Are you trying to review your homeowner’s insurance policy, only to get confused by all the technical jargon, fine print, and hidden exclusions? If so, blame your insurance company. They purposefully make your policy hard to comprehend, in the hope that you don’t understand what is or isn’t covered. That way, if damage to your property happens, they can have reason to deny your claim.
Don’t let them make you pay for repairs or replacements out-of-pocket! Read our guide to understand what exactly is included in your homeowners insurance policy, which coverage option is right for you, how you can better protect your property, and much more!
What is Homeowners Insurance?
Homeowners insurance is coverage you can buy to protect your home, belongings, and liability responsibilities (harm that takes place to others on your property). It acts as a safety net, shielding you from having to pay for repairs, replacements, or other unforeseen events completely out of pocket.
In order to receive homeowner’s insurance, you have to make a monthly payment (also known as a premium). In Wisconsin, the average homeowner’s insurance policy typically costs $1,1000 to $1,500 a year, or about $90 to $130 a month. (But this number can vary depending on factors like your credit, home age, zip code, and more.)
In return for paying your premium, your insurance company will give you money if a “covered event” occurs and causes damage, and you can then use this money to recoup your losses. These “covered events” are typically referred to as “perils” in your policy.
Note: If you’re unfamiliar with the language used by your insurance, check out our property insurance terms resource for clarification on words that might be in your policy.
Examples of Covered “Perils”
Covered perils are specific, unpredictable types of events that can cause damage to your property. Your insurance company claims it will financially protect you from these events, which typically include:
- Fire or smoke
- Hail
- Lightning
- Wind or storms
- Ice, snow, or sleet
- Theft
- Vandalism
Examples of “Perils” That Aren’t Covered
Unfortunately, just because an event can cause damage to your property doesn’t mean it’s covered by your insurance policy. Some examples of perils that aren’t covered include:
- Flooding
- Sewer or sump-pump backups
- Earthquakes or landslides
- Wear, tear, or neglect
- Nuclear hazard
- Government action (including war)
- Power outages
It’s important to note that you can buy separate coverage for some of the risks outlined above. Flood insurance or earthquake insurance, for example, is typically available separately, and many insurance policies offer sewer back-up add-ons.
Depending on your property location and risks, purchasing additional insurance may be necessary to protect your property. Flood insurance is a particularly popular one, as it can protect homeowners, renters, and landlords against losses resulting from heavy rain, storm surges, melting snow, or overflowing bodies of water.
Why Do I Need Homeowners Insurance?
If you’re still deciding whether or not to buy homeowners’ insurance, we strongly advise you do so. Although insurance companies are, for the most part, untrustworthy and without your best interests in mind, there are still two important reasons to purchase homeowners’ insurance:
- Protect yourself financially: As mentioned, homeowners’ insurance protects you from having to entirely pay for damage to your home or personal belongings. The average cost of fire damage, for example, is around $83,991. Without insurance, you’ll be covering that out-of-pocket.
- Satisfy your mortgage lender: If you have a mortgage, it’s highly likely that your mortgage lender will require you to have homeowner’s insurance. If you don’t have your own insurance policy, your lender will insure your home for you and require you to pay for it, and these policies tend to be less protective and have higher premiums.
What’s Included in Homeowners Insurance?
A homeowner’s insurance policy is a bundled policy that combines different types of insurance coverage into one. It typically includes four main components: coverage for dwelling, personal property, personal liability, and additional living expenses.
Dwelling (Structure of Your Home)
The dwelling coverage provides financial aid for damages to your home. Typically, you want enough coverage to cover the cost of rebuilding your home from the ground up. Most Wisconsin homeowners insure their home for around $300,000 to $400,000, but this number can vary greatly depending on your home’s value. Dwelling coverage also extends to other structures like a detached garage or a tool shed, which are commonly covered for 10% of the house coverage amount.
Personal Property (Contents of Your Home)
Personal property coverage is for the personal belongings in your home, such as furniture, clothing, and electronics. The coverage amount is typically 50% of the dwelling policy limit. For example, if your home is insured for $300,000, your personal belongings might be covered up to $150,000.
However, it’s important to note that it only pays the current cash value of the destroyed item (unless you have replacement cost coverage, which we’ll cover below). This also provides off-premises coverage, which protects your belongings against theft even when they’re not in your home.
The homeowner’s insurance policy may offer limited coverage for valuables like furs, jewelry, and silver. (typically capped at around $1,000 to $2,000 per item). If you want to cover them further, you may want to consider purchasing extra “personal property floater” insurance, which offers additional protection to items not completely covered by homeowner’s insurance.
Personal Liability
Personal liability coverage is included in homeowners policies and covers non-auto accidents on and off your property if they are caused by you, a family member, or your pet. It covers legal defense costs and any damages awarded by the court. There is typically no deductible, and the basic limit is usually $100,000 per occurrence, although higher limits can be requested for an additional cost.
Additional Living Expenses (ALE)
Additional living expenses coverage helps with the cost of temporary accommodation if you need to move out due to damage from a covered risk. Typically, the policy will cover up to 20% of the dwelling policy limit. That means, if your home is insured for $300,000, you’ll get $60,000 to spend on additional living expenses. (If you stay with friends or relatives and incur no extra expenses, the insurance company will not pay additional living expenses.)
Different Types of Coverage for Homeowners Insurance
When it comes to insuring your property and belongings, there are different types of coverage that youcan choose from for your insurance policies. The type of coverage you choose will determine how much you get paid by your insurance company in the event of a covered peril.
The two most popular ones are replacement cost value (RCV) and actual cash value (ACV). Guaranteed (or extended) replacement cost is also an option, but less common. Here is a table that summarizes the key differences:
- Replacement Cost Value (RCV): This coverage reimburses you for replacing your damaged or stolen items with new items of a similar kind and quality, without deducting for depreciation.
- Actual Cash Value (ACV): This coverage reimburses you for the current value of your damaged or stolen items, taking depreciation into account. As a result, the payout may be lower than the cost of replacing the items with new ones.
- Guaranteed (Extended) Replacement Cost: This coverage is essentially an enhanced version of RCV. It offers the same benefit of covering replacement costs and safeguards against cost increases (surge charges).
Which Coverage is Right for Me?
When you’re trying to decide which type of coverage is best for you, there are a few things to consider:
- What is my budget for my insurance?
- How long do I plan on staying in my home?
- How important is it that I replace my assets with something brand new?
- How likely are my property/belongings to depreciate?
If you plan to keep your property for several years, then RCV insurance may be a better choice than ACV because it helps replace the value and protect against rising home prices. However, if you’re planning to sell soon, ACV may be better because it protects against falling home prices and gives you a price range immediately.
And while RCV may be more appealing because it replaces damaged property entirely with one of a similar quality, the coverage comes with higher premiums (which may be worth it in the long run). If your budget is tighter, you might not be able to afford the monthly payments.
Meanwhile, some insurance advisors think that all homeowners should buy a guaranteed replacement value policy because you need enough insurance to rebuild your home, preferably at current prices (which probably will have risen since you purchased or built).
Ultimately, the type of policy you choose will depend on your budget and priorities, especially as it relates to what you want to replace or repair.
What is an Insurance Deductible?
When your property is damaged, your deductible is a fixed amount of money that you must pay out-of-pocket before your insurance company comes in and contributes money towards the remaining expenses. That means if your property loss ends up being below your deductible level, your insurance company won’t have to pay anything, and your claim will be denied.
Here’s an example (shown above): Say a storm knocks tree branches onto your roof, causing damage. The repairs are estimated to cost around $300, but your deductible is set to $500. That means your insurance company is not required to pay anything, leaving you to pay $300 you of pocket. Meanwhile, if the repairs are going to be $1,000, your insurance company will give you $500.
Is Homeowner’s Insurance the Only Type of Property Insurance Available?
Although this guide mostly talks about homeowner’s insurance, there are many other types of property insurance available, such as:
Renter’s Insurance
Renter’s insurance is designed for people who rent property and do not own. It provides coverage for personal belongings within the rental unit, liability protection, and additional living expenses if the rental property becomes uninhabitable (due to a covered peril).
Renter’s insurance is essential for protecting tenants’ belongings, since the landlord’s insurance typically only covers the structure of the building. Most rental companies will require their renter to have some form of renters’ insurance before being allowed to move in.
Condo Insurance
Condo insurance is specifically tailored for condominium unit owners. It provides coverage for personal property, liability protection, and improvements made to the unit. Since condo associations typically have master insurance policies that cover the building’s structure and common areas, condo insurance focuses on protecting the unit owner’s personal property and liability.
Landlord Insurance
Landlord insurance, also known as dwelling fire insurance, is designed for property owners who rent out one or more residential properties. It provides coverage for the structure of the rental property, liability protection, and loss of rental income if the property becomes uninhabitable due to a covered peril.
Confused by Your Homeowners Insurance Policy? Contact Fortitude
If you’re struggling to understand your policy while filing an insurance claim, don’t hesitate to contact Fortitude Public Adjusters. We’re insurance professionals who understand the complicated ins and outs of the claims process and will fight on your behalf to get a proper settlement. Our free consultations are a risk-free way to find out how we can help you get the money you deserve!
