Published On: Thu, Jul 11th, 2019

Insurances you should be doing for your home right now

It can all happen so fast. One moment, you’re enjoying a hot summer afternoon in your backyard. Then, a distressing tone comes over the radio. The Emergency Alert System freezes you in your tracks, as the sky darkens.

A robotic voice dispassionately confirms one of your deepest fears: The National Weather Service has issued a Tornado Warning. As thunder cracks in the distance, you gather your family and flee inside.

You watch the storm rage, until the rain, lightning, hail, and intense winds get too scary to watch. You make for the basement – shortly after, you hear a deafening roar. Two minutes later, you emerge, only to find your roof in tatters.

Would you be able to afford these repairs on short notice? The vast majority of us don’t have the means – that’s why we have insurance.

Many types of homeowner’s coverage exist. In this guide, we’ll analyze each, so you’ll understand which plans are best for your needs.

 

Types of insurance/warranties you can get for your home

No law, federally or at the state level, compels you to get homeowner’s insurance. However, it is practically mandatory, as no broker will extend financing to a buyer who refuses coverage.

If they did, people could walk away from their mortgages whenever disaster struck. This would cost brokers MILLIONS, potentially putting smaller firms out of business. Unless you have the dough to purchase a property 100% out-of-pocket, you’ll need insurance to get financing. Period.

Having said that, many different types of home insurance exist. We’ll explain each, in brief, below. 

 

Basic Form (HO1)

As the name suggests, basic form insurance is a bare-bones policy. It only protects you against the “ten named perils.” These are:

  1. Fire/smoke
  2. Explosions
  3. Hail/windstorms
  4. Lightning
  5. Vandalism
  6. Theft
  7. Damage caused by aircraft
  8. Damage caused by motor vehicles
  9. Riots/civil unrest
  10. Volcanic eruptions

Insurance companies will reject any claim that does not fit into these airtight categories. Also, the theft category only covers damage to the structure, not the value of items stolen.

Because of their ultra-narrow scope, HO1s are hard to find. When you can, they are the cheapest policies you can buy. However, we don’t recommend them, as broad forms, which cover a more extensive array of issues, are only marginally pricier.   

 

Broad Form (HO2)

Can’t afford a special/comprehensive form policy? Ignore the low price-points of basic policies and opt for a broad form instead. For just a few dollars more, HO2s cover a wider range of defined perils. They defend against everything named in a basic policy, plus:

  1. Ice/snow/sleet
  2. Falling objects
  3. Freezing damage in heating and AC units, and other home systems
  4. Sudden, accidental failure of household systems, like pipes
  5. Damage caused by an accidental discharge/overflow of steam or water
  6. Sudden and accidental damage caused by an artificial electrical current (e.g., a power surge).

Unlike HO1s, most HO2s cover loss of property. Occasionally, insurers may also cover personal liability. Carefully read the terms and conditions of ANY broad form before signing on the dotted line.

 

Special Form (HO3)

Most home buyers find special form policies, or HO3s, to be the best value in home insurance. Special forms are a “named peril/open peril” policy. This designation means your insurance company will cover the structure of your house against all but excluded perils. These include (but are not limited to) the following:

  1. Floods
  2. Earthquakes/mudslides/landslides
  3. Damage caused by insects, vermin, rodents, and birds
  4. Wear & tear, deterioration, neglect
  5. Any damage caused by the settling of your foundation
  6. Fungus & mold damage
  7. Damage caused by pets or animals
  8. Intentional damage (e.g., arson performed to collect insurance money)
  9. Government action, war, nuclear hazards
  10. Damage caused by the enforcement of laws and ordinances 
  11. Corrosion, rust, and smog

However, an HO3 only covers the loss/damage of personal property caused by the 16 named perils. This proviso means you are on the hook for anything that falls outside these stringent regulations.  

 

Comprehensive Form (HO5)

If you want to protect your home AND your belongings, look into getting comprehensive form coverage. Known as an HO5, it is a 100% open peril policy. If any unexpected event (that the insurer doesn’t exclude) occurs, your insurer will cover BOTH your structure and belongings against damage/loss.

HO5s also cover personal liability. If a roofer sues when they fall off your house, your insurance will cover that.

Comprehensive forms cover a LOT, but always read the fine print. This way, you can compare the excluded conditions, caps, etc. of multiple firms before making a decision.   

 

Condo Form (HO6)

Are you moving into a condominium complex? Your building’s insurance may cover damage to shared systems, but it doesn’t protect your belongings, nor your liability. By getting an HO6, your insurer will cover you against litigious dinner party guests who may sue after getting “food poisoning.”

 

Mobile Home Form (HO7)

Mobile homes, for whatever reason, aren’t classified as “homes” by many insurance companies. A policy, called an HO7, covers these unique structures. They mimic an HO3, but some contain provisions for extended belongings coverage.

 

Older Home Form (HO8)

Older homes have charm. Unfortunately, more can go wrong with these structures, making them difficult to insure. Fortunately, HO8 policies, or older home forms, are readily available. They mirror HO1 policies, which means they only protect against the ten named perils.

However, unlike HO1s, HO8s only pay out on an “Actual Cash Value” basis. You receive payouts based on the property’s assessed worth – not the cost of complete replacement. Unless you have no other option, we advise seeking out different policies. 

 

Title Insurance

That nondescript, innocent-looking home on the corner can hide a lot of secrets. Some could expose your broker (and YOU) to significant financial risk. For example, let’s say the previous owner of your 1950s ranch bungalow skipped out on their property taxes. After purchasing the property, you find out the city has placed a lien against your deed. 

Because these properties cannot legally change hands, it would cease to belong to you. You’d be allowed to walk away, leaving your broker holding the bag. Of course, you’d also be out of a home, less closing costs and mortgage payments.

Title insurance protects borrowers and lenders against these situations. As such, these policies are practically mandatory – no broker will lend to you if you refuse.

 

Home builder’s warranties

Brand new homes look solid on the outside. However, the quality of workmanship can vary from one builder to the next. Many contractors cut corners – this could leave you with a home that’s falling apart, just years after completion.

For this reason, always opt for a builder that guarantees their work with a warranty. These policies typically extend over ten years. Superficial elements, like paint and flooring, have the shortest coverage, usually lasting a year. Builder warranties cover more critical aspects, such as the framing and the foundation, over 5-10 years. 

 

Home warranties

All it takes is the failure of one appliance/home system to remind us how dependent we are on technology. However, systems like central air can cost THOUSANDS to fix, but homeowner’s insurance doesn’t cover against wear & tear.

Home warranty plans fill this gaping hole. Like insurance, you pay a monthly premium. Whenever something covered breaks, the homeowner calls their home warranty firm and files a claim. Upon approval, they dispatch a technician who fixes the issue. Service fees included, the annual expense can be less than average maintenance costs for owners of older homes.   

 

What’s required, and what’s optional

Life keeps getting more expensive. In response, we try to minimize our outgo by running all expenses through the wringer – home insurance and warranties included.

Let’s start with the former – do we really have to get homeowner’s insurance? Technically, we don’t. However, most people don’t have 250k lying around – they just can’t buy a house outright. So, they go to a broker. Put yourself in their shoes – would you lend mortgage money to everyone in your town, knowing one hurricane would wipe you out? Of course not.

As such, insurance is a must – you only get to choose the flavor.

Warranties are a different matter. Let’s say you decline a builder’s or a home warranty. If something goes wrong with your new home, 100% of the risk lies with YOU. If your fridge dies tomorrow, your banker or builder doesn’t care. The big-money lenders have no skin in the game, so warranties are optional.

Of course, a broken furnace could cost $4,000 you might NOT have. If that bothers you, you’ll want to get a home warranty. It all comes down to choosing the right plan. Different homeowners have different needs. If you live in a condo, an appliances-only plan makes sense. Own a high-efficiency furnace? Ensure your contract has high enough coverage caps (or none at all.)   

 

The insurance companies always win (but that’s okay)

The current state of the world has made us cynical. In lunchrooms and over water coolers, we commiserate over the latest scandals reported in the news.

Some denigrate insurance companies as legalized extortionists. It’s easy to agree with this sentiment when you hear stories of denied claims, high premiums, and so on. However, their biggest bone of contention goes like this: You always pay more than you’ll get in benefits.

People who say this don’t understand the most fundamental principle in business – make more money than you spend. If everyone got more in benefits than they paid in premiums, all insurance companies would go BROKE.

Without insurance companies, you’d be at the financial mercy of storms, criminals, and a host of other threats. When you partner with a reputable firm, it’s a win-win situation. They profit (and so do their employees), and you’re protected against disaster.   

 

Protect yourself from disaster

Homeownership is a point of pride for many people. It is also a source of many fears. By protecting your investment with insurance and warranties, you’ll gain the peace of mind needed to enjoy your life. 

 

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