What is Homeowners Insurance?

Homeowners insurance is a crucial part of your home. While it isn’t mandatory, it is important to have home insurance to protect your investment. Some lenders will require homeowners insurance in addition to a mortgage to protect their investment. They might even require the homeowner to open an escrow account to ensure that the homeowner isn’t late on any payments.

What Does Home Insurance Cover?

Homeowners insurance is exactly what it sounds like. It is an insurance policy that homeowners take out to protect their home. If there is any damage to the home and your insurance plan covers it, you aren’t responsible for paying out of pocket for everything. It is wise to have insurance so that in the event of an emergency, you won’t have to stress. After all, repair costs can get very expensive.

While homeowners insurance sounds like it only covers damages to a home due to natural disasters, it covers much more. Depending on the plan, most homeowners insurance can cover personal belongings. For example, if furniture is damaged from a fire, your insurance company will help with that. Homeowners insurance will even cover personal items that travel with you. If you’re on vacation and you accidentally left your expensive watch in a hotel room, insurance will help to cover the costs to replace it.

Homeowners insurance can also cover liability issues that take place in your home. For example, if someone were to fall in your home and take legal action, homeowners insurance can help cover the legal costs and injuries. This isn’t something that most homeowners think about, but it could happen.

Typically, a homeowners insurance policy can be covered in 6 parts:

Dwelling

A house or attached structures

Other structures

Stand-alone structures such as a tool shed

Personal property

Covers replacement or repair of property stolen or damaged in a covered loss

Personal liability

Costs of another party’s injuries while on the insured party’s property

Loss-of-Use

Covers the cost of additional living expenses due to temporary relocation if the property is inhabitable

Medical Payments

Medical costs that happen on the property by those not listed as residents

Different Types of Homeowners Insurance Policy Types

With all insurance companies, there are different tiers of policies for people to choose from. For dwelling coverage, the two most common types are HO-2 and HO-3. The difference between the two policies is the amount of coverage. An HO-2 policy covers your personal property and is commonly known as a “named-peril” policy. This homeowners insurance covers less and very specific problems like property damage from and aircraft, riots, windstorms, volcanic eruptions,  hail, falling objects, etc. The HO-2 policy also covers more normal incidents like fire, smoke, water damage, theft, and vandalism. HO-2 policies also cover personal belongings, but only when the damage is caused by the specific incidents listed.  Of note, flood damage is not covered in any standard homeowner’s policy and requires separate flood insurance to cover damage specific to a flood.

The HO-3 policy is an “open-peril” policy, which means that it will cover most risks. An HO-3 policy will cover all of the risks listed in an HO-2 policy and more. It will not only cover more risks so that there’s more coverage, but it will also cover personal objects as well as personal liabilities that take place on your property. HO-3 policies also provide more financial protection. Usually, insurance companies will reimburse you for personal property claims via the actual cash value, which is the amount of money it would cost to replace an item, usually handled by an insurance company’s claims department.

Other home insurance coverage types

Homeowners insurance can cover other unexpected occurrences away from your home such as personal property coverage for lost items while traveling or covering your children’s stuff when they are away at college in on-campus housing.  Depending on your policy, property and liability coverage for cemetery plots and for trees and plants in your garden may also be covered.

How much home insurance do i need?

This really depends on the replacement cost of your home, which is usually determined by the insurance company you work with.  This replacement value is how much it would cost an insurance company to replace your house and belongings.  This is different from the market value that depends on a lot of outside variables that effect the real estate market.

Is homeowners insurance required?

Home insurance is not legally required like other insurance types like auto insurance, but mortgage lenders may require it as it is in the mortgage company’s best interest to have this coverage.

 How Do I Choose The Right Insurance Company?

Different insurance companies offer different rates for their policies, so it is important to research and see which one best fits your priorities. If you don’t have the time to sit down and research different companies and what they cover, check out PolicyPilot.com to see a breakdown of the best homeowners insurance options.

What Doesn’t Homeowners Insurance Include?

While homeowners’ insurance companies include coverage for a variety of risks, there are some that all insurance companies exclude from their policies. Flooding, earthquakes, landslides, mold, infestations, normal wear and tear are some of the risks that make the list.  For these particular risks, you can purchase insurance policies protecting you from these risks separately. You are more than welcome to talk to your insurer about risks that aren’t listed on your policy and see if adding endorsements is possible. Endorsements will cost extra, but they will provide more protection.