How to Read and Understand Your Homeowner's Insurance Policy
On and on we've talked about how important it is to be familiar with your homeowners insurance policy. However, these types of insurance policies are not the easiest to read and interpret due to lengthy and often complex language. Let's break down some of the most important sections of the standard policy in a way that's easier to understand.
Homeowners insurance covers losses and damages to your home, along with property and other assets up to a certain amount. Sometimes, mortgage lenders will require you to carry this type of insurance. Regardless, it's a good idea to carry this insurance even if your mortgage lender does not require you to, as most people can't afford to purchase a new home out of pocket in the event of an accident that results in a total loss. Homeowners insurance will also provide liability coverage against accidents that may happen on the property or inside your home involving others.
There are three common types of homeowners insurance policies; HO-2, HO-3, and HO-4. The first, HO-2, is a basic policy that covers the most common types of basic perils such as fire, lightning, theft, and vandalism.
The second, HO-3, offers a more wide range of coverage, but excludes things that are more rare in occurrence, such as earthquakes, landslides, and floods. You can purchase supplemental policies that will cover these additional perils if you feel you are in need of the extra safety net.
The final of the most common three is HO-4. This policy is basically renter's insurance. This covers personal property that you keep in an apartment or rented home, and also covers liability to protect you in case someone is injured while they are on the home or property that you are renting.
The Declaration Page
The declaration page is an overview, or summary, of your coverage and important information. Things you'll find on the declaration page include:
● Your full name and address
● The address of the home, if it's different than the policy holder's living address
● The policy effective dates, which are the dates during which the policy is active
● The name of your insurance agent
● The name of the mortgage company
● An overview of the coverage types and policy limits
● Any additional endorsements you've opted to pay
● Your deductible
● Any discounts you receive, such as bundle discounts
● The total cost of the policy
● Your monthly premium
● A phone number and address for the insurance company
Sections and Coverage
The dwelling is the part of the home that the insurance policy will pay to rebuild in the event that it is damaged or destroyed under the specific types of damages noted in the policy (fire, wind, etc). This section of your homeowners insurance policy defines specifically what counts as a dwelling, and what doesn't count. Your home and attached garage are typically covered by this section of the policy. This section will also detail what is not covered. For example, the policy might say that a detached garage, shed, or fence, is not considered part of the "dwelling" and may be subject to a different section of coverage known as "other structures."
The "other structures" section outlines what structures are covered that are not part of your dwelling. This may include structures like a shed in your backyard, a fence that surrounds your home, or a detached garage that is not connected to the main house. If you look at page 5 of this example, you'll notice that structures used for business purposes are not covered under the "other structures" section.
Personal property details the coverage for the things that you own. Appliances, electronics, clothes, jewelry, games, furniture, and other personal items are covered in this area of the policy. Many policies will have a limit as to what amounts they can reimburse. For example, jewelry may only be covered up to $2,000, so if you own something that is worth more, you may need to seek extra coverage. In this example from Allstate, on page 6, they list the maximum coverage for each specific type of item. According to their example policy, they will only cover up to $1,000 for the theft of firearms. Read this section clearly to determine what is covered and what is not.
Loss of Use
This section will outline what they will or won't supply in the event that you cannot use your home. If repairs are being made in the home, or if your home is deemed unlivable after a fire, you may need temporary living arrangements or living expenses in the meantime.
Liability coverage is important because it protects you by covering damages or injuries that may have happened on your property. For example, if you have a guest over to visit and they fall down the stairs, your personal liability coverage may protect you from financial damages incurred as a result. Most policies will provide a minimum of around $100,000 of personal liability coverage per person, per occurrence. This can help cover medical bills or legal expenses that may result from these types of unexpected incidents.
Important Vocabulary to Know
Many policies, like this one from Allstate, contain a section dedicated to explaining the words and definitions they use in the policy. For example, they detail that when they say "building structure," they specifically mean a structure that has walls and a roof. It seems self explanatory, but it is important that you know specifically what they mean in order to understand the exact coverage. Some phrases or words, however, can be left off of this section. Here are the most common words and phrases you may need to be familiar with.
Actual Cash Value - Actual Cash Value, or ACV, is the amount equal to the replacement cost of something minus depreciation.
Deductible - The deductible is the amount you have to pay out of pocket before the insurance kicks in and starts paying. For example, if you have a $5,000 deductible and make a claim for $25,000 in damages, you'll need to pay $5,000 out of pocket and the insurance company will provide $20,000.
Depreciation - a reduction in the value of an asset with the passage of time. Most things depreciate due to regular wear and tear.
Liability - when you are responsible for something, especially by law
Rider - an endorsement, or additional coverage on a standard policy