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.
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What is in a standard homeowners insurance policy?
A standard homeowners insurance policy includes four essential types of
coverage. They include:
1. Coverage for the structure of your home.
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.
2. Coverage for 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.
3. Liability protection.
This 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 their filing a
liability claim 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.
4. Additional living expenses in the event you are temporarily
unable to live in your home because of a fire or other insured disaster.
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 -- for a limited amount of time.
If you rent out part of your house, this coverage will also reimburse you for
the rent that you would have collected from your tenant if your home had not
been destroyed.
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Are there different types of policies?
Yes. A person who owns his or her home would have a different policy from
someone who rents. Policies also differ on the amount of insurance coverage
provided.
The different types of homeowners policies are fairly standard throughout the
country. However, individual states and companies may offer policies that are
slightly different or go by other names such as �standard� or �deluxe�. The one
exception is the state of Texas, where policies vary somewhat from policies in
other states. The Texas Insurance Department (
http://www.tdi.state.tx.us ) has detailed information on its various
homeowners policies. You should consult with a professional insurance
consultant to determine which coverages best suit your needs
If you own your home
If you own the home you live in, you have several policies to choose from. The
most popular policy is the HO-3, which provides the broadest coverage. Owners
of multi-family homes generally purchase an HO-3 with an endorsement to cover
the risks associated with having renters live in their homes.
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HO-1: Limited coverage policy
This �bare bones� policy covers you against the first 10 disasters. It's no
longer available in most states.
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HO-2: Basic policy
It provides protection against all 16 disasters. There is a version of HO-2
designed for mobile homes.
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HO-3: The most popular policy
This �special� policy protects your home from all perils except those
specifically excluded.
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HO-8: Older home
Designed for older homes, this policy usually reimburses you for damage on an
actual cash value basis which means replacement cost less depreciation. Full
replacement cost policies may not be available for some older homes.
If you rent your home
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HO4-Renter
Created specifically for those who rent the home they live in, this policy
protects your possessions and any parts of the apartment that you own, such as
new kitchen cabinets you install, against all 16 disasters.
If you own a co-op or a condo
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H0-6: condo/co-op A policy for those who own a condo or co-op, it
provides coverage for your belongings and the structural parts of the building
that you own. It protects you against all 16 disasters.
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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 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 doesn�t make sense to cancel your policy and risk losing what
you�ve invested in your home.
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How and why it is important to take a home inventory!
Would you be able to remember all the possessions you�ve accumulated over the
years if they were destroyed by a fire? Having an up-to-date home inventory
will help you get your insurance claim settled faster, verify losses for your
income tax return and help you purchase the correct amount of insurance.
Start by making a list of your possessions, describing each item and noting
where you bought it and its make and model. Clip to your list any sales
receipts, purchase contracts, and appraisals you have. For clothing, count the
items you own by category -- pants, coats, shoes, for example �- making notes
about those that are especially valuable. For major appliance and electronic
equipment, record their serial numbers usually found on the back or bottom.
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Don't be put off!
If you are just setting up a household, starting an inventory list can be
relatively simple. If you�ve been living in the same house for many years,
however, the task of creating a list can be daunting. Still, it�s better to
have an incomplete inventory than nothing at all. Start with recent purchases
and then try to remember what you can about older possessions.
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Higher Value Items!
Valuable items like jewelry, art work and collectibles may have increased in
value since you received them. Check with your agent to make sure that you have
adequate insurance for these items. They may need to be insured separately.
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Take Pictures!
Besides the list, you can take pictures of rooms and important individual
items. On the back of the photos, note what is shown and where you bought it or
the make. Don�t forget things that are in closets or drawers.
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Use a Video Recorder!
Walk through your house or apartment videotaping and describing the contents.
Or do the same thing using a tape recorder.
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Using your computer!
Use your PC to make your inventory list. Personal finance software packages
often include a homeowners room-by-room inventory program.
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Keep Your list, video and photos safe!
Regardless of how you do it (written list, floppy disk, photos, videotape or
audio tape), keep your inventory along with receipts in your safe deposit box
or at a friend's or relative's home. That way you�ll be sure to have something
to give your insurance representative if your home is damaged. When you make a
significant purchase, add the information to your inventory while the details
are fresh in your mind.
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What's the difference between cancellation and non-renewal?
There is a big difference between when an insurance company cancels a policy
and when it chooses not to renew it. Insurance companies cannot cancel a policy
that has been in force for more than 60 days except:
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If you fail to pay the premium.
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You have committed fraud or made serious misrepresentations on your
application.
Non-renewal is a different matter. Either you or your insurance company can
decide not to renew the policy when it expires. Depending on the state you live
in, your insurance company must give you a certain number of days notice and
explain the reason for non-renewal before it drops your policy. If you think
the reason is unfair or want a further explanation, call the insurance
company's consumer affairs division. If you don't get an explanation, call your
state insurance department.
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