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When most of us think of homeowners insurance, we think about getting coverage for major home repairs — the big-ticket items the insurance company can pay out for in the event of a loss or damage. We’re talking about things like a tree falling over in a storm and wrecking your roof or a robber making off with your electronics and jewelry.

Sure, you need that kind of protection, but your homeowner’s insurance policy should also include a very important kind of coverage beyond that: loss of use coverage. This is also sometimes known as additional living expenses (ALE) coverage or Part D coverage. Loss of use coverage is an important part of your home insurance (and some rental insurance policies) that kicks in when your home is rendered uninhabitable. Let’s say in the example above, where your roof needs major repair work. You may not be able to live in your home while this is underway. Since you have “lost the use” of your typical living space, the policy will help you pay for lodging and other expenses.

Read on to learn more about the loss of use coverage, including coverage limits and policy conditions. It’s an important consideration if a worst-case scenario ever happens to your home sweet home.

What Does Loss of Use Coverage Mean?

Loss of use coverage is the part of your homeowner’s insurance policy that covers the costs you’ll incur if you lose the usage of your home.

For example, if a fire destroys a significant portion of your house and it needs to be rebuilt, your typical home insurance policy will cover the cost of repairs. But (and this is a biggie) you may find yourself suddenly facing a whole lot of living expenses you otherwise wouldn’t. Hotel rooms and restaurant meals can add up quickly, and without your own kitchen and bedroom to cook in and retire to, you’d be pretty much forced to take advantage of these expensive options. Or perhaps you have to put your possessions in storage as your home is rebuilt, or even rent an apartment. These are the kinds of expenses that loss of use coverage will typically reimburse.

Recommended: Homeowners Insurance Coverage Options to Know

Coverage Limits

Like most other forms of insurance, loss of use coverage does come with certain limits — you don’t have carte blanche to go out and stay at a swanky hotel for months and eat exclusively Wagyu beef on the insurance company’s dime.

Generally, loss of use insurance is calculated and expressed as a percentage of your dwelling coverage limit — the amount of money up to which the insurer will pay out to repair or rebuild your home in the event of a qualified loss.

For example, if your dwelling insurance limit is $350,000, and your loss of use coverage is 20%, you’d have up to $70,000 to put toward living expenses during the time your home is being repaired. That may sound like a lot of money, but you’re likely to face a lot of expenses, especially since you’ll still be responsible, during that time, for paying your mortgage, insurance premiums, and other normal monthly bills.

Loss of use coverage is most commonly between 20% and 30% of the dwelling coverage limit, but it is possible to find plans with a higher loss of use limit — or a lower one.

In fact, although loss of use coverage is fairly standard, it is possible to purchase a homeowners or renters insurance policy that doesn’t include it, so always be sure to read your paperwork in full, including the fine print, to ensure you know what you’re getting.

Recommended: What Is Renters Insurance and Do I Need It?

Policy Conditions

Loss of use coverage is subject to additional conditions along with the coverage limit. For example, you’ll most likely be asked to prove your expenses to the insurance company in order to get the claim paid — so be sure to keep the receipts for all those hotel-room breakfasts!

Your policy may include other terms and conditions as well. Yet again, another good reason to get nice and cozy with that fine print.

Which Living Expenses Are Covered By Loss of Use Insurance?

Although the loss of use insurance covers many different kinds of living expenses while your home is being rebuilt or repaired, it doesn’t cover everything.

Once again, the only place to get verified information about what your specific policy covers is — you guessed it — your specific policy paperwork, but here are some of the most common covered costs.

•   Temporary housing, such as hotels, motels, or a temporary apartment

•   Moving costs

•   Public transportation

•   Grocery and restaurant bills beyond your typical expenditure

•   Storage costs

•   Costs to board a pet

•   Laundry costs

•   Parking fees

Once again, refer to your policy documentation in order to confirm which expenses are covered under your plan.

What Else Does Your Home Insurance Cover?

Loss of use coverage is only one small part of your overall homeowner’s insurance policy, which likely has several different coverages built in. A standard homeowners insurance policy offers coverage in the following categories:

•   Dwelling coverage, which covers the cost of repairing or rebuilding your house up to the given limit

•   Personal property coverage, which covers the costs of replacing your belongings in the event they are stolen, lost or damaged as part of a covered event

•   Personal liability coverage, which pays out to cover the medical or legal expenses you might incur if someone is accidentally hurt on your property (for example, if they’re bitten by your dog)

•   Additional coverages, such as coverage for additional structures on the property, specific damaging events (or “perils”) that aren’t listed in the standard policy, excess coverage for expensive belongings, etc.

As you can see, homeowners insurance is about way more than insuring the four walls of your home, though it should cover that, too. Keep in mind that each of these coverages comes with its own limits and policy conditions. (We’d remind you to read the fine print again, but at this point, you’ve probably got it. Right?)

In addition, homeowners insurance generally involves — as do most forms of insurance — paying a deductible when it comes time to file a claim. That means you’ll be responsible for a certain out-of-pocket cost to cover even coverage-eligible sustained damages, although the insurance company will likely pay out significantly more. (For example, a homeowners insurance deductible might be $1,000, which isn’t nothing… but is a lot better than paying $30,000 out of pocket to replace your entire roof. In this instance, you’d pay $1,000 while the insurer would pay $29,000.)

Deductibles are charged in addition to the premiums you pay on a monthly, quarterly, or annual basis simply to keep the insurance policy active. (Typically, the higher the deductible, the lower the premium, and vice versa.) Again, it may feel like a pain to have to pay so much money simply to have insurance just in case something happens, at which point you’d have to pay out your deductible as well… but for most of us, our homes are the single largest purchase we ever make and the biggest asset to our names. It’s an investment worth protecting, especially when you consider the often astronomical cost of even basic home repairs.

The Takeaway

Loss of use insurance is a type of coverage baked into most homeowners and many renters’ insurance policies. This coverage pays out toward the extra living expenses you’ll incur if your home is rendered uninhabitable by a qualified loss, such as the cost of hotel rooms, additional food expenses, pet boarding, and public transportation.

While homeowners insurance is a valuable financial tool, it’s not the only one to keep in your tool belt. If you have family members and loved ones who rely on your income in order to maintain their lifestyle and comfort, life insurance can be a great way to ensure your death is primarily an emotional, rather than financial, loss.

SoFi has teamed up with Ladder to offer high-quality life insurance plans that are quick to set up and easy to understand, and our overall policy limits go up to $8 million. You can get a decision in minutes today, right from the comfort of your home — which, after all, already has its own insurance policy. (Right?)

Photo credit: iStock/Ridofranz

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Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Homeowners insurance is not quite as simple as paying each month and then, if something bad happens, the insurance company will automatically cover it all. Generally speaking, you’ll still be on the hook for a certain amount of money if and when the time comes to file a claim. That amount is called your homeowners insurance deductible, and you do get some leeway when it comes to choosing it.

Here’s what you need to know about homeowners insurance deductibles, and how to decide on an amount that’s right for you.

What Is a Homeowners Insurance Deductible?

A homeowners insurance deductible is the amount of money you’ll pay out of pocket when you file a claim for damage repair or replacement. In other words, it’s your portion of the responsibility for the expense.

For example, say your home weathers a windstorm and sustains roof damage to the tune of $10,000. If your deductible is $1,000, you’ll pay that much toward covering the repair cost, and the insurance company will pay the remaining $9,000.

Keep in mind that your deductible is distinct from your insurance premium, which is the amount you pay on a monthly, quarterly or annual basis, regardless of whether or not you’re filing a claim, to keep the policy active.

Types of Homeowners Insurance Deductibles

Homeowners’ insurance deductibles can be calculated in a variety of different ways. The two most common are flat deductibles and percentage deductibles.

Flat Deductible

A flat deductible, as its name suggests, is one that’s charged as a flat fee regardless of the full price of the damage. In our roof damage example above, the flat deductible is $1,000.

Indeed, $1,000 is a pretty standard deductible for those who choose a flat homeowners insurance deductible, though lower deductibles ($500) and higher deductibles ($2,000) are also available. Of course, like any other insurance product, the lower your deductible is, the higher your monthly premiums will be — and vice versa. It’s important (and often challenging!) to strike a balance between ample coverage and affordability.

Percentage Deductible

Percentage deductibles are those that are assessed as a percentage of the total insurance coverage amount on your home.

For example, if your home is covered for up to $350,000 and your deductible is 1%, you’d be on the hook for up to $3,500 if you filed a claim. Percentage deductibles tend to start around 1% and go up to 10% of the total home coverage value. The higher the percentage, the lower your monthly premiums — but consider that even 3% of that $350,000 total is $10,500. Again, it’s a balancing act.

What Is a Disaster Deductible?

It’s important to bear in mind that standard homeowners insurance policies don’t cover everything. Generally, eligible claims are limited by the named perils in your policy document — perils that include vehicular damage, theft, falling objects, and many other occurrences, but not major disasters like earthquakes, hurricanes and floods.

If you live in an area prone to these events, you’ll likely need to purchase additional insurance coverage specifically in case they occur — and the deductibles for these disasters work a little differently than standard homeowners deductibles do. Always review your insurance paperwork to ensure you know exactly how your policy works, but here are some general rules around what you might expect when it comes to disaster deductibles.

•  Hurricane deductibles may be a reality in your life if you live along the Atlantic coast, especially in states like Florida and Louisiana that are very prone to these massive storms. It’s complicated, though, because most standard homeowners insurance policies do cover some amount of wind and storm damage — so the deductible you’ll be responsible for will depend on how the insurance company assesses and documents the damage. In many cases, hurricane insurance requires policyholders to have a percentage deductible rather than a flat deductible, which could mean higher out-of-pocket expenses if extreme damage occurs.

•  Wind damage deductibles may apply to those who live in Tornado Alley and other areas that frequently experience extreme windstorms. Similar to hurricane insurance, most standard homeowners policies do include some wind damage coverage, so your experience will depend on how the damage is coded by the insurer. This type of insurance is another where the deductible is typically paid in a percentage (usually 1%-5% of the total home insurance coverage value).

•  Flood insurance deductibles vary by state and insurance company, and you’ll likely be able to choose between a flat deductible and a percentage deductible. Even if you don’t think you live in an area that’s particularly prone to floods, you might consider purchasing this additional insurance, which is not included in most standard homeowners policies. According to the Insurance Information Institute , approximately 90% of natural disasters in the United States involve flooding, which can cause catastrophic (and very expensive) damage quickly.

•  Earthquake insurance deductibles vary depending on your state and location, but are another that is paid by percentage — a percentage that might be as high as 20% of the replacement value of your home. States with high earthquake risks may set a minimum deductible of 10% of the home replacement value, which is expensive… but a lot less expensive than rebuilding the whole home yourself out-of-pocket, which you might just have to do in the case of a serious earthquake.

Recommended: Is Homeowners Insurance Required to Buy a Home? 

How to Choose the Right Deductible

Now that we’ve covered different homeowners insurance deductibles, we come to the fun (or not-so-fun) part: how do you figure out which type and level to choose?

Understanding How Your Deductible Affects Your Premium

As with all insurance products, the basic equation comes down to how much you can afford to pay on a regular, ongoing basis versus how much you might be able to afford to pay in the event you need to file a claim.

Higher deductibles mean lower premiums, but more out-of-pocket costs when something goes wrong. On the other hand, higher premiums might be harder to keep up with month to month but mean that in the event of a disaster, you’re more likely to have fuller coverage.

Keep in mind, too, that your home is likely to be your single largest asset; losing it (or seeing its value depreciate steeply) could quickly decimate your overall financial wellness and net worth. For that reason, it’s usually a good idea to opt for fairly substantial homeowners insurance coverages, even if you’re not required to do so by your mortgage lender.

Recommended: Homeowners Insurance Coverage Options to Know

The Takeaway

A homeowners insurance deductible is the amount of money the insured is responsible for in the event that a claim is filed. It’s separate from the premiums the insured party pays to keep the policy active. However, deductibles and premiums are related: generally speaking, the higher the deductible, the lower the premium, and vice versa.

Pretty much all types of insurance hinge on this monetary balancing act — but because of how financially catastrophic certain events can be, it’s usually worth paying overtime to ensure someone’s got your back if disaster strikes.

The same can be said of life insurance. SoFi has partnered with Ladder to offer our members term life insurance at affordable prices. Getting life insurance coverage can help take care of the people who matter most if something happens to you.

SoFi can help you get a life insurance quote in a matter of minutes.

Photo credit: iStock/Lordn

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Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Insurance not available in all states.
Gabi is a registered service mark of Gabi Personal Insurance Agency, Inc.
SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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With most things in life, it helps to be covered — by a coworker, an insurance policy, or a roof over your head. In investing, it can also pay to be covered. When it comes to options contracts, a covered call is an option trading strategy worth knowing about.

Here’s all you need to know about putting together a covered call strategy, when to consider it, and how it may — or may not — pay off.

What is a Covered Call?

A covered call is an options trading strategy that opens up an additional avenue to generate income. In a covered call transaction, an investor sells call options on a security they own. This strategy can be beneficial to the investor if they don’t expect the value of the stock price to move much in either direction during the terms of the option.

Call Options Recap

A “call” is a type of option (you may be familiar with calls versus puts), that allows investors to buy shares of an underlying asset or stock at a specific, prearranged price, called the strike price. Usually, an investor dealing with call options holds a long position — that is, they think that the underlying stock is going to appreciate.

This opens up the opportunity to profit from their position. If you thought that a stock’s price was going to increase, you might want to buy that stock, hold onto it, allow the price to increase, and then sell it in order to generate a profit.

Call options allow investors to do more or less the same thing, but without having to buy or pay the full price for the underlying shares. Instead, a premium is paid for the right to execute the trade at the strike price.

What’s the Difference Between a Call and a Covered Call?

The main difference between a regular call and a covered call is that a covered call is “covered” by an investor holding an actual position. That is, if an investor sells call options on Company X stock, it would be “covered” if the investor actually owns, or holds a position, on Company X stock.

Conversely, if an investor does not hold a position on, or own any Company X stock and sells a call option, they’re selling a regular call option. This is also known as a “naked” option.

Example of a Covered Call

The point of selling covered calls to other investors is to boost your own investment income. If, for example, you have 100 shares of Company X stock, and were looking for ways to potentially increase your annual return from that holding, you could try selling covered calls to other investors.

Here’s what that might look like in practice:

Your 100 shares of Company X stock are worth $50 each: $5,000 total, at current market value. To make a little extra money, you decide to sell call options to your friend Harris, at a strike price of $70. Harris pays you $10 for the premium.

Let’s say that Company X stock’s price only rises to $60, and Harris doesn’t execute the option, so it expires. You keep the $10, plus your 100 shares. You’ve turned a profit of $10 selling call options, and your shares have appreciated to a value of $6,000. So, you now have a total of $6,010.

For all intents and purposes, the best-case scenario, for you, is that your shares rise in value to near the strike price, (say, $69) but Harris doesn’t exercise the option. In that scenario, you still own your shares (now worth $6,900) and get the $10 premium Harris paid you.

But the risk of buying call options is that you could lose out on bigger potential gains.

So, if Company X stock rises to $90 and Harris executes his option, you would then be obligated to sell your 100 shares to him, which are now worth $9,000. You would still get the $10 premium, plus the value of the shares at the predetermined strike price of $70 — netting you $7,010. Effectively, you’ve turned a holding valued at $5,000 into $7,010. Not bad!

On the other hand, had Harris not exercised his option, your shares could be worth $9,000. That’s the risk you run when selling covered calls.

Recommended: How to Sell Options for Premium

When and Why Should You Do a Covered Call?

There is no definite right answer in terms of the right time to use a covered call strategy — it involves weighing the risks involved and doing a bit of reading the tea leaves in terms of the market environment.

It’s generally best to write covered calls when the market is expected to climb — or at least stay neutral. Nobody knows what’s going to happen in the future, and investors might want to be ready and willing to sell their holdings at the agreed strike price.

As for why an investor might use covered calls? The goal is to increase the income they see from their investment holdings. Another potential reason to use covered calls, for some investors, is to offset a portion of a stock’s price drop, if that were to occur.

Pros and Cons of Covered Calls

Using a covered call strategy can sound like a pretty sweet deal on its face. But as with everything, there are pros and cons to consider.

Covered Call Pros

The benefits of utilizing covered calls are pretty obvious.

•   Investors can potentially pad their income by keeping the premiums they earn from selling the options contracts. Depending on how often they decide to issue those calls, this can lead to a bit of income several times per year.

•   Investors can determine an adequate selling price for the stocks that they own. If the option is exercised, an investor profits from the sale (as well as the premium). And since the investor is receiving a premium, that can potentially help offset a potential decline in a stock’s price. So, there’s limited downside protection.

Covered Cons

There are also a few drawbacks to using a covered call strategy:

•   Investors could miss out on potential profits if a stock’s price rises, and continues to rise, above the strike price. But that just goes with the territory. As does the possibility of an option holder executing the option, and an investor losing a stock that they wanted to keep.

•   An investor can’t immediately sell their stocks if they’ve written a call option on it. This limits the investor’s market mobility, so to speak.

•   Investors need to keep in mind that there could be capital gains taxes to pay.

The Takeaway

A covered call may be attractive to some investors as it’s an opportunity to try and make a little more profit off a trade. That said, as with all trading strategies, it may pay off in your favor, and it may not. There are no guarantees.

Calls, puts, and options trading can get complicated, and fast. That’s why it’s helpful if your options trading platform isn’t more complicated than it needs to be. SoFi’s options trading platform has an intuitive and approachable design. You can trade options from the mobile app or web platform, and reference the offered educational resources about options.

Trade options with low fees through SoFi.

FAQ

There are a lot of details and terms regarding options, and it can be hard to keep track of everything. Here are a few common questions about covered calls.

Are covered calls free money?

Covered calls are not “free money”. But covered calls can provide a boost to one’s investment earnings — though an investor does have to assume some risks associated with selling options.

The strategy is more of a game of risk and reward, and there’s always the risk that the strategy could end up backfiring, particularly if your stock’s value increases much more than you anticipated.

Are covered calls profitable?

They have the potential to be profitable: If you’re selling call options on your holdings, then you should be receiving a premium in return. In that sense, you’ve turned a profit. After all, the entire point of selling calls on your holdings is to increase your profits, too.

But how profitable the strategy is, and the risks involved, will depend on a number of factors, such as the underlying stock, market conditions, and the specifics of the call option.

What happens when you let a covered call expire?

If you’ve sold a covered call option to someone else and it expires, nothing happens — you keep the premium, and nothing changes.

Because an option is only that — an option to execute a trade at a predetermined price for a select period of time — the option holder’s reluctance to execute during the time period means that the option will expire worthless.

Can you make a living selling covered calls?

Living strictly off of income derived from covered calls is theoretically possible, but you’d need a big portfolio (against which to sell those options) to make it work. There are a lot of things to consider, too, like the fact that a lot of the income your covered calls do generate is going to be taxed as capital gains, and that the market isn’t always going to be in a favorable environment for selling covered calls.

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Photo credit: iStock/millann

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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