury and advertising liability; accounts receivable up to $10,000; money lost on premises up to $5,000 and off premises up to $2,000.

How to keep adequate insurance coverage with rising home values?

According to the Trusted Choice® survey, nearly 40 percent of homeowners who said they had significantly remodeled their homes (such as adding a deck, room, or porch) said they had not updated their homeowners insurance policies to reflect these changes. This means that if something were to happen to your home, such as a fire that destroys it, you would most likely lose the money you spent remodeling that kitchen or adding that deck, as your policy would only pay to repair the house as it was insured, or before the remodel.

Also, many consumers (47 percent according to the survey) do not add valuables they have in their homes (such as wine collections, fine art, jewelry, etc.) to their policies. Most homeowners insurance policies do not cover these valuables, but they can often be added as riders to the policy to cover the replacement cost.

The survey also found that nearly 7 in 10 families who rent their homes said they did not have renters insurance. Renters insurance protects your personal property in many cases of theft or damage, and may even pay for temporary living expense if your rental is damaged so seriously that you can’t live in it. Renters insurance also provides liability protection for all sums that you are legally obligated to pay as a result of a suit or claim by others that are injured while in your home (slip-and-fall, etc.). Best of all, renters insurance is very affordable.

Shop Around
This is the number one way to save money on your homeowners insurance. If you’ve just purchased or are about to purchase a new home, get several quotes before choosing the company you want to give your business to. Rates can vary by hundreds of dollars from company to company. This also applies to longer term homeowners. Your current company could be overcharging you, and it makes sense to compare rates and think about switching companies if you can save a significant amount of money.

But don't consider price alone. The insurer you select should offer both a fair price and excellent service. Quality service may cost a bit more, but you buy insurance in case you need to make a claim, so it's important to get a company with a good reputation.