Insurance Plan 101

Purchasing an insurance policy is one of the most important tasks when buying a home. Your policy could mean the difference between a few hundred and a few thousand dollars of expenses should something happen. Most home insurance plans have a basic format for what?s included, with a few things dependent on location, but it?s important to make sure your policy is protecting you to the utmost extent.?


One of the more common misconceptions about home insurance is what type of water damage is covered under policies and damage caused by natural disasters. We cover this briefly in our article sharing costly things to consider when purchasing insurance. To simplify it even further, let?s break down exactly what should be included in your policy and what you should be prepared for.?


Before we dive in, there?s one important thing to note about insurance plans in general. There are three different levels of coverage which will determine the extent of what the insurance company will take care of in the event of something happening. These levels include:


    1. Limited Coverage | HO-1 and HO-2 Insurance: this is a bare minimum plan that only offers coverage for things specifically listed within the policy. Some lenders may not even let you choose this level of coverage and require the next option as the minimum in order for the loan or mortgage to be approved.?
    2. HO-3 Insurance: HO-3 insurance is the most common with ?nearly 80% of coverage on owner-occupied homes,? according to Nerdwallet. These policies cover the type of damage you?d normally expect with a home insurance plan with a few exceptions and a limit to personal belongings.
  • HO-5 Insurance: Otherwise known as broadest coverage, this is the most extensive plan and only available for homes that are in great condition and in low-risk locations. These policies cover damage from any cause except anything that?s listed out in the policy.?


With HO-3 Insurance being the most common, these plans should typically include:


  • Fire and Smoke Damage including anything caused by lightning, explosions, accidental fires, electrical sparks, or a power surge.
  • Common Weather Damage such as wind, hail, snow, or ice. Damages typically needed to be covered include a collapsed roof from heavy snow or ice, damage to siding from heavy winds, broken windows from hail, etc.
  • Along the same lines, any systems that freeze and require repairs or cause issues like a burst pipe or broken HVAC system.
  • Tree Damage and other pains caused by falling objects.
  • Water Damage caused from things like a burst pipe or faulty system that suddenly causes an issue. Any water damage through negligence or from weather-related flooding is not included.
  • Burglaries, Thefts, & Vandalism including any damage received through civil disturbances. Some plans are limited in the personal property that is covered so if you have many things of value, you might want to consider an addition to your standard policy.?
  • Vehicular Damage like that caused by a car or a plane (yes, a plane). It might seem impossible but it?s more so improbable.?


What?s not covered is usually more of a suprise than what is covered. This includes:


  • National Disasters. Floods, earthquakes, landslides, mudslides, sinkholes, and war-related accidents are not included in most insurance plans unless specifically noted. If you live in an area prone to flooding or any sort of ?earth-moving? events, it could be worth it to consider additional insurance policies in case of an emergency. Flood insurance can save people tens of thousands of dollars.?
  • Homeowner Neglect. It doesn?t matter what level policy you choose. If something is damaged because of failing to keep up with repairs, chances are it?ll be extremely difficult to persuade your insurance company. An example of this would be a roof that hasn?t seen repairs in decades that caves in because of a bad snowstorm.?
  • Pest Damage. If you think a critter has made itself a home in your attic, now might be a good time to consider hiring a service to relocate it. Pest damage can cost homeowners thousands of dollars over time if they aren?t dealt with immediately and most insurance policies don?t cover these damages. Raccoons, for example, have been known to eat through siding, insulation, and even drywall, a project that would cost far more than the fee to have someone remove and relocate them safely. Pest damage includes anything caused by animals, insects, rodents, and even pets.?


Home Insurance doesn?t only cover repairs though. Everything mentioned so far would fall under the category of dwelling and structures. Policies also cover personal property, living expenses, liability, and medical. These are the less obvious necessities you could need help covering should something happen.


Personal Property. A little earlier when discussing burglaries and thefts, we mentioned that some plans limit the personal property that is covered in policies. The Personal Property section of your policy includes all of your possessions and valuables. There is a limit to what?s covered though. So if you have something particularly valuable inside your home, like an expansive and expensive wine collection, it might be best to consider extra coverage.


According to The Simple Dollar, ?it?s advisable to do an inventory of your belongings, especially if you have collectibles, expensive jewelry, or other valuables that may exceed the amount of standard personal property coverage your home insurance policy comes with. If your personal property amount exceeds your standard coverage, you can buy additional coverage for the higher-valuable goods.?


Living Expenses. Let?s consider this for a moment. If an unfortunate event occurs like a fire, and your home is not in living condition, where will you go? In the event of damage to your home that?s so severe you can?t live in it, many standard policies provide temporary living expenses. According to Investopedia, your policy would ?reimburse you for the rent, hotel room, restaurant meals, and other incidental costs you incur while waiting for your home to become habitable again.? There can be limits to these expenses so make sure to understand what your plan?s coverage includes.


Liability. This coverage within your policy protects you in the case of a lawsuit over an injury or property damage. According to Money Under 30, ?liability coverage should be comparable to what is customary in your area. This can vary by state since the laws covering damages are different.? Most policies generally start at $100,000 and increase from there.?


Medical Coverage. Similar to liability, medical coverage protects you in the case someone gets hurt on your property. This can include anything from a dog bite to a broken arm from an icy driveway.?


Owning a home is a big responsibility in itself. The last thing you want is to be at risk for additional financial burdens because of ill preparation. Home Insurance is an expense that should be considered in your budget when looking for a home. Being prepared for the cost is much easier in the long run than reacting to the cost.?


Insurance policies vary in price based on the age of your home, the quality of the home, the size of the property, any of the liabilities that come with the property or location, and so much more. The Simple Dollar shared a great list of questions to ask your insurance agent the next time you speak with them so you can make sure to purchase the best policy for you.

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