While no one wants to overpay for home insurance, it is far worse to be under-insured. Without adequate limits and the right types of coverage, you could face a financial shortfall should you ever need to file a claim. But how much home insurance is enough? In this article, we will explore the various types of coverage included in the two most frequently purchased home insurance policies and help you determine how much coverage you really need.
Understanding HO-3 and HO-5 Home Insurance
Home insurance is offered in many different forms. There are basic policies that provide too little coverage to protect against a major loss adequately, and there are policies with broader coverage that safeguard you against the unexpected. Often referred to as ‘standard coverage,’ the HO-3 insurance policy is the most frequently purchased form of coverage, followed closely by the more comprehensive HO-5.
Both types of home insurance provide open peril coverage to protect your home’s structure against all risks not excluded in your policy. However, only HO-5 offers open peril protection for your personal belongings, too. With HO-3, personal belongings are only protected against the named hazards listed inside your insurance policy.
There are several coverages listed on HO-3 and HO-5 home insurance policies. Each serves an important purpose in protecting you against financial loss.
Dwelling (Coverage A)
The first coverage you may notice on your policy is for your home’s structure (Dwelling). This section will include your deductible, which is the amount you agree to pay toward the cost of a claim. We recommend choosing a deductible you can reasonably afford in the event of an unexpected loss. Though high deductibles of $1,000 to $2,000 can lower your annual insurance premiums, low deductibles of $500 can significantly reduce your cost burden when filing a claim.
You will also need to decide on a coverage amount for your Dwelling. Most lenders require enough coverage to at least pay off your mortgage, but we recommend purchasing enough protection to completely rebuild your home with same-quality materials and finishes if it is damaged or destroyed due to a covered event. Thanks to the ‘Co-Insurance Rule, too little coverage puts you at risk of a financial shortfall for total losses, as well as partial losses since insurers can under-fund your claims in proportion to the percentage your home is under-insured.
For help calculating your Dwelling coverage needs, contact an agent here at Patriot Insurance. We’ll use our home cost estimator to assess the local cost of reconstructing your home, as well as added costs, such as debris removal.
Other Structures (Coverage B)
Most properties have additional structures other than the primary dwelling; this includes all separate structures that are not used for business purposes. Examples include:
- Pole Barns
- Detached garages
- Swimming pools
- And more
Insurers typically include coverage for Other Structures by default, and usually at no additional cost. Default limits are usually about 10 percent of your Dwelling coverage, although you can purchase additional coverage if necessary. Like Coverage A, the other structures on your property are not protected against exclusions, such as flooding. Talk with an agent here at Patriot Insurance if you think you may need supplemental coverage or higher limits than are available by default.
Personal Belongings (Coverage C)
The things you own are protected under Coverage C of your home insurance policy. This covers all of your belongings for their actual cash value (ACV); that is the depreciated value of your damaged or stolen items. Typical coverage for Personal Belongings is between 50 and 80 percent of your Coverage A limit, although you may need additional coverage for high-value items that are subject to dollar limits.
To help you better understand the actual value of your belongings, we recommend maintaining an inventory of your possessions and updating it frequently. Mobile apps are perhaps the easiest way to keep track of this information and also store it for safe-keeping.
Loss of Use (Coverage D)
If disaster strikes your home, you may have to live somewhere else while it is being repaired. Loss of Use coverage helps pay for the additional living expenses you incur as a result of not living in your own house. This could be the cost of rent, hotel fees, laundry service, meals, and more. While Loss of Use coverage has its limits, they are often set to 20 percent of your Coverage A limits by default.
Continue reading part two of “How much home insurance is enough?”