10 basic home insurance facts
Updated by Richard Barrington
Home insurance may not be the first thing you think of when you start shopping for a mortgage loan, but the two are related. Are you wondering, "Is home insurance important?" A mortgage lender requires you to carry home insurance in order to protect their loan collateral -- and you should be equally eager to find home insurance that protects your investment.
Whether you are about to become a first-time homebuyer or have owned property for decades, the following 10 home insurance facts should help you get the right policy:
10 fun facts about home insurance
While these home insurance facts may not all be fairly classified as "fun," they are interesting and important.
1. Home insurance coverage varies
Perhaps the best way to start any list of interesting insurance facts is to point out that home insurance policies can provide vastly different levels of protection.
Start with the fundamental question: why do people get home insurance? The simple answer is to protect their home and personal property. A standard home insurance policy covers the home and your belongings, as well as your liability for any injuries or property damage you, your family members or pets may cause others. It also may provide additional living expenses in case you can't live in the home while it's being repaired after an insured disaster.
The differences between policies come down to the details. Exactly what type of compensation does the policy provide for your property, and what types of damage does it protect against?
Policies are fairly standard among states, except for Texas, which has its own policy definitions. Here are the basic types of home insurance in most states:
- HO-1: A bare-bones policy that has been discontinued in most states because home owners generally demand a broader range of coverage. HO-1 insurance covers your property against 10 common hazards, but if damage is caused by a hazard not specifically named by the policy, you may not be covered.
- HO-2: This broadens the number of hazards covered to 16, but like the HO-1 policy this is a "named perils" policy, meaning if the cause of the damage is not specifically identified in the policy you are not covered.
- HO-3: This type of policy is popular because it provides broader coverage than the two listed above. The HO-3 policy covers your home against all hazards unless they are specifically excluded. However, the contents of the home are only covered against hazards specifically listed in the policy.
- HO-5: Designed to provide very broad coverage of both your home and its contents, an HO-5 policy protects both against all hazards except those specifically excluded by the policy.
- HO-6: Commonly known as condo insurance or town home insurance, HO-6 policies protect owners of condominiums for damage to the portion of the property they own, as opposed to common areas of the property. It is a named perils policy and so only covers hazards specifically identified in the contract.
- HO-8: Properties such as older homes could cost more to rebuild than they are worth on the market, and thus would be extremely expensive to insure. An HO-8 policy allows home owners to insure against 10 common hazards, but only to the extent of the home's market value.
2. Certain losses are excluded from most home insurance policies
Standard home insurance policies don't cover floods or earthquakes. You must purchase separate policies to get coverage for those disasters. Your mortgage lender may require you to buy insurance through the National Flood Insurance Program if you live in a flood-prone area.
In some coastal areas, home insurance policies exclude damage from wind. Homeowners would require a separate policy to cover wind damage. Earthquake insurance is available as an option, and is recommended in areas with significant seismic activity, such as California.
3. Market value vs. rebuild cost can differ
In many cases, the cost to rebuild is more than a home's market value. Therefore, if your insurance only covers the market value of the property, you may not be able to afford to replace it after a total loss.
If you intend to stay in your property, you may be less concerned about the ups and downs of real estate market prices than with making sure your insurance coverage is adequate to replace the property, if necessary. After the housing market imploded in 2008, more than 25 percent of 800 people polled by the Insurance Information Network of California mistakenly thought they should reduce their home insurance because market values had dropped. This line of thinking could lead you to having less insurance than you'd need should you have to rebuild.
Note that this underscores the difference between a mortgage lender's perspective and a home owner's perspective toward home insurance. The lender requires you to insure enough to protect the balance of their mortgage loan to you, while you need to protect the entire home and its contents.
4. Personal property protection can be inadequate
When it comes to protecting the contents of your home, one of the not-so-fun facts about home insurance is that standard policies put dollar limits on valuables. So, if you own expensive items such as jewelry, furs, fine art and antiques you may need to buy a "floater" or endorsement to provide extra coverage.
You should keep an updated inventory of your belongings and their value, and check periodically with your insurance agent to make sure these items are adequately covered.
5. Shop around: home insurance pricing varies
All this talk about standard policies and standard coverage may make you think that if you own a typical home with a normal amount of personal property, one policy is just as good as another. That ignores other important components of insurance, such as price and service.
Compare quotes for the same type of policies from different companies to see who has the best price. Also, check with your state's insurance department website to learn about consumer complaints about insurance companies you are considering.
6. Your credit score can affect home insurance premium
Speaking of price, you might think the home, its location and its contents will determine what you pay for insurance. These are important factors, but so is something else: your credit history.
Though a few states ban the practice, in most cases your credit history affects what you pay for home insurance. The better the credit rating, the lower the premiums you are likely to pay. So, while you may be focused on spiffing up your credit rating in order to get a good deal on your mortgage loan, you should work to maintain a good rating even after that loan is in place. Good credit could save you money on home insurance for years to come.
7. Home buyers need to get a CLUE
Why do people get home insurance? To protect against future problems, though knowledge of past home insurance claims can be valuable.
A Comprehensive Loss Underwriting Exchange (CLUE) report provides information on claims that have been filed for the past seven years. While you aren't entitled to a CLUE report on another home owner's property, a growing number of buyers are requiring sellers to provide a copy of this report before finalizing a deal. The loss history may reveal problems that could make insuring the home difficult or expensive.
8. Your home insurance policy can fall behind your property
Let's say that in preparation for closing on your home you find the ideal insurance policy for your needs. So you think that job is out of the way -- now you just have to pay your premiums on time, and you're all set.
The problem is, the nature of what you want to insure may change over time. Additions or upgrades to the home may make it more more valuable, and you may acquire more expensive personal possessions.
To make sure your coverage stays in step with your property, you should periodically make provide your insurance agent with an up-to-date description of the house and your possessions, and confirm that your coverage limit is still sufficient to meet your needs.
9. Poor maintenance may cause claim denials
Not all damage is covered by home insurance. If damage results from your failure to properly maintain the property, the insurance company may deny a claim that results from that poor maintenance.
Here's an example: suppose you persistently fail to fix a leaky roof. If this results in water damage to the structure and possessions below that roof, the insurance company may deny your claim because it is due to negligence rather than an accident.
10. It doesn't always pay to make a home insurance claim
Use your judgement before you make a home insurance claim, because it may cause your premium to increase. This is significant, because making a claim has a one-time benefit while premiums must be paid year after year.
Let's say you have damage that amounts to $100 over your deductible. The cause of the damage is covered, so you could file a claim. If you do though, you may get the unpleasant surprise of finding your annual premium hiked by $75. As a result, within two years you will have paid $150 more in premiums just to make that $100 claim - and you'd have years of higher premiums still ahead of you.
Home insurance can be a confusing subject and isn't very exciting, but it is important to understand these basic home insurance facts. Handling your insurance correctly can save you hundreds in premiums and ensure that your property is well protected.
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