What It Covers
A standard homeowners policy (known as an HO-3) covers four main areas:
- Dwelling coverage: Repairs or rebuilds your home's structure if damaged by covered events (fire, wind, hail, lightning, vandalism, and more).
- Personal property: Replaces your belongings — furniture, electronics, clothing — if stolen or destroyed. Typically covers 50-70% of your dwelling coverage amount.
- Liability: Covers legal and medical costs if someone is injured on your property or if you damage someone else's property. Usually starts at $100,000.
- Additional living expenses (ALE): Pays for temporary housing and related costs if your home is uninhabitable after a covered event.
What It Doesn't Cover
This is where most homeowners get burned. Standard policies do not cover:
- Floods: Requires separate flood insurance through FEMA's NFIP or a private insurer. If you're in a flood zone, your lender will require it.
- Earthquakes: Requires a separate policy or endorsement. Deductibles are typically 10-20% of coverage.
- Sewer/drain backup: Requires a separate endorsement, usually $50-100/year. Worth adding.
- Home business equipment: Standard policies cap business equipment coverage at $2,500. You may need a rider or separate policy.
- High-value items: Jewelry, art, and collectibles are capped (often $1,500-$2,500 per category). Schedule them individually for full coverage.
Replacement Cost vs Actual Cash Value
This is the single most important decision in your policy:
- Replacement cost: Pays what it actually costs to rebuild or replace at today's prices. This is what you want.
- Actual cash value (ACV): Pays the depreciated value. A 10-year-old roof destroyed by a storm might only get you 30-40% of what a new roof costs. Avoid this on dwelling coverage.
Key point: Make sure your dwelling coverage is enough to actually rebuild your home at current construction costs — not what you paid for the house, not its market value. Construction costs have risen sharply, and many homeowners are significantly underinsured.
What to Look For
- Guaranteed replacement cost: Some policies guarantee they'll rebuild your home even if costs exceed your coverage limit. Worth the extra premium.
- Liability limits: $100K is the default but may not be enough. Consider $300-500K, especially if you have assets to protect. Or pair with an umbrella policy.
- Deductible: Higher deductible = lower premium. A $2,500 deductible instead of $1,000 can save 10-25% on premiums. Just make sure you can afford it.
- Bundling: Most insurers offer 5-25% off when you bundle home + auto.
Common Mistakes
Mistake #1: Insuring for market value instead of rebuild cost. Your home's market value includes land, location, and market conditions. Your insurance should cover what it would cost to rebuild the structure.
Mistake #2: Not updating your policy after renovations. That $40K kitchen remodel increased your home's rebuild cost. Tell your insurer.
Mistake #3: Assuming everything is covered. Read the exclusions. Flood, earthquake, sewer backup, and high-value items almost always need additional coverage.
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