Purchasing the right type of homeowners insurance policy means more than just meeting your state’s minimum liability requirements for homeowners insurance or comparing insurance costs.
A standard homeowners insurance policy is an HO-3 policy, also called an “open peril” policy. This protects your home against everything except for any exclusions specifically named in your policy.
However, there are many instances where you may want additional coverage, such as if you live in an area prone to flooding or you run a business from your home.
In this guide, I’ll review some extra homeowners insurance coverage options you may want to discuss with your insurance agent.
Opt for Guaranteed Replacement Cost
A standard homeowners insurance policy pays to repair or rebuild your home up to the dwelling coverage limit you purchased. Traditional guaranteed replacement cost insurance coverage goes a step further — it promises to pay whatever it takes to completely rebuild your home, even if construction costs exceed your original policy limits after a covered loss.
This protection may be beneficial if rebuilding expenses rise significantly in your area after a major disaster that severely damages homes in the area. Having this coverage means you won’t be left under-insured during the insurance claims process. In many states, insurance companies may cap guaranteed replacement cost insurance coverage, so make sure you understand the limitations, especially if you live somewhere prone to natural disasters like earthquakes or hurricanes.
Replacement cost coverage typically only refers to your home’s structure — not your personal belongings. To protect your personal property, you’ll need to purchase additional coverage. With this coverage, your insurance would pay the full price to replace stolen or damaged personal property with brand-new items, rather than only the depreciated cash value.
Consider These Extra Coverages
In addition to guaranteed replacement cost, here are some other homeowners insurance add-ons to consider to provide additional peace of mind:
- Inflation guard: This coverage automatically increases dwelling and contents limits annually to match local construction cost inflation. This prevents becoming underinsured over time, so you won’t need to worry about inadequate homeowners insurance coverage.
- Ordinance or law: This optional coverage pays to bring damaged sections of your home up to current code requirements during repairs or rebuilding – crucial for older homes with property damage.
- Liability umbrella: While your homeowners’ insurance policy provides some liability coverage in case someone is injured on your property, an umbrella policy goes beyond your policy limits in case you are sued. This can also help to protect your assets.
- Scheduled personal property: Your policy likely has limits on how much it will pay for individual items that were damaged or stolen. Purchasing a scheduled personal property rider allows you to protect your most precious possessions by providing higher coverage limits for valuables like jewelry, art, antiques, collectibles, and electronics.
- Home business: If you run a business from your home, you may want to purchase this additional insurance coverage. Not only does it protect your business’s property, including any electronics or professional equipment, but it also provides additional liability coverage that exceeds standard homeowners insurance policy allowances.
- Flood and earthquake: While your policy covers water damage resulting from accidents like burst pipes, it does not cover flooding. If you live somewhere prone to floods, you’ll have to purchase coverage separately through the National Flood Insurance Program. In California, you may need earthquake coverage; check with the California Earthquake Authority.
So, Are Extra Coverages Worth the Cost?
The value of added homeowners insurance coverage depends on your unique assets and risks. But in my experience for many homeowners, the relatively small increase in homeowners insurance premiums provides peace of mind and can prevent major financial headaches after an unexpected loss of personal property or property damage.
For older homes especially, insurance coverage protection like replacement cost and ordinance-or-law insurance coverage is strongly recommended. Your insurance agent can help weigh the pros and cons and identify the most beneficial insurance coverage options for your situation. It’s good practice to compare what insurance pays against the costs of your homeowner’s insurance premium. When shopping for insurance, get quotes from several companies to find the best coverage and value.
FAQs About Home Insurance Coverages
What exactly does guaranteed replacement cost homeowners insurance provide?
This ensures you have coverage from your insurance company to pay the full cost to rebuild your home from a claim after a covered total loss, even if construction costs exceed your original insurance policy limits at the time of the claim.
Should I get replacement cost insurance coverage for personal property?
Yes, most homeowners find this coverage beneficial. This add-on pays the cost of replacing damaged or stolen items with brand-new models, rather than just receiving the depreciated cash value. You may want to explore appliance insurance options as well if you’re worried about repairing or replacing your appliances.
Why is ordinance or law important?
Ordinance or law is beneficial if you have an older home. It is insurance coverage for the extra expenses to bring repaired home sections up to current building code requirements after a property damage loss.
What's the difference between dwelling insurance coverage and replacement cost homeowners insurance?
Dwelling coverage sets the maximum payout up to your policy limits. Replacement cost is insurance coverage that ensures you’re covered if rebuilding expenses exceed those original limits after a major disaster that impacts construction costs.
There are risks that can impact homeowners insurance that you should be aware of.
I recommend reviewing your homeowner’s insurance policy annually with your insurance agent to help identify important gaps in coverage as assets, risks, and building codes evolve over time.