Everything you need to know about home insurance

My wife and I have been homeowners for just over a year now. As we had only rented before this, one of the things we’ve had to figure out is home insurance.

Early this year, in fact, is the first time I had to shop around for home insurance. Our rate had gone up by $410 and by shopping around I managed to lower it by $500. I wrote a post on how I did this.

In that post, I talk about the different coverages that home insurance provides and how I was able to lower the premium while maintaining the same level of coverage by playing around with the different limits.

The post was long enough without getting into the nitty gritty of home insurance so I left out some explanation. In this post, I fill in those gaps.

Below you’ll find a comprehensive list of the terms you should be aware of when purchasing home insurance. Each term links out to a website where you can find further info.

Home insurance terms made simple

Coverage A. Dwelling: covers your house, including an attached garage/deck, verandas/screened-in porches/etc., chimneys, countertops, flooring, countertops, cabinets, vanities, and built-in appliances. If home is damaged by a covered accident, dwelling coverage may pay to repair, rebuild, or replace your home’s physical structure.

• Protects against fire, hail, lightning, tornadoes, explosions, falling objects, theft, snow, motor vehicle, etc.
• Doesn’t protect against flooding, earthquakes, sewer backups, or lack of maintenance.

Coverage B. Other Structures: protects structures on your property not physically connected to your home, such as a detached garage, storage shed, guest house, gazebo, or fence. The limit is typically set to 10% of your policy’s dwelling coverage, though this can vary by insurer.

Coverage C. Personal Property: helps cover the cost of your personal items if they are destroyed, damaged, or stolen due to a covered loss. Personal property includes things like furniture, clothing, electronics, sports equipment, and kitchenware. Typically set to a percentage of dwelling coverage—50% to 60% is common. Also known as contents coverage on a home policy.

• Personal Property coverage can be replacement cost or actual cash value. Let’s say you bought a computer a few years ago for $1,000 and it gets broken in a covered accident.
  • With replacement cost, the insurer would give you enough money to buy the same computer, brand-new.
  • With actual cash value, the insurer would give you the depreciated value of the computer, which is likely to be much less than the cost to purchase a new one.
• Due to this difference, replacement cost coverage is more expensive, but recommended.

Coverage D. Loss of Use: may pay for your hotel/living and meal expenses if you’re unable to live in your home due to a covered accident. Typically set to 10% or 20% of your dwelling coverage.

• Loss of use covers the excess of what you normally spend for certain things. Let’s say your home is damaged by fire. You’re unable to use your kitchen to cook, so you’ve been eating your meals at a restaurant. Your tab at the restaurant was $500 for the week, but you normally spend $400 a week for groceries. Your loss of use coverage will pay out the difference of $100.
• May cover temporary housing (hotel or rental home), additional fuel costs/utilities/food expenses (groceries, restaurants, cooking supplies), storage units, boarding of pets, laundry, moving costs, public transportation fees, and parking fees.

Coverage E. Personal Liability: protects you financially if you’re responsible for damages or injuries to others. This protection extends to household relatives, so if your child accidentally damages your neighbor’s property, you may be covered. Typically set to $100,000, $300,000, or $500,000. Also known as personal liability insurance.

• Generally covers injuries on your property, damage to others’ property (e.g., your child hits a baseball through a neighbor’s expensive stained-glass window.), lawsuits and lawyer/court fees (if sued over an accident, your personal liability coverage may help pay for a lawyer and legal expenses, as well as any settlements against you.), and dog bites (varies by insurer and dog breed; often not covered.)
• Does not cover car accidents, intentional harm or damage, your own injuries or damages, or business claims.

Coverage F. Medical Payments: helps pay for expenses related to an injury that occurs on your property—whether you’re found liable or not. Used to cover small, less-costly injuries.

• With personal liability coverage, the policyholder must have been deemed liable to have caused or aided in the event of the injury. With medical payments coverage, it doesn’t matter who’s at fault. Your home insurance policy could still help to pay for the damages.
• If a friend is over for a barbecue and trips on the patio steps, resulting in a hospital visit and a sprained ankle, you can use medical payments coverage. It’s a fairly minor injury that likely wouldn’t result in too many medical bills or a lawsuit.
• If that same incident resulted in a broken ankle and a lawsuit, it would be a personal liability claim.

Deductible: The amount you pay out of pocket before the insurance starts paying.

• Let’s say your home insurance has a $2,000 deductible. If you have a covered accident which will cost you $5,000 to fix, you’ll pay the first $2,000 out of pocket and the insurance will pay the remaining $3,000. The deductible applies on each claim you make.

Extended replacement cost: an endorsement on your home insurance policy that extends your dwelling coverage by 10% to 100% of the cost to rebuild your home. Also known as extended dwelling coverage or increased replacement cost.

Service line coverage: an endorsement that can be added to home insurance policies to cover the cost of repairing or replacing a broken utility line (e.g., water, power, cable, internet, gas, sewer) running into your home. Your coverage limit for a damaged service line is often up to $10,000 and may include a deductible. Also known as buried utility lines coverage.

Refrigerated property coverage: protects the contents of freezers and refrigerators in the event that electrical service to a device is interrupted. The endorsement usually has a low limit and a deductible. Unless you’re someone who has lots of food in your freezers or refrigerators, you likely don’t need this coverage, though it’s not always possible to remove it from the policy.

MGA: Managing General Agent

Fully Earned Premium: the amount of premium that is retained by the insurance company regardless how long you have the policy.

• For example, an insurance company has a $150 fully earned fee. You purchase and cancel the policy on the same day. The $150 fully earned fee isn’t refundable.

Inflation protection: a home insurance coverage endorsement that automatically increases your policy’s dwelling coverage limit to reflect the current construction and labor costs in your area.

• Say your home is insured for $150K and your inflation protection coverage is set at 7%. If you suffer a total loss of your home 90 days into your year-long policy term. Your dwelling coverage limit will be upped to reflect an 7% daily inflation rate, so your coverage limit would now be around $152,611¹, instead of $150K.
• With inflation protection coverage, your dwelling coverage limit will increase according to the rising costs of building materials and labor— typically from 4-8%—but your home insurance premiums will only increase by 2-4%.

Ordinance or law coverage: an additional home insurance coverage that covers the increased cost of complying with local building codes after a covered loss. Typically included in homeowners insurance policies up to a limited amount — generally 10% of your home’s dwelling coverage limit.

• With 10% coverage, if your home is insured for $350,000, you’d have up to $35,000 in building ordinance or law coverage.

Brand New Belongings: a Nationwide feature. An optional, add-on endorsement that can provide funds to repair or replace certain belongings in the aftermath of a covered loss, without a deduction for deterioration and depreciation.

• This essentially turns the Personal Property coverage into replacement cost rather than actual cash value.

Water backup: provides coverage if water backs up through your sewer, drains, or your sump pump overflows.

Landlord’s furnishings: provides coverage for appliances, carpeting, and other household furnishings in an apartment or room that’s rented out to others.

Summary

Home insurance isn’t complicated—it just takes a bit of time to wrap one’s head around the terminology and the costs associated with each of the coverages.

If you understood this post and read my five-part play on how I lowered our home insurance premium by $500, you know pretty much all you need to know about home insurance.

In short:

1. The more expensive your home, the more expensive your home insurance.
2. Raising your deductible and lowering your coverage limits are two ways to lower your annual premium. Be sure you’re able to cover the deductible, that you’re comfortable with the limits, and that the reductions make sense—lowering a limit by $100,000 to save a dollar isn’t worth it.
3. Bundling car and home insurance is another good way to save.
4. Check your insurer’s website for discounts, then call and ask. Then call back to get a different rep and ask again. It’s possible that a discount was missed or that you might be able to enroll in a program, like Nationwide’s smart home program, for extra savings.
5. Each insurance company has its own quirks and terminology. Nationwide, for example, has Brand New Belongings and Allstate has Claim Rateguard. Be sure to understand the quirks of your insurer.

For a good overall summary, see this insurance coverage summary from Progressive.

Godspeed, my friend. May your discounts be high and your home insurance premiums be low.