Homeowners Insurance 101: A Guide for Homebuyers in Metro Detroit

Homeowners insurance. You know you should probably have it, and if you have a mortgage, you’re required to have it. But how much do you know about it beyond that – what it covers (and does not cover), the types of policies, how much coverage you need? What happens in case of minor damage from a storm, or even something as rare as fire damage? If you’re not familiar with these things, you may very well be overpaying and/or be underinsured. To help you out, we’ve put together this homeowners insurance guide for homebuyers in Metro Detroit.

Homeowners Insurance Overview

Homeowner’s insurance is a safety net. It will “compensate you if an event covered under your policy damages or destroys your home or personal items. It will also cover you in certain instances if you injure someone else or cause property damage.”

The three main functions of this insurance are to…

1. “Repair your house, yard and other structures.
2. Repair or replace your personal belongings.
3. Cover personal liability if you’re held legally responsible for damage or injury to someone else.”

There are three basic levels of coverage with homeowner’s insurance  – actual cash value, replacement cost, and extended replacement cost/value. In addition, “[p]olicy rates are largely determined by the insurer’s risk that you’ll file a claim.” This risk is assessed on the basis of “past claim history associated with the home, the neighborhood, and the home’s condition.”

Types of Policies

There are several types of homeowner’s insurance (also called “policy forms”), with some providing more coverage than others. The most common policy types are . . . 

HO-1 AND HO-2

When it comes to homeowners insurance, not all policies are created equal, and some are definitely less popular than others. These less common policies provide the least amount of coverage and are often seen as basic or minimal options. They typically offer payouts only for damage caused by specific issues listed in the policy. In fact, together, these two types of coverage account for about 8% of all homeowners insurance policies!

Let’s dive into the details of these lesser-known options.

HO-2 Insurance

The HO-2 policy, often referred to as “Broad Form” insurance, is the more common of the two bare-bones options. It generally covers your house and belongings against a set list of 16 specific causes of loss. These perils may include things like fire, theft, vandalism, and certain types of water damage. While it offers more coverage than the HO-1, it still has its limitations, as it only pays out for damages caused by the specified perils listed in the policy. This means that if damage occurs from an event that isn’t covered, you’ll be on the hook for those repair costs.

HO-1 Insurance

On the other hand, the HO-1 policy is the most basic and least widely available type of homeowners insurance. It covers losses from an even shorter list of perils compared to the HO-2 form, making it a bare-bones option for homeowners. The limited coverage can leave many homeowners vulnerable, as any damage resulting from unlisted events would not be covered.

While these policies may come with lower premiums, they also offer significantly less protection. Homeowners looking for a safety net that covers a broader range of potential risks would be better off considering more comprehensive options, like the HO-3 or HO-5 policies. These options provide coverage for all perils except those specifically excluded, giving you greater peace of mind knowing that you’re better protected against unexpected events.

HO-3

When it comes to homeowners insurance, the HO-3 insurance policy is the heavyweight champion, often referred to as “special form” coverage. It’s the most commonly purchased type of homeowners insurance, accounting for nearly 80% of coverage on owner-occupied homes! If you have a mortgage, there’s a good chance your lender will require you to carry at least this level of coverage to protect their investment.

What Does HO-3 Insurance Cover?
One of the standout features of the HO-3 policy is its comprehensive protection for your home. It typically covers damage caused by any incident except for those specific exclusions mentioned in the policy, such as natural disasters like earthquakes or floods. This means that as long as the cause of the damage isn’t explicitly excluded, you’re generally covered, giving you significant peace of mind.

What About Your Belongings?
When it comes to your personal belongings, though, the HO-3 policy takes a slightly different approach. It usually covers your possessions against a specific list of 16 “named perils.” These perils typically include risks like theft, vandalism, fire, and certain types of water damage. If damage occurs due to an event that isn’t listed in this set of perils, you won’t be compensated.
For homeowners who want to ensure that their belongings are fully protected, it’s often wise to consider purchasing additional coverage or riders to fill those gaps.

In summary, while the HO-3 insurance policy provides robust coverage for the structure of your home against a wide range of potential risks, it’s essential to be aware of the limitations regarding personal property. Being proactive about understanding these details can help you make informed decisions and ensure that you have the protection you need.

HO-5

The HO-5 insurance policy, often referred to as comprehensive form or premier coverage, stands out as the most extensive type of homeowners insurance available. If you’re looking for the broadest protection for your home and personal belongings, this is the policy to consider.

What Does HO-5 Insurance Cover?

The beauty of the HO-5 policy lies in its generous coverage: it pays for damage to both your home and your belongings from virtually any cause—except for those specific exclusions that the policy names. This means that you have a high level of protection against unexpected events, providing you with significant peace of mind.

Who Can Get HO-5 Coverage?

However, it’s important to note that the HO-5 policy is typically available only to well-maintained homes located in low-risk areas. Insurers often look for properties that are less likely to experience hazards, such as natural disasters or crime. Because of this, not all insurance providers offer this type of policy, so it may require some shopping around to find one that does.

In summary, if you’re in a position to qualify for an HO-5 insurance policy, you’ll enjoy unparalleled coverage for your home and belongings. Just remember to maintain your property well and ensure it’s in a low-risk area to take advantage of this comprehensive protection. Having this level of coverage can provide you with the assurance that, come what may, you and your belongings are well-protected!

Replacement Cost, Actual Cash Value, and More

You also need to be aware that “[i]fyour home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy. Your payout could differ depending on the cost to rebuild and the coverage you chose – and much of it will be paid directly to contractors rebuilding your home, in many cases.”

Concerning this, here are some things you need to consider when deciding on coverage:

REPLACEMENT COST

This type of coverage, often referred to as guaranteed replacement cost coverage, is designed to ensure that you can rebuild your home regardless of the current market conditions or the costs associated with construction. Essentially, it means that if disaster strikes and your home is damaged or destroyed, your insurance will cover whatever it takes to rebuild it to its original state—even if that amount exceeds your policy limits.

Why Is This Important?

Why is this kind of coverage crucial? Well, let’s say you’ve had your homeowners insurance for several years, and during that time, construction costs have significantly risen in your area due to inflation or increased demand for building materials. If you only have standard coverage with set limits, you might find yourself in a tough spot. For example, if your home were to suffer a catastrophic loss and you only had enough coverage to rebuild at previous rates, you could end up underinsured and facing out-of-pocket expenses that you weren’t prepared for.

How Does It Work?

With guaranteed replacement cost coverage, however, you don’t have to worry about those rising costs. Your insurer will assess the current expenses needed to rebuild your home after a total loss and provide the necessary funds to cover it. This means you can rest easy knowing that you’re not just protected at the time of purchase but also safeguarded against future increases in construction costs.

In summary, opting for guaranteed replacement cost coverage can be a game-changer for homeowners. It offers an invaluable layer of protection that adjusts to the ever-changing market, ensuring that you won’t face financial hardship if you need to rebuild your home. If you’re considering homeowners insurance, it’s definitely worth exploring this option to secure your peace of mind!

ACTUAL CASH VALUE

Actual Cash Value (ACV) Coverage is a type of insurance policy that calculates the payout based on the current market value of your property at the time of loss. This means that if your property is damaged or destroyed, the insurance company will reimburse you for the cost to repair or replace it, but they will subtract an amount for depreciation.

How Does It Work?
Let’s break it down a bit further. Imagine you bought a new television for $1,000. If that television gets damaged after a few years, its value would have decreased due to wear and tear, right? With actual cash value coverage, the insurance company won’t pay you the full $1,000 to replace it. Instead, they’ll calculate how much your television is worth at the time of the loss, which might be around $600, depending on its age and condition. So, you’d receive $600 to help cover the cost of replacing your TV, not the amount you initially paid for it.

Common Applications
While this method of valuation is typically not used for the home itself (where replacement cost policies are more common), it is often applied to personal belongings within your home. This can include items like furniture, electronics, clothing, and other possessions. Therefore, if you have actual cash value coverage on your personal belongings and you suffer a loss, it’s essential to understand that depreciation will be factored into the compensation you receive.

Pros and Cons
Pros:
Lower premiums: Because actual cash value coverage is often less expensive than replacement cost coverage, it can help you save on your insurance premiums.
Cons:
Potentially lower payouts: The main drawback is that you may receive significantly less in compensation when you need to replace your items, particularly if they’ve depreciated over time. This can leave you with unexpected out-of-pocket expenses.

When considering your homeowners insurance options, it’s crucial to understand the implications of actual cash value coverage. While it may save you some money on premiums, it’s important to weigh that against the potential financial impact if you need to file a claim. If you’re looking for the best protection for your personal belongings, you might want to explore replacement cost coverage instead, which can offer greater peace of mind.

FUNCTIONAL REPLACEMENT COST VALUE

This type of coverage will pay to repair damage to your home, but possibly with cheaper materials than the original. For example, damage to plaster walls may be repaired with drywall, which is cheaper.

REPLACEMENTCOST VALUE

“Replacement cost value coverage pays to repair your home with materials of ‘like kind and quality,’ so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.”

EXTENDED REPLACEMENT COST VALUE

This type of coverage “will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home.” This limit is typically a percentage or a dollar amount, but in either case, it provides “a cushion if rebuilding is more expensive than you expected.”

Guaranteed Replacement Cost Value

“Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits.” The catch, though, is that this level of coverage isn’t offered by all insurance companies.

Determining Amount of Coverage Needed

Now, you need to determine exactly how much coverage you need from your homeowner’s insurance. You’ll need enough coverage to rebuild/repair your home in the case that is destroyed or severely damaged. You can estimate the cost to rebuild by multiplying your home’s square footage by per-square-foot local construction costs. YourMetro Detroit agent can also provide some guidance here. Just call(313) 246-4551 to find out more.

What you shouldn’t do is “focus on what you paid for the house, how much you owe on your mortgage, your property tax, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance. Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.”

When it comes to your belongings, your personal property, “you’ll generally want coverage limits that are at least 50% of your dwelling coverage amount, and your insurer may automatically set the limit that way.” You can, however, lower the limit or purchase more coverage if you need to/

With respect to the liability limit, experts advise having a “limit at least high enough to cover your net worth,” including “savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.”

Cost of Homeowners Insurance 

So what does homeowner’s insurance cost? The national average is about $1,600 per year, but this is an average and individual prices can be much higher or lower. In addition, your credit score can also affect the cost of your insurance.

And then there’s the deductible – the amount you have to pay out of your pocket before the insurance kicks in. Here are the two main things to keep in mind when choosing your policy’s deductible:

1. A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
2. With a lower deductible, you’ll pay a higher premium, but will pay a lot less out of your pocket for a claim.

When It’s Time to Buy

Ultimately, homeowners insurance isn’t a luxury – it’s a necessity. But there are so many influencing factors and available options, it’s difficult to know what kind of policy and coverage is right for you. An experienced Metro Detroit agent can provide valuable assistance in many of these areas. We suggest that Metro Detroit home buyers trying to untangle the homeowner’s insurance puzzle, contact us today at (313) 246-4551.