Welcome to the latest entry in the Financial Planning 101 series. The last several blogs have focused on life insurance and now the focus will shift to home owners insurance. When purchasing a house most people just get issued a policy and make sure the amounts are sufficient to cover the cost of the house and their personal possessions. The truth is there are multiple types of homeowners policies and the goal of this blog will be to educate you on the different policy types so you can understand what is best for you.
Why do you need homeowners insurance? Most of us think about protecting our home against fire or storm damage and that would be correct but there are lots of other coverages included with this insurance. Homeowners insurance also covers your personal possessions from damage as a result of these events and also provides liability coverage in the case of an accident or injury on your property. Below is a summary of the various types of coverage you will find in a homeowners policy. You will find these in the details of your homeowners policy which can be a lengthy document.
Section I
1. Coverage A – This is the coverage for the dwelling itself. This is what many people associate with replacing their house. The amount of coverage though is often different than the value of the house. This is due to part of the market value including the land and the land does not need to be replaced even in the event of a total loss of the house. You must carry at least 80% of replacement cost of the house or you will end up being responsible for a portion of the cost even if the damage is less than the insured amount.
2. Coverage B – This covers structures not attached to the primary dwelling for example storage sheds or unattached garage. This coverage is 10% of the amount of coverage A. This will not cover a detached structure if it is used for business purposes.
3. Coverage C – This is for household contents and personal property. This coverage is typically 50% of coverage A. This coverage is usually stated in terms of actual cash value. This means that the insurance company will depreciate an asset and only pay what the item is worth now. For instance, if six years ago you bought a sofa for $2,000 and there is fire damage you may only $500 and not the $2,000 you paid for it or might need to buy a similar brand new couch.
In addition there are limits placed on certain types of personal property that will be covered.
· $1500 on securities, bank notes and personal records
· $1500 on watercraft including trailers
· $1500 for other trailers
· $2500 for business property at insured residence
· $1500 for jewelry, watches and stones by theft
· $2500 for loss of firearms by theft
· $2500 for loss of silverware by theft
4. Coverage D – This provides reimbursement in the case you are temporarily unable to be in the residence due to an insurable event. This coverage is typically 30% of coverage A. This would cover expenses incurred while staying in a hotel or a rental unit while the home is being repaired.
5. Additional coverages – This can be any additional specific coverage the policyholder needs that aren’t covered by the areas above. Examples could be collectibles, art, jewelry or other valuables and any items excluded from coverage C or that need coverage in excess of the stated included limits.
There are many specific provisions within this coverage. Work with your insurance agent to get a full listing as this is the catch all for any coverage not included in the other sections.
Section II
1. Coverage E – Provides liability coverage for personal liability as a result of bodily injury or property damage. Coverage is typically $100,000. This amount can vary and should have an amount that works in conjunction with an umbrella liability policy. For instance, many umbrella policies might provide $1,000,000 in liability coverage but will only kick in after $300,000 is used from the homeowners policy if the incident occurred on the property.
2. Coverage F – Provides liability coverage for medical treatment for injuries, typically in the amount of $1,000.
3. Additional coverages – Additional liability as needed
There are many exclusions and special provisions for this section as well that should be reviewed with your insurance agent to make sure you fully understand the coverage.
Next a few definitions.
Bodily injury – Bodily harm, sickness or disease including required care, loss of services and death resulting from injury
Property Damage – Physical damage to or destruction of tangible property including loss of use of property
Insured – Includes residents of the insured household who are relatives to the primary insured/homeowner, others under age of 21 under the care of the homeowner or full time students.
For section II liability coverage listed above those responsible for animals or watercraft with the owner’s permission and those employed by the insured operating vehicles on the insured location are covered.
Insured location – This includes the residence itself, the grounds and structures on the grounds like swimming pools or detached structures. Also covered is property where the insured is staying so you are covered when staying at a relative’s house for example. Also, any land owned or rented by the insured is covered including funeral plots.
Occurrence – An accident or event that results in bodily injury or property damage.
Deductible – The portion of the damages the insured is responsible to pay before the insurance company pays. This amount can vary and can influence the amount of the premium paid. Deductibles are usually in the range of $250 – 1000. The higher the deductible the lower the premium.
Next we’ll get into the six different types of policies. These different types of policies cover different types of dwellings, have different levels of coverage or cover different types of events. First let’s get into the types of events that will result in an insurable event. These are called perils in the insurance industry. Here is a list of the 16 named perils.
· Fire of lightning
· Aircraft
· Windstorm or hail
· Vehicles
· Explosion
· Smoke
· Riot or civil commotion
· Accidental discharge/overflow of water or steam
· Theft
· Vandalism
· Falling objects
· Freezing of plumbing, HVAC systems or appliances
· Volcanic eruption
· Damage from artificially generated electricity
· Weight of ice, snow or sleet
· Sudden or accidental tearing apart, cracking, burning or bulging
Note there is no stated coverage for flooding, appliance breakdown or zombie apocalypse (just making sure you’re paying attention with that last one). Most policies will also have a list of the excluded events they won’t cover. This is a key area to review on your policy as you may think you are covered for certain events when you may not be. These excluded events often include but are not limited to normal wear and tear, pollution damage, frozen pipes and pet damage.
Policy Types
1. HO-2
This is also referred to as the broad form or form 2. This type of policy covers the 16 named perils listed above for the following amounts.
Coverage A – replacement cost up to specified amount
Coverage B – replacement cost up to 10% of coverage A
Coverage C – actual cash value up to 50% of coverage A
Coverage D – actual costs up to 30% of coverage A
This tends to be the least expensive and least comprehensive coverage for homes due to coverage being limited to the 16 named perils.
2. HO-3
This is also referred to as special form or form 3. This is the most common type of coverage for homeowners. The main difference between this and HO-2 is that HO-3 covers open perils meaning it is not limited to the named 16 perils.
Coverage A – replacement cost up to specified amount
Coverage B – replacement cost up to 10% of coverage A
Coverage C – actual cash value up to 50% of coverage A, only named perils
Coverage D – actual costs up to 30% of coverage A
3. HO-4
This is more commonly known as renter’s insurance. This is for people who don’t need to insure the structure itself but only their personal property.
Coverage A – no coverage
Coverage B – no coverage
Coverage C – actual cash value up to specified amount, 16 named perils
Coverage D – actual costs up to 30% of coverage A, open perils
4. HO-5
This is also known as the comprehensive form. This policy offers the most thorough coverage with open peril coverage across the board.
Coverage A – replacement cost up to specified amount
Coverage B – replacement cost up to 10% of coverage A
Coverage C – actual cash value up to 50% of coverage A, only named perils
Coverage D – actual costs up to 30% of coverage A
5. HO-6
This policy is for those who own a condominium or townhouse and have to provide coverage for anything not provided by the managing association.
Coverage A – replacement cost up to specified amount, 16 named perils
Coverage B – included in coverage A
Coverage C – actual cash value up to specified amount, 16 named perils
Coverage D – actual costs up to 30% of coverage C
6. HO-8
This is specifically for older or rundown homes where the cost of replacing the home exceeds the market value. Replacements or repairs will be made with common and not antique or specialized materials. Theft is limited to $1000. Certain coverages are limited to 11 named perils which excludes the accidental discharge/overflow of water or steam, falling objects, the plumbing or HVAC systems, damage from artificially generated electricity, weight of ice, snow or sleet and the sudden cracking, tearing, burning.
Coverage A – replacement cost up to specified amount, 16 named perils
Coverage B – included in coverage A
Coverage C – actual cash value up to specified amount, 16 named perils
Coverage D – actual costs up to 30% of coverage C
That concludes an overview of homeowners insurance including the different coverages and types of policies. If you have questions on your current coverage contact your insurance agent or a fee only financial planner to make sure you have adequate coverage or to see if you could save money by dropping unnecessary coverage.
Thank you for reading this most recent entry in the Financial Planning 101 series. Stay tuned for the next blog which will focus on auto insurance.
As always if you have any questions or want to contact us you can email me at info@7thstfinancial.com or visit our website at www.7thstfinancial.com.
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