Homeowners insurance. You know you should probably have it, and if you have a mortgage, you’re required to have it. But how much do you know about it beyond that – what it covers (and does not cover), the types of policies, how much coverage you need? What happens in case of minor damage from a storm, or even something as rare as fire damage? If you’re not familiar with these things, you may very well be overpaying and/or be underinsured. To help you out, we’ve put together this homeowners insurance guide for homebuyers in Fort Myers.
Homeowners Insurance Overview
Homeowner’s insurance is a safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”
The three main functions of this insurance are to…
- “Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- Cover personal liability if you’re held legally responsible for damage or injury to someone else.”
There are three basic levels of coverage with homeowner’s insurance – actual cash value, replacement cost, and extended replacement cost/value. In addition, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk is assessed on the basis of “past claim history associated with the home, the neighborhood, and the home’s condition.”
Types of Policies
There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . .
HO-1 AND HO-2
The policies that garner the least favor among homeowners offer minimal coverage and strictly reimburse for damages resulting from specified issues. Combined, these categories represent a mere 8% of homeowners’ insurance coverage. HO-2 insurance, the prevalent option, extends coverage to your residence and possessions against a predefined set of 16 causes. On the other hand, HO-1 insurance, less prevalent in availability, epitomizes the most rudimentary form of homeowners’ insurance, providing protection against an even more limited range of perils compared to the HO-2 counterpart.
HO-3
“HO-3 insurance policies, also called ‘special form,’ are by far the most common,” accounting for almost 80% of coverage on owner-occupied homes. “If you have a mortgage, your lender is likely to require at least this level of coverage. HO-3 insurance policies generally cover damage to your home from any cause except those the policy specifically excludes, such as an earthquake or flood. However, where it concerns your belongings, an HO-3 policy typically covers only damage from 16 ‘named perils’ unless you buy extra coverage.”
HO-5
This type of insurance, alternatively referred to as comprehensive form or premier coverage, offers the most extensive protection available. Essentially, it encompasses a wide range of scenarios, paying for damage to both your home and possessions from nearly all conceivable causes, unless specifically excluded in the policy. However, it’s worth noting that this level of coverage is usually reserved for well-maintained homes situated in low-risk areas. Not all insurance providers offer this comprehensive option, making it essential for homeowners to explore their options carefully when seeking maximum protection for their property.
Replacement Cost, Actual Cash Value, and More
You also need to be aware that “[i]fyour home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”
Concerning this, here are some things you need to consider when deciding on coverage:
REPLACEMENT COST
Imagine having coverage that guarantees the full cost of rebuilding your home, regardless of any increase in construction expenses, even if it surpasses your policy limits. This scenario becomes particularly crucial when construction costs surge in your locality while your insurance coverage remains stagnant.
Picture this: You’re protected by a policy that ensures your home can be fully reconstructed, accommodating any unforeseen spikes in building expenses. This provision acts as a safety net, especially in areas where inflation in construction costs outpaces the growth of insurance coverage. So, even if your policy’s limits seem fixed, you can rest assured knowing that your insurance will adapt to meet the actual rebuilding expenses, safeguarding your home against the impacts of fluctuating construction costs.
ACTUAL CASH VALUE
“Actual cash value coverage entails reimbursing the expenses required to restore or substitute your impaired property, factoring in depreciation. While this approach is less frequently employed for residential structures within policies, it’s commonly utilized for personal belongings. In essence, it accounts for the wear and tear of items over time, ensuring fair compensation that aligns with their current market value.”
FUNCTIONAL REPLACEMENT COST VALUE
This specific insurance coverage ensures that any damages to your home will be addressed, yet the materials used for repairs might not match the original ones in terms of quality or cost. For instance, if there’s damage to the plaster walls, the insurance may opt to repair them with drywall, a more economical alternative. While this solution restores functionality, it might not fully replicate the aesthetics or durability of the original materials. Thus, it’s crucial for homeowners to review their policy details thoroughly to understand the extent of coverage and potential compromises in material quality that may occur during repairs.
REPLACEMENTCOST VALUE
“Replacement cost value coverage ensures that your home can be restored to its original state by covering the expenses of repairs using materials that are equivalent in quality and type. For instance, if your home has plaster walls, they would be replaced with plaster during the restoration process. It’s important to note that while this coverage guarantees the rebuilding of your home to its former condition, the reimbursement amount is capped by the dwelling coverage limits outlined in your policy.”
EXTENDED REPLACEMENT COST VALUE
This particular insurance coverage offers a safety net that goes beyond the basic dwelling coverage. It ensures that in the event of damage to your home, you’ll receive compensation exceeding the face value of your dwelling coverage, up to a predetermined limit. Whether this limit is expressed as a percentage or a specific dollar amount, its purpose remains consistent: to provide financial cushioning in scenarios where the cost of rebuilding surpasses initial estimations. This extra layer of protection offers peace of mind, knowing that your insurance coverage adapts to unforeseen circumstances and potential fluctuations in construction costs.
Guaranteed Replacement Cost Value
“Guaranteed replacement cost value coverage ensures that in the event of a covered loss, such as damage to your home, your insurance will foot the bill for the complete repair or replacement, regardless of whether it surpasses the limits stated in your policy. However, it’s crucial to note that not all insurance providers extend this level of comprehensive coverage.”
When you opt for guaranteed replacement cost value coverage, you’re safeguarding yourself against the potential shortfall between your policy’s limit and the actual cost to rebuild or repair your home. It offers peace of mind knowing that, in the face of unexpected calamities, you won’t be left with significant out-of-pocket expenses. It’s worth exploring different insurance options to find the best fit for your needs and budget, as not all policies are created equal.
Determining Amount of Coverage Needed
Now, you need to determine exactly how much coverage you need from your homeowner’s insurance. You’ll need enough coverage to rebuild/repair your home in the case that is destroyed or severely damaged. You can estimate the cost to rebuild by multiplying your home’s square footage by per-square-foot local construction costs. YourFort Myers agent can also provide some guidance here. Just call(239) 360-3176 to find out more.
What you shouldn’t do is “focus on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”
When it comes to your belongings, your personal property, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can, however, lower the limit or purchase more coverage if you need to/
With respect to the liability limit, experts advise having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”
Cost of Homeowners Insurance
So what does homeowner’s insurance cost? The national average is about $1,600 per year, but this is an average and individual prices can be much higher or lower. In addition, your credit score can also affect the cost of your insurance.
And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:
- A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
- With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.
When It’s Time to Buy
Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. But there are so many influencing factors and available options, it’s difficult to know what kind of policy and coverage is right for you. An experienced Fort Myers agent can provide valuable assistance in many of these areas. We suggest that Fort Myers home buyers trying to untangle the homeowner’s insurance puzzle, contact us today at (239) 360-3176.