Homeowners Insurance: A Guide for Homebuyers

 

Home insurance is super important for homeowners, especially if you’ve got a mortgage. But hey, lots of folks don’t know what it covers, the policies, or how much coverage they need. It’s key to get what’s in your policy, what’s not, and how to deal with small damages like storm or fire incidents. Not being clued in on this stuff could mean paying too much or not having enough coverage. That’s why we’ve put together this awesome guide to help you out with homeowners insurance!

Homeowners Insurance Overview

What is Home Insurance?

Home insurance is a policy that provides financial protection for a homeowner’s property and belongings against damages and losses due to events like theft, fire, or natural disasters.

 Its core components typically include:

Dwelling (Coverage A): This insurance coverage helps protect the physical structure of your home, such as the windows, roof, and many other things that help create it.

• Other Structures (Coverage B): This type of insurance can extend coverage to structures on your property that are not attached to your home, such as a shed or fence.
• Personal Belongings (Coverage C): Safeguarding many things inside the four walls of your home, this coverage helps protect your personal belongings — like electronics, clothing and furniture — from damage, destruction, and theft.

Loss of Use (Coverage D): Also known as additional living expense coverage, loss of use works to reimburse you for extra expenses you incur when a covered peril forces you to temporarily move from your home.

• Personal Liability (Coverage E): Liability insurance is there for you if somebody is injured on your property, then sues you for damages and you’re found liable.
• Medical Payments (Coverage F): This type of insurance coverage helps to pay medical expenses if another person gets injured on your property.

 

Types of Policies

 

Homeowners’ policies may have different names depending on the insurance company that sells them.  Standard homeowners insurance policies are often referred to as:

• HO-2 Broad Form (named peril) 
• HO-3 Special Form (open peril and named peril) 
• HO-4 Renters Insurance
• HO-6 Condominium Unit Owners 
• HO-8 Modified Named Perils Form (usually for older homes)

 

Levels of Home Insurance Coverage

Understanding the various levels of home insurance coverage is essential for new homeowners. Choosing the right level ensures neither over-insurance nor under-insurance, providing adequate protection to rebuild, repair, or replace possessions if needed.

Actual Cash Value

Actual cash value (ACV) covers the cost to replace the home or possessions minus depreciation, reflecting the item’s current market value. For instance, if a five-year-old laptop is stolen, ACV would pay the current value of a five-year-old laptop, not the cost of a new one. This level might be appropriate for those seeking lower premiums but has the limitation of potentially insufficient funds to fully replace items.

Replacement Cost

Replacement cost covers the actual amount it would take to replace the home or possessions without deducting for depreciation. This option might be preferred by those who want to fully replace items at current retail prices. While it usually comes with higher premiums, it ensures that homeowners can recover the full value of lost or damaged items.

Guaranteed/Extended Replacement Cost

Guaranteed and/or extended replacement cost offers even more protection, covering costs beyond the policy limit to rebuild the home. This level might be necessary in areas with fluctuating construction costs or for unique properties, offering advantages like full coverage for rebuilding, even if costs exceed the policy’s limits. 

Determining Amount of Coverage Needed

Factors included for amount of coverage: 

• Square footage of your home.
• Age and condition of your home.
• Current, local construction and material costs.
• Type of foundation.
• Any specialized design, engineering or construction features.
• The type of interior and exterior construction and materials, including frame, masonry (brick or stone) or veneer.
• Type of roof construction and materials.
• The style of the house.
• Attached or detached garages and outbuildings.

Cost of Homeowners Insurance 

According to quotes we obtained from seven top home insurers in Maryland, the typical cost of homeowners insurance in the state falls between $1,700 and $2,700. These quotes are specifically for $400,000 worth of dwelling coverage and $100,000 in liability coverage.

And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:

1. A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
2. With a lower deductible, you’ll pay a higher premium but will pay a lot less out of your pocket for a claim.

Bottom Line

Home insurance is crucial for homeowners, particularly those with mortgages. Understanding coverage, policies, and necessary protection is vital. Being informed about policy details can prevent overpaying or being underinsured for damages like storms or fires.