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From the Colonel - November edition - Buying Home Insurance: What Do You Need to Know?
Buying Home Insurance: What Do You Need to Know?
If you’re looking into buying a new home, you probably know that you will need to buy homeowner’s insurance, too. All the policies involved with this process can be confusing and overwhelming, that is why I thought it would be interesting to help you understand your coverage options by breaking them down. You will find them below.
There are different types of coverage
Every insurance policy is different. Therefore, it is important that you read yours thoroughly to ensure you understand what it will cover. The different types of policies are:
HO-1 Basic Form
This is the simplest form of home insurance there is. However, this policy is hardly ever seen. A number of mortgage companies have explained that HO-1 Basic has fallen into disuse due to its ‘modest’ coverage, which covered only specific events, like:
Fire or smoke.
Hail and Windstorms.
Damage from vehicles.
Damage from aircraft.
Riots and civil commotion.
HO-2 Broad Form
This is a more comprehensive form of HO-1, but it is still very specific. It covers all of the events listed under HO-1, plus:
Damage from the weight of ice, snow, or sleet.
Freezing of household systems like AC or heating.
Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems.
Accidental discharge or overflow of water or steam.
Sudden and accidental damage from artificially generated electrical current.
Your personal belongings.
HO-3 Special Form
This is the most common form of home insurance these days. HO-3 differentiates itself from the previous two policies due to its broader coverage. This policy will cover any kind of damage to your home and/or your belongings, with the exception of some specific events that are listed under the policy’s terms. Ensure that you review everything in the document to prevent any unfortunate surprises.
HO-5 Comprehensive Form
As suggested by its name, HO-5 is the most comprehensive form of homeowner’s insurance one can buy. Similar to HO-3, this policy will cover any unexpected event, with the exception of those unlisted. Nevertheless, this policy has fewer exceptions and more often than not, one can choose their own coverage limits.
Note: You can find other forms of homeowner’s insurance that were not mentioned here. They are for particular kinds of housing such as rentals, condos, or mobile homes.
Not everything is covered!
The exclusions are the most important parts of a policy, and understanding them is vital to avoid disappointment in the case of tragedy. Normally, events like earthquakes, floods, landslides, and construction needed to bring your home up to code will not be included in a basic HO-3 policy. You will want to read over any policies while you are trying to figure out the whole home-buying process, so you can be aware of all the specific exclusions and avoid unfortunate surprises.
Depending on where you live, you may need more coverage than is offered in the standard policy. If that is the case, you will need rider insurance. A rider is a provision that adds or amends coverage to your policy. Even though riders are an additional cost, you will want to get it as it normally proves to be worth it. It is always better to be safe than sorry.
How reimbursement works
If you ever find yourself in a situation where you need to make a claim and your policy does cover it, the company will send you the payment for any damage to your house or belongings. There are three different ways in which they can reimburse you:
Cash value coverage
The insurance company issues a payment for the cost of replacement, minus a deduction for appreciation. This form of reimbursement normally comes with more affordable policies, however, it also comes with the smallest payout.
Replacement cost coverage
There is no deduction for appreciation. Nevertheless, there is a cap to the coverage. If the costs surpasses the policy cap, you might end up paying out of pocket.
Guaranteed or extended coverage
There is no coverage cap for this type of payout. The insurance company will pay for everything, even if the cost goes above the cap. This is, however, the most expensive kind of policy.
Don’t forget that when it comes to Real Estate, “Dan’s The Man”. Please let me know if I can help you with anything!
Fathom Realty, Chapin SC
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Dan Lang is a realtor/broker in Chapin, South Carolina. Dan retired after 29 years of service in the Marine Corps as a Lieutenant Colonel. He has personally moved more than a dozen times during his ca....
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