How much home insurance is enough? When homeowners are searching for coverage, they often ask this question in an attempt to save money on premiums. While no one wants to overpay for insurance, it could prove far more expensive to be underinsured. Despite that fact, news reports are filled with sad stories about victims who lost everything in a fire or some other disaster, only to find out too late their insurance would not pay for the damages. In this post, we’ll explore the package of coverages offered on two of the most commonly purchased insurance policies to help you determine how much home insurance is enough for you.
HO-3 and HO-5: What’s the Difference?
While there are several different forms of home insurance, HO-3 and HO-5 are the most frequently purchased by homeowners due to their versatility and broad coverage solutions. Both protect against a wide range of losses beyond just damages to your home. Both also provide open peril coverage for all types of risks that threaten the structure of your home (except those excluded in writing).
In fact, the primary difference between these two policies is found in the ‘Personal Belongings’ coverage. Under HO-3 coverage, home contents are only covered for damages caused by certain specified events. With an HO-5, damages are covered for all types of hazards (except those excluded in writing).
Dwelling
Many risks threaten the structure of your home, from fire and smoke damage to inclement weather and falling trees. Dwelling coverage helps pay for repairs to your home when it is damaged, as well as the rebuilding of your home if it is destroyed. We recommend insuring your house for its full replacement value – not your mortgage balance or the price you paid for your home. This assures you have the money to rebuild a same-size home with similar finishes and materials based on today’s current construction costs.
What Having the Right Coverage is Important
If you underinsure your home’s structure, it could have tremendous repercussions. Not only might you fall short of the funding needed to rebuild your home after a disaster, but you could also be denied full coverage of a partial claim due to enforcement of the ‘Co-Insurance Rule.’ This rule allows insurers to pay partial claims if you haven’t sufficiently insured your home for a total loss. For example, if your home is underinsured by 15 percent; you may only receive $85,000 for your $100,000 partial-loss claim.
Deductible
When you purchase home insurance, you will select a deductible to pay toward the cost of future damage and loss claims. Deductibles come in all sizes and should be chosen based on preference and affordability. Lower deductibles can minimize your cost burden after a loss, but a higher deductible could yield savings now in the form of lower premiums. Talk with a team member here at Homewood Insurance Agency for help choosing an amount that is right for you.
Other Structures
If you have additional structures on your property, they are not covered under the Dwelling section of your insurance policy. Insurance companies cover these structures separately – usually for up to 10 percent of your Dwelling coverage limit. This could come in handy if a fallen tree destroys your carport and fence or a fire starts in your detached garage.
Personal Belongings
Your TV, furniture, and clothes may not have cost as much as your home, but losing all of them at once could total a major loss of tens or even hundreds of thousands of dollars. The ‘Personal Belongings’ section of your insurance policy reimburses you for the loss of your possessions due to a covered event, such as theft or fire. Insurers typically reimburse you for your loss based on the actual cash value of your belongings. If you would rather be reimbursed for the cost to replace your belongings with new ones, talk with an agent here at Homewood Insurance Agency about adding an endorsement to your policy.
Most insurance companies include default coverage for personal belongings with limits between 50 and 80 percent of the Dwelling coverage limit. They also impose limits on specific categories of items, such as fine jewelry and firearms. To ensure your home’s contents are adequately insured, we recommend taking inventory of your belongings and updating it frequently. This can help in calculating your actual coverage needs and also simplify the claims process after a major loss.
Loss of Use
If your home is uninhabitable after a fire or other damaging event, ‘Loss of Use’ coverage can help pay for the extra expense of living elsewhere while your house is being repaired. For many people, this could mean paying for the cost of living in a hotel for a few days or weeks. For others, it could mean covering the rent on an apartment for a few months. Most homeowners are more than sufficiently insured with default Loss of Use coverage, which is usually set at approximately 20 percent of the Dwelling coverage limit.
Personal Liability
All standard home insurance policies include coverage for personal liability if you are at-fault for a third-party’s injuries or damage to their property. This may include an accident that occurs at your home or damages you, your child, or your pet cause while away from home. With a few exceptions for things like car and boat accidents, most homeowners can rely on personal liability coverage nearly anywhere they go.
Unlike other types of home insurance coverage that protect against the loss of your house and assets, personal liability coverage provides payment to other people. However, it can still help protect you against a major financial loss, since you might otherwise be responsible for paying for any damages out of pocket. That is why we recommend purchasing high limit coverage – usually a minimum of $100,000 to $300,000.
Often, the cost of a claim is much higher than anticipated, providing victim compensation for medical expenses, lost wages, emotional trauma, and more. The average dog bite claim, for example, is currently more than $37,000, which is nearly double what it was in 2003.
Medical Payments
You go to great lengths to ensure your home is a danger-free zone, but accidents can still happen. If a child sprains her ankle jumping on your trampoline or a party guest cuts herself using one of your kitchen knives, medical payments coverage can help pay for doctor, and emergency room visits up to the limits of your policy, which are usually between $1,000 and $5,000. Unlike personal liability coverage, medical payments cover all third-party injuries, including those for which you are not at fault.
Endorsements
Some homeowners have different types of risks than others. To keep home insurance costs low, a standard policy typically includes only the coverage need by most homeowners. Additional risk protection is available in the form of optional endorsements that increase coverage benefits, cover additional belongings, or otherwise protect against certain types of events not covered under a standard policy. Examples include coverage for:
- High-value belongings
- Home business inventory and assets
- Water backup and sewer
- Replacement cost coverage for belongings
- Inflation guard to cover the rising cost of rebuilding
- And more
For help determining which endorsements could be right for you, contact our office today.
Beyond Home Insurance
Sometimes even high-limit personal liability coverage is not enough to protect your income and assets against a lawsuit. When judgments and legal costs exceed the limits on your policy, umbrella insurance can provide the supplemental protection you need to meet your financial obligations. Umbrella insurance is high-limit liability protection that pays for damages that exceed your primary coverage limits. It usually carries a minimum of $1 million in additional coverage, all for an average of just $200 per year or less. That is a small price to pay to secure your family’s financial future better.
For more information about umbrella insurance and how it can protect your income and assets, contact the team here at Homewood Insurance today.
