Best Way to Read Your Home Insurance Policy

02 Feb

Purchasing home insurance is an absolute necessity and is an important part of your financial portfolio as a homeowner. Understanding the coverages that your policy provides is also extremely important. 

While a home insurance policy can seem complicated, they are typically pretty standard and not that mind bending if you have a basic understanding of insurance terms. We thought it might be helpful to have a quick look at how to read a homeowners insurance policy. Keep reading to learn everything you need to know about a homeowners policy and the coverage it provides:

How to read your home insurance policy

When it comes to a homeowners insurance policy, the declarations page, which is usually the first page, is one of the most important sections. It spells out your details such as your name, the address of the property being insured as well as the various coverages, coverage amounts and deductibles. The declarations page also includes information on any additional policy endorsements and your annual premium.

The policy itself is usually after the declarations page and includes all of the policy details as well as policy language, exclusions and conditions, and definitions of important terms used in the policy.

Sections of a homeowner insurance policy

A homeowners policy includes a variety of coverage types and each one typically comes with a coverage limit. The main element with homeowners insurance is the dwelling coverage and some of the other coverages in the policy use a percentage of the dwelling coverage amount when determining coverage limits. Let’s have a look at the various sections of a policy and what they cover:

  • Dwelling coverage: This is the most important section of the policy. It pays to repair or rebuild your home’s structure if it is damaged or destroyed by a covered peril. In most cases, your dwelling coverage limits are what it would cost to rebuild your home as it is now, it is not the current market value of your home. 

While your home may be worth $500,000, that number takes into account the property it sits on as well as local market conditions. Rebuilding your home may only cost $300,000 and that is what your dwelling coverage limits will reflect. Your insurance agent can help you determining the dwelling coverage amount you should be carrying based on local building costs. 

  • Other structures: This coverage will repair or rebuild other structures on your property. This can include fences, outbuildings, sheds, or even a gazebo. Coverage limits are typically 10 percent of your dwelling coverage so if you are carrying $300,000 in dwelling coverage, your other structure coverage is capped at $30,000.
  • Personal property: This coverage will pay to replace your personal property if it is destroyed by a covered peril. This includes electronics, your clothes, furniture etc. Personal property coverage is typically capped at 50% or your dwelling coverage but it can be as low as 20% so make sure you fully understand your coverage limits. 
  • Loss of use: If your home is unlivable or completely destroyed due to damage from a covered peril this coverage will help pay some of your expenses such as hotel bills, restaurant costs and even dry cleaning. 
  • Liability: If someone is injured on your property, liability coverage will help cover their medical bills and any legal bills that crop up if they decide to sue you, up to your coverage limits. 

In addition, if you, a family member or even your pet causes damage to someone else’s property, your liability coverage will help cover any costs, up to your coverage limits. Most standard homeowner policies come with $300,000 in liability coverage but this can be upped if you have significant assets and need more coverage.

  • Medical coverage: This will provide a small amount of coverage to cover medical costs if a guest is injured on your property, but you are not legally responsible for the injury. This coverage is usually capped at around $5,000.
  • Endorsements: Add-on endorsements can vary by insurer as well as the state you live in but are additional coverages you can add to your policy, for an additional premium. Endorsements can include coverage for identity theft, high value items such as jewelry and coverage for a home business.

Reviewing your home declarations page

The first page of your policy is typically the homeowners insurance declarations page, this is a snapshot of the policy as well as your coverages and limits. It includes a wide variety of information including:

  • Information about the insurance company
  • Name of insured
  • Property location
  • Selected coverages
  • Coverage limits
  • Deductibles
  • Endorsements
  • Policy number
  • Policy term

If you have a mortgage one the property, the mortgage company will be listed to show its insurable interest in the property.

You should review your declaration page whenever you get a new policy or renew your current policy to make sure all of the coverages you need are on the policy and the deductibles and endorsements are correct. 

Home insurance exclusions

Most standard homeowner insurance policies come with exclusions to coverage. Make sure you read through the exclusions and understand the limits of your coverage. Most policies will exclude the following:

  • Normal wear and tear
  • Construction defects
  • Foundation failure
  • Pet and animal damage
  • Earth movement
  • Intentional loss
  • Nuclear hazard
  • Mechanical breakdown
  • Mold and fungus
  • Flood and earthquake damage

If you live in an area where flooding or earthquakes are common you will need a separate flood insurance or earthquake policy to be fully protected. 

Covered Perils

Finally, let’s have a quick look at the standard perils that homeowners insurance protects against. While it can vary by insurer, most policies offer coverage for the following perils:

  • Fire and smoke
  • Lightning strikes
  • Windstorms and hail
  • Explosion
  • Vandalism and malicious mischief
  • Damage from an aircraft, car or vehicle
  • Theft
  • Falling objects
  • Weight of ice, snow or sleet
  • Water damage

Covered perils can vary by policy so always check your policy to make sure you are covered.

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