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 Wilmington, NC.
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…
- “Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- 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
The least popular homeowners insurance policies provide the most limited coverage and pay out only for damage caused by the specific issues explicitly listed in the policy. Together, these two types make up about 8% of all homeowners coverage. The HO-2 insurance policy, which is the more common of the two, typically covers your house and personal belongings only for the 16 named perils outlined in the policy. These perils often include fire, lightning, windstorm, hail, and other specific causes.
On the other hand, the HO-1 policy is the most bare-bones form of homeowners insurance and is not widely available today. It covers losses from an even shorter, more restrictive list of perils compared to the HO-2 form. Because of its limited scope, HO-1 is rarely recommended except in very specific situations where minimal coverage is acceptable. Understanding the differences between HO-1 and HO-2 can help homeowners make informed decisions about the right insurance to protect their property and belongings adequately.
HO-3
HO-3 insurance policies, often referred to as “special form,” are by far the most common type of homeowners insurance, accounting for nearly 80% of coverage on owner-occupied homes. If you have a mortgage, your lender will almost certainly require at least this level of coverage to protect their investment. HO-3 policies provide broad protection by covering damage to your home from any cause except those specifically excluded in the policy, such as earthquakes, floods, or acts of war.
When it comes to your personal belongings, however, an HO-3 policy generally covers losses only from 16 named perils, including fire, theft, and vandalism, unless you choose to purchase additional endorsements or riders. This means that while your home structure enjoys comprehensive protection, your belongings have more limited coverage under the standard policy. Understanding the scope of an HO-3 policy is essential for homeowners who want to ensure their property and valuables are adequately insured without paying for unnecessary extras.
HO-5
Also known as the comprehensive form or premier coverage, the HO-5 insurance policy offers the broadest and most extensive protection available for homeowners. Unlike other policies, HO-5 covers damage to both your home and personal belongings from virtually all causes, except those specifically excluded by name in the policy. This means it provides “open perils” coverage for both your dwelling and contents, offering greater peace of mind for homeowners seeking maximum protection.
HO-5 policies are typically available only for well-maintained homes located in low-risk areas, such as neighborhoods with low crime rates and minimal exposure to natural disasters. Because of the enhanced coverage and reduced risk, not all insurance providers offer this type of policy, and premiums tend to be higher compared to HO-3 or HO-2 forms. However, for those looking for premier homeowners insurance that covers a wide range of potential damages—including sudden and accidental incidents—HO-5 is an excellent choice.
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 coverage will pay whatever it takes to fully rebuild your home, even if the total cost exceeds your original policy limits. This situation can arise, for example, if construction costs have sharply increased in your area due to labor shortages, rising material prices, or natural disasters, while your coverage amount has remained unchanged. Replacement cost coverage helps protect homeowners from unexpected out-of-pocket expenses after a major loss.
ACTUAL CASH VALUE
Actual cash value coverage reimburses the cost to repair or replace damaged property minus depreciation for age and wear and tear. While most home insurance policies avoid using this method for the structure itself, it is commonly applied to personal belongings like furniture and electronics. This means the payout might be significantly lower than the replacement cost, especially for older items.
FUNCTIONAL REPLACEMENT COST VALUE
This form of coverage pays to repair your home using materials or methods that restore function but may not match the original exactly. For example, damaged plaster walls might be repaired with drywall, which is a more affordable alternative. Functional replacement cost can help reduce claims expenses but may affect the home’s original aesthetic or quality.
REPLACEMENTCOST VALUE
Replacement cost value coverage reimburses repairs or replacements using materials of “like kind and quality.” So, if your home originally had plaster walls, the insurance payout will cover plaster repairs—not cheaper alternatives. However, this coverage is limited to the dwelling coverage amount set in your policy, so it’s important to ensure your limits reflect current rebuilding costs.
EXTENDED REPLACEMENT COST VALUE
Extended replacement cost coverage offers an added layer of financial protection by paying beyond your policy’s dwelling limit, up to a specific percentage or dollar amount. This “cushion” can be critical if rebuilding costs unexpectedly rise after a disaster, such as during periods of high demand for construction services. It helps homeowners avoid the burden of paying extra out-of-pocket when the true cost to rebuild surpasses the initial coverage.
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. It’s crucial to have enough coverage to rebuild or repair your home if it is destroyed or severely damaged. One practical way to estimate rebuilding costs is by multiplying your home’s total square footage by the average local construction cost per square foot. Your trusted Wilmington, NC insurance agent can provide more precise estimates based on current market rates and building standards. Just call (910) 319-8878 to find out more.
What you shouldn’t do is focus on what you originally paid for the house, your remaining mortgage balance, your property tax, or the potential sale price. Basing your coverage on these figures can leave you underinsured or paying for unnecessary coverage. Instead, make sure your dwelling coverage limit matches the actual cost to rebuild your home. This approach ensures you’ll have sufficient funds for repairs or reconstruction without overpaying on your premiums.
When it comes to your personal property coverage, also known as your belongings, experts generally recommend setting coverage limits at least 50% of your dwelling coverage amount. Many insurers automatically assign limits around this level, but you have the flexibility to adjust it based on your inventory. If you own valuable items or collectibles, consider increasing your personal property coverage or purchasing additional endorsements to protect those assets fully.
Regarding liability coverage limits, financial experts advise maintaining a limit at least equal to your net worth. This includes the total value of your savings, investment accounts, and other assets minus any outstanding debts like auto loans and credit card balances. Adequate liability coverage protects you from costly lawsuits and claims resulting from accidents or injuries on your property, safeguarding your financial future.
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:
- A higher deductible will reduce your premium, but you’ll pay a lot more when you file a claim.
- 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 that protects your biggest financial asset. From natural disasters to liability claims, the right policy ensures peace of mind when the unexpected happens. But with so many influencing factors—such as property age, location risk, replacement cost, and coverage types—not to mention the variety of home insurance policies available, it’s difficult to know what kind of coverage truly fits your needs and budget.
An experienced Wilmington, NC agent can provide valuable assistance in many of these areas, including helping you compare policy types like HO-3 or HO-5, assessing your property’s rebuild cost, and understanding how much personal liability coverage or replacement cost coverage you might need. Whether you’re buying your first home or simply reassessing your existing policy, we suggest that Wilmington, NC home buyers trying to untangle the homeowner’s insurance puzzle contact us today at (910) 319-8878. We’re here to help you make a confident, informed choice about your coverage.