Understanding homeowners insurance

If you've ever owned a home, you may think you know the drill about homeowners insurance. After all, it's required for anybody who has a mortgage. Most people get it and forget it. But it's important to know how your policy works. This can help lessen any overwhelming feelings of having to file a claim if you experience a covered loss.

Here are the basics: You get a policy and agree to pay a premium for coverage you select. In return, your insurance company promises to pay for damage, up to your policy's limits, in the case of a disaster. They'll help cover the cost of repairing or rebuilding your home, as well as damage and theft of personal belongings.

If a disaster or theft happens, you file a formal request, or "claim," with your insurance company. But before they cover your loss, you have to pay a deductible.

A deductible is the out-of-pocket amount you pay before your insurance pays the rest of a claim. You and your insurance company agreed to the deductible amount when you bought your policy. Typically, the claim payment issued by your insurance company is for the total amount of the loss minus your deductible.

What's the difference between a percentage deductible and a flat-rate deductible?

The concept of a deductible may seem straightforward, but here's where things can get tricky. There are two types of deductibles. Understanding which you have is important, as it can have a big impact on your out-of-pocket costs if you have to file a claim.

In most places, deductibles can be either a fixed dollar amount or a percentage.

• Percentage deductibles are a percentage of your "dwelling limit" and change if the rebuild value of your home changes.
• Fixed dollar deductibles are an exact amount and don't change with the rebuild value of your home.

"Percentage deductibles are based on the estimated cost to rebuild your home, not the market value or the amount of the covered loss," says Melani Scamardo, USAA Advice Director.

Your dwelling limit can change over time because of factors like inflation or property improvements. When the dwelling limit changes, your percentage deductible changes, too. For example, if your dwelling limit is $400,000 and your percentage deductible is 1%, you'd pay $4,000 out of pocket. But if your dwelling limit increases to $450,000, then your percentage deductible would increase to $4,500.

How do I know if I have enough dwelling coverage?

Your dwelling limit is the maximum amount your insurance company will pay to rebuild your home if it's damaged by a covered loss. It's a good idea to review your dwelling limit every year to confirm it's enough to rebuild your home.

Be sure to consider current costs of construction, materials and labor.

"There's a difference between how much it would cost you to rebuild your home and the market value of your home," says Scamardo. "Your dwelling limit is calculated from your home characteristics."

"Most people assume that the home insurance company updates the policy for them as changes are made to the home, but that's not the case."

So, if you have made or are considering making home improvements, make sure to also update your policy's dwelling limit. Everything from adding an attached deck to renovating a kitchen can all increase your home's rebuild value.

What's replacement cost versus actual cash value?

When you set up your homeowners policy, you may have to decide how you want any losses reimbursed. These losses could be to the home itself or your personal belongings. There are two approaches:

• Replacement cost. This is the amount needed to replace or rebuild an item or home with a similar, new one. Let's say a covered loss ruins your older TV. Replacement cost would pay for a similar model at today's price. If a covered hailstorm damages your 10-year-old roof, it would pay for a new roof made of similar materials.
• Actual cash value. This coverage considers depreciation in the value of your property. So, if a covered event destroys your 10-year-old couch, you get what it's worth at the time of loss, not the money needed to buy a new one.

The amount your insurance company will reimburse you is always subject to your policy limits. Also, keep in mind that your deductible still applies for both replacement cost and actual cash value.

What are the pros and cons of a low premium?

Scamardo cautions that, while a higher deductible can save you money through a lower premium, it also increases the risk you take. "Take into account the amount of cash you typically have on hand in an emergency fund or in your bank account."

Think about your monthly budget. It may include expenses like your mortgage, groceries, gas and fun money. Do you have leftover money each month that you could use to pay an unexpected deductible? Do you have enough savings to cover three to six months of your living expenses in your emergency fund?

If you answered no to those two questions, you may want to choose a lower deductible. Yes, you'll pay a higher premium, which would slightly increase your mortgage payment if your insurance premiums are paid through an escrow account. But you'll be better able to pay that lower out-of-pocket deductible if you need to file a claim.

For more information on the claim process, check out our Claims Center. "Here, USAA members can see how the process works and when they'd need to pay out of pocket in order to have their property repaired or replaced," Scamardo says.

What does homeowners insurance cover?

Every insurer is different. The descriptions below are for informational purposes only. You should read over the declarations page of your insurance policies for specific details on your coverage.

Most companies' homeowners policies cover fire, theft, vandalism and some weather-related events. Your policy should cover physical damage inside and outside your home. This includes some spaces and things you may not consider, such as:

• Floors, walls and cabinets inside your home.
• Garage doors, windows, chimneys and roofs on the outside of your home.
• Detached garages, fences, sheds and other structures not attached to your home.
• Furniture, jewelry, clothes, electronics and other things you own.

What's loss of use?

If a covered event leaves your home too damaged to live in, you may need temporary housing. This coverage pays for increased expenses, above your normal living expenses, to maintain your standard of living. That could include money spent on hotel or apartment rent, restaurants, laundry services, moving expenses and pet boarding.

Loss of use coverage is included with many homeowners insurance policies, but not all. Check your policy to verify if it includes this coverage. If a covered loss causes you expenses because you are unable to live in your home, you'll want loss of use coverage.

How does liability coverage work?

This is one of the most important pieces of your homeowners coverage. It may protect you if you're found to be at fault for someone's injury or property damage. It also may cover your legal costs with such claims.

Generally, you should carry liability coverage at least equal to your net worth — the value of your assets minus your debt. If your assets are higher than the maximum coverage allowed on your homeowners insurance, you can typically get extra liability coverage with an umbrella insurance policy. It can help protect the savings and other assets you've worked hard to get.

What are medical payments to others?

This part of your policy covers medical costs for people injured on your property. It also covers those injured by you while you're away from your property. It doesn't include costs incurred by you or your family.

With limits between $1,000 and $5,000, this coverage isn't meant to address severe events. It simply provides a way to take care of smaller medical costs to injured houseguests. That's smart, since doing so may help you avoid expensive liability claims.

What's personal property protection?

Most policies cover personal property you own or use anywhere in the world, subject to some limits.

"If you're in the military, it's important to think about the needs you have that are unique to service members," says Scamardo. "Be sure your homeowners or renters policy covers uniforms and military gear. You want to be able to cover your personal belongings at today's replacement cost, with no depreciation."

Your policy also covers other people's stuff that you're borrowing or using.

Some items covered for theft losses are subject to dollar limits. These include coins, jewelry, firearms, silverware and stamps. If you have any of these and they're valued above your policy limit, consider a Valuable Personal Property policy.

Cyber-crimes are becoming more apparent. Most of us have a mobile device, do virtual banking or shopping online. And there are scammers constantly coming up with new schemes. Homeowners insurance can be helpful, for example USAA Homeowners Insurance policies also include up to $5,000 of identity theft coverage.‍ ‍ ^{See note 1} If you are concerned about cybercrimes impacting your financial wellbeing, it may be a good idea to consider personal cyber insurance.

What "weather-related events" do policies include?

Standard homeowners insurance policies cover damage from most natural events like lightning and fire. However, these vary by state.

Weather-related events not typically covered include:

• Floods. If you live in Special Flood Hazard Areas, flood insurance is mandatory. But regardless of where you live, you should consider purchasing it. That's because even a few inches of excess water can cause massive damage.
• Earthquakes. For an extra premium, you can add earthquake coverage to your homeowners policy.
• Wind and hail. In some states, particularly those on the coast, wind and hail damage requires separate coverage.

When you purchase your homeowners insurance policy, check to see if it includes wind and hail coverage. Your insurer may offer specific endorsements for wind, hail and earthquakes that can be added to your policy. Those endorsements may also have a specific deductible that is different from your policy deductible.

"Many times, members don't realize tornado and hurricane damage falls under the wind and hail category," says Scamardo.

Flood damage is typically not covered on homeowners insurance policies. However, flood coverage is offered through the National Flood Insurance Program (NFIP) (Opens in New Window).‍ ‍ ^{See note 2}

“Floods can occur anywhere,” says Scamardo. “If it can rain where you live, it can flood.” Even if you don't live in a high-flood risk area, it may be a good idea to consider flood insurance.

When should I consider extra liability coverage?

Several situations might call for an umbrella policy, which provides further liability coverage. Some of these include:

• Higher risk items at your home. If you own a large dog, swimming pool, or trampoline, you may have a higher liability risk property.
• Lots of visitors. Perhaps you host dinners or Super Bowl parties, hire contractors to clean or repair your home, or regularly hire a babysitter. Frequent guests can leave you open to liability by increasing the chances of someone injuring themselves at your house.
• Social media presence. If you write online reviews about your experiences, this could increase the likelihood of a business or person suing you. A regular homeowners policy doesn't cover libel and slander and wouldn't protect you.