Your homeowner’s insurance policy provides financial protection for your home, personal belongings, and even your assets. Here in Arizona, there are several forms of home insurance, the most common of which are the HO-3 and HO-5 policies. In this post, we will review the coverages typically included in these policies and help you better understand how much home insurance is enough for you.
HO-3 vs. HO-5
The Special Form HO-3 is the most frequently purchased policy and is often referred to as ‘standard coverage.’ This type of home insurance includes coverage for the home’s structure for all types of risk-related damages so long as they are not specifically excluded in the policy. The contents inside the home are also covered, but only for damages caused by perils named in the policy. Homeowners may instead opt for the more comprehensive HO-5 insurance, which provides the same coverage as HO-3, only the contents inside the home are covered for all risks that are not specifically excluded in the policy.
Both HO-3 and HO-5 require homeowners to pay a deductible for claims of damage or loss of personal property and structural damages. The deductible is the amount you select at the time you purchase your policy, and it often ranges between $500 and $2,000.
Coverage A – Dwelling
Dwelling insurance covers damages to your home’s structure. This type of coverage is typically mandatory for borrowers with a mortgage, but it is recommended for all homeowners who wish to protect their homes against damage or loss. For example, a grease fire in the kitchen could cost you tens of thousands of dollars in clean-up and repairs. If you file a claim for the damages against your home insurance policy, you pay only your deductible.
There are three important reasons to choose the right coverage limits for your dwelling. Most importantly, it determines how much funding will be available to repair or rebuild your home if it is damaged or destroyed. Too little coverage could put you at risk of a major financial loss. Secondly, low limits could subject you to the ‘Co-Insurance Rule,’ which penalizes policy-holders for partial losses when the Coverage A amount is less than what is required. Finally, the amount you choose to insure your dwelling for often establishes a baseline from which the default limits on other home insurance coverages are calculated.
Calculate Your Coverage Needs
When you calculate your dwelling coverage needs, we recommend doing so according to the actual cost to rebuild a comparably sized home with similar finishes. While you do not need to factor in the cost of the land (it’s not insurable), you should consider the cost of cleanup and remediation after a potential disaster. Remember, home insurance should protect your asset – not simply pay off the mortgage. For help calculating your dwelling coverage needs, contact an agent here at Smart Move Insurance. We’ll use our ‘Home Cost Estimator’ to find an accurate coverage amount.
Coverage B – Other Structures
If you have other structures on your property, such as a fence or unattached garage, you need coverage for those, too. Since they are not a part of your primary dwelling, they are covered under Coverage B, which is often calculated at 10 percent of the dwelling coverage. If the default coverage is too low, however, you can request a higher limit.
Coverage C – Personal Property
The next coverage listed in a home insurance policy is coverage for damages or loss of personal possessions and contents inside the home. Few people accurately estimate the actual value of their belongings, which can total tens or even hundreds of thousands of dollars. In many cases, insurance companies automatically cover personal property at a default rate equal to 50-80 percent of the dwelling coverage limit. However, we recommend using an app to take and digitally store a home inventory of your belongings. Not only does this help determine your actual coverage needs, but it may also minimize the burden of declaring losses after a covered event.
Loss of Use (Coverage D)
Rebuilding can take time, during which you will need to find temporary living space while still paying your mortgage. Loss of Use coverage helps pay for excess living expenses beyond your normal costs. This could include extra costs associated with renting, laundering your clothes, or even feeding your family. In most cases, insurance companies set default loss-of-use coverage at approximately 20 percent of the limits on your dwelling insurance.
Continue reading part two of “How much home insurance is enough?”