What is Homeowners Insurance?

Different policies exist for renters, owners of mobile homes, people seeking bare bones coverage and those living in homes that are very old, but most homeowners will purchase what is called an HO-3 policy. This insurance policy covers your home and its contents against damage and theft, as well as you, the owner, against personal liability if someone is injured while on your property. This coverage also includes damage caused by pets and most major disasters, though floods and earthquakes require separate policies. Homeowners insurance does not cover problems that result from poor maintenance or general wear and tear. A basic homeowners insurance policy should also cover other structures on your property and should provide for living expenses in case you are not able to live at home after a fire or other insured disaster. The amount of coverage provided for each of these items varies depending on the insurer and the type of policy.

Photo used under Public Domain If you live in a city prone to earthquakes, like San Francisco, you might want to consider getting a special policy.

One of the first things you need to know about your policy is the liability limit. The liability limit determines how much coverage you have should something happen to your home. These limits usually start at $100,000, but policies can be purchased with much higher limits. Most experts recommend that you have at least $300,000 to $500,000 of coverage, depending on the value of your home.

When someone talks about the amount of coverage they have, or their liability limit, they are probably referring to the coverage for their home -- that is, for the amount of money it would cost to rebuild their home given the price of materials and labor in the area. This amount is not the same as the purchase price of your home, which accounts for factors like the value of the land. A quick estimate of your rebuilding cost can be done by multiplying your home's total square footage by the building cost per square foot [ref].

While your liability limit is a reflection of the amount of coverage for your actual home, other structures on your property, such as a garage, are usually covered for 10 percent of that amount. Coverage for personal belongings usually falls somewhere between 50 percent and 70 percent of the amount of coverage on the structure of the home. And, as mentioned earlier, in case you have to live somewhere else because of damage to your home, most plans cover costs of living away from home -- hotel, restaurants/food, etc. -- up to 20 percent of your home's liability limit. Other policies may provide unlimited coverage for living expenses but only for a limited period of time.

Photo courtesy MORGUEFILE ©2005-2006 Although this event was caused by Hurricane Charlie, a thunderstorm with lightning could send a tree crashing through your roof. Homeowners insurance would likely help with the cost of removal and repairs.

Another option you'll probably be asked to consider is replacement cost versus actual cash value. Here's where you'll really want to consider the contents of your home. Let's say, while you're not a complete luddite, by comparison to most current homeowners, the amount of electronic gadgets in your home is pretty small. You have a television that's almost as old as you are and you wouldn't miss it if it were gone. You also have an inexpensive stereo and the computer you use is an old loaner laptop from work. So which option is right for you? Going with actual cash value would mean that if these items were damaged, you'd get an amount of money equivalent to the current value of those items (accounting for depreciation). The laptop is covered through work; you won't need to replace that. And since you don't really care about the television, you could simply take the money you get and just get a new, cheap stereo. Meanwhile, your neighbor has everything a home theater should have - a plasma TV, a surround sound speaker system, DVD player, etc. in both her living room and the family room. With that kind of equipment, she'd definitely want to consider replacement cost coverage, which pays for a new version of the item that was lost or damaged - there's no accounting for depreciation. Obviously, in the case of electronics, which can depreciate in value rapidly over time, a replacement cost policy can be a big advantage. However, this isn’t the only scenario that calls for this option. Let’s go back to your household contents. There are other types of items to consider when making this decision. For example, what about the collection of signed prints you have? And there’s also the stamp collection and those original, signed Pearl S. Buck manuscripts. Original pieces of artwork or other costly collectibles can be just as, if not more, valuable than today’s pricey electronics. Replacement cost coverage is usually 10 percent more expensive than actual cash value coverage, but under the right circumstances, it's definitely worth the extra coverage.

Is my Policy Special?
Some homeowners may require a higher liability limit than what comes standard with their policy. Getting a higher limit can sometimes be as simple as paying a higher premium. However, in certain cases a special type of policy might be necessary. For example, an umbrella or excess liability policy is a separate policy that pays money to the policyholder after the liability limit on your regular homeowners insurance has been reached. Some umbrella policies defend against things like invasion of privacy, slander and libel. Generally, you have to have $300,000 in regular coverage before you can get an umbrella policy, and the more coverage you have in your regular policy, the cheaper your umbrella policy will be. An umbrella policy of $1 million in extra liability protection can cost $200 to $350 a year.

You may need an umbrella policy if you want coverage beyond a standard homeowners insurance policy.

Other special policies include a special personal property floater/endorsement. This type of policy allows you to insure valuable items individually or together, has no deductible and charges a premium based on what the item is, its worth and where you live. An appraisal or a recent receipt determines the value of the item in question.

Remember that most standard policies do not cover earthquakes or floods. If live in an area prone to these disasters, you'll definitely want to consider special insurance policies that cover earthquakes and/or floods. Many policies do cover other natural disasters such as tornadoes and hurricanes, but it's always best to check with your carrier and, if your area experiences these disasters, consider getting a special policy.

Photos courtesy stock.xchng © and MORGUEFILE ©2005-2006 Some homeowners insurance policies cover damage from blizzards and tornados, but it's best to check with your provider to see if you're covered.