Being a homeowner can be exciting and empowering. But it also carries a lot of responsibility. It’s critical to make sure you have the right protection for your house and all the valuable things inside. This is where homeowners insurance comes in.
Homeowners exists to cover your home from unforeseen dangers, losses, or expenses. Fires, burglaries, and natural disasters are just some of the things that can threaten your home. However, liabilities, such as those when someone gets injured on your property, can also put your home in danger. Home insurance simply gives you a layer of protection for your house and wallet.
Having homeowners coverage can save you from needing to pay thousands out of pocket for damages or losses. Though no state requires it by law, banks or lenders will make you purchase home insurance if you’re mortgaging your house.
Like all other forms of insurance, homeowners may seem complicated. You may wonder things like whether you need it, how much it costs, or what exactly it covers. In this article, we’ll dive into the essentials of homeowners coverage. We’ll go over:
- How it works
- Whether you need it
- What it does and doesn’t cover
- Types of policies
- How much it costs
- Types of reimbursement
- Frequently asked questions
How Homeowners Insurance Works
Homeowners coverage is a type of policy you can get that protects your home and belongings. In the event of an accident, your home insurance will help replace or pay for the damages or losses to your house or personal items caused by specific dangers. Many people refer to these dangers as “perils” in the homeowners world.
Home insurance also takes care of liabilities due to accidents or injuries that happen on your property. Imagine that your neighbor comes over to talk to you. Suddenly, they trip and hurt themself. In this case, your homeowners coverage will step in to cover any expenses from your neighbor’s injury.
Who Needs Homeowners Insurance?
No state requires home insurance. But most banks will require you to have it if you have a mortgage. They do this to ensure the protection of the asset for which they gave you a loan. Without homeowners coverage, they could risk losing a serious amount of money.
Let’s face it, life happens. At any moment, something out of your control can cause damage to your house or threaten your way of life. Unless you can handle shelling out lots of money for emergencies, you’ll want to buy home insurance. The protection a homeowners policy can give you peace of mind and may only set you back a little. But random accidents and damages could set you back to the point of financial ruin.
What It Covers
Homeowners insurance provides a lot of coverage for your home. Here’s what it covers:
- Dwelling coverage. Covers damages to your home and any other structures you have, such as sheds or garages.
- Personal liability coverage. Protects you from any liabilities or expenses from injuries or damage that occur on your property.
- Personal belongings coverage. This covers damages or losses to any of your belongings after incidents such as a fire, storm, or even theft. Common examples of personal belongings include furniture, clothes, and technology.
- Loss of use coverage. Covers any extra living or housing costs you have if you can’t live in your house because of damages it’s sustained. Note that it only covers expenses that exceed your normal cost of living.
When you read about home insurance coverage, you’ll likely see the word “peril” come up several times. This refers to the many types of things that could put your house in danger. Per the Insurance Information Institute (III), homeowners covers 16 main perils:
- Fire or lightning strikes
- Hail or wind damage
- Riots or other types of disturbances
- Damage from land vehicles and objects thrown out of them
- Damage from an aircraft
- Burglary or theft
- Volcanic eruptions
- Falling objects
- Damage from the weight of ice, sleet, or snow
- Water damage due to faulty plumbing, sprinkler systems, heat or air conditioning, or appliances
- Cracking, bulging, or ripping apart of a faulty air conditioning, hot water, or fire protection system
- Freezing of a heating, plumbing, or any other water system
- Electrical damage
What It Doesn’t Cover
While homeowners can protect you and your home from many types of dangers, there are certain types of incidents it won’t help you with. These are some of the most common causes of damage that a standard policy won’t cover:
- Flood damage
- Earthquake damage
- Natural foundation settling or ground movement
- Sewer backups
- Lack of proper maintenance of your house or property
- Damage by animals or pests
Though standard homeowners doesn’t include protection for floods or earthquakes, you can still add coverage for them as an endorsement or separate policy. This may be helpful if your lender requires it. Or if you live in an area that’s at a high risk of these natural disasters. You can typically get flood insurance with the National Flood Insurance Program (NFIP). You can buy an earthquake coverage from most major insurers.
Endorsements and Riders
An endorsement or policy rider is a type of add-on or change you can make to your existing policy. The most common usage of an endorsement is adding optional coverage that’s not part of the standard policy you already chose. You may want to get an endorsement if you want protection for a certain peril, like earthquakes, that your policy doesn’t cover.
Different Types of Homeowners Policies
How much coverage you receive can vary in large part due to the type of policy you select. You’ll have to select one type of policy form when you buy your home insurance. Homeowners policy forms usually appear with a number, such as HO-1 or HO-5. Each policy either covers a different number of perils or serves a unique purpose.
Sometimes known as the “special form,” HO-3 is the most common out of all the different types of policy forms, according to the National Association of Insurance Commissioners (NAIC). It covers all 16 perils unless your provider decides to omit any of them. It also includes all the most basic types of coverage from a standard homeowners policy.
Another policy you can choose is HO-1. This is the most basic type of policy out there. It’s more limited than HO-3, only giving you coverage for up to ten perils. It may also be hard to get since many insurers don’t even offer it.
You can also get an HO-5 policy. It’s like HO-3 in that it covers all 16 of the perils. But it also includes extra benefits such as more coverage for expensive houses and personal property. You should note that you might only be able to get an HO-5 policy if you’ve just bought a recent or new home. An HO-5 policy will also be much more expensive than a standard HO-3 policy.
How Homeowners Insurance Reimburses You
You may wonder about how your homeowners insurance reimburses you for damages to your house after you file a claim. The answer isn’t cut and dried. It can be different depending on how much coverage you have.
When you buy homeowners, you’ll have to choose a coverage level. The type of coverage level you get will affect how your home insurer reimburses you for an incident. Typically, you’ll need to choose between replacement cost or actual cash value (ACV).
If you choose replacement cost, your insurer will pay you an amount of money that’s equal to the value of your home or any lost belongings so that you can replace them. It doesn’t take any depreciation or any other loss of value into account. All you’ll have to pay is your deductible.
On the other hand, ACV will pay the amount of money necessary to replace your home and items, minus any depreciation. This means that, even if you paid a certain amount for an item, your insurer would only look at what it was worth at the time of the accident. Many insurers will use factors about items such as their age to figure out the depreciation. Like replacement cost, you’ll only have to pay your deductible.
How Much Does Homeowners Insurance Cost?
The cost of homeowners insurance can vary depending on several factors. And many companies likely have different prices or look at different things when deciding your rates. In general, you can expect to pay more if you appear to be at a high risk of filing claims.
Below are some common rate factors:
The type of policy and coverage you get. Some policies can come with more coverage and can lead to higher rates. Other policies come with less coverage but can be more affordable. Extra coverage such as endorsements can also make your insurance more expensive.
Claims history. Filing more claims in a short period costs your insurer more money. It’s likely your rates will reflect that.
How high you set your deductible. Setting a higher deductible can lower your rates since you assume more risk if a peril affects your house. But if you have a lower deductible, your insurer will charge you more for the increased risk they have to take on.
Where you live. Home insurance rates can be higher if you live in an area with a high crime rate or that’s at risk of accidents and natural disasters.
Credit score. Your credit history can reflect your reliability as a customer or homeowner. You could pay more if your insurer thinks you have a spotty past.
Features about your home. Certain features about your home can shift your rates. For instance, having a security system could help lower your rates because it prevents danger. But owning a swimming pool could be a potential hazard for yourself or your guests and raise your premium.
It’s important to remember that how much you pay with one company may not be how much you’ll pay with another. It’s always a clever buying strategy to compare home insurance prices between insurers if you suspect you’re paying too much. You never know, the right deal for homeowners coverage could be elsewhere.
Frequently Asked Questions
Why do I need homeowners insurance?
Homeowners insurance can protect your home when disaster strikes. Without it, you’d need to pay out of pocket to replace your house or the items in it. It’s not required by any state, but many mortgage lenders require coverage to prevent significant financial losses.
What does home insurance cover?
Homeowners insurance covers you in four important ways: The first is obvious, your house. It’s a no-brainer that this sort of coverage would in some way pay for damages to your home. Personal liability is also included in a standard homeowners policy. Your personal belongings are covered by homeowners insurance wherever you take them, even when the items are away from home. Finally, when you can’t live in your home while it’s being repaired, loss of use pays for temporary living arrangements until the work is completed.
What isn’t covered by a homeowners policy?
Insurers are very specific about the 16 named perils a homeowners policy covers. They are even more particular when it comes to what your home insurance won’t cover. They are, in no particular order: earthquakes, floods, sewer backups, landslides and foundation settling, animals and pests, and lack of maintenance. You can often purchase supplemental coverage for some of these. Ask your agent for details.
How much coverage should I buy for my home?
How much home coverage you should buy largely depends on many things. You should begin by asking yourself how safe your house is from potential perils. For example, if you live somewhere with lots of crime or natural disasters, you may want to buy more coverage. It’s always a good idea to buy as much as you can afford. More coverage can sometimes mean that you’re spending more money, but it can also give you some peace of mind.