What is homeowners insurance? Homeowners insurance provides you with financial protection in the event of a disaster or accident involving your home. In addition, homeowners insurance policies are generally “package policies.” This means that the coverage includes not only damage to your property,
but also your liability—that is, legal responsibility—for any injuries and property damage to others caused by you or members of your family (including your household pets).
- 1 What Is Homeowners Insurance?
- 2 Standard homeowners insurance protections
- 3 What is not covered by a standard homeowners policy
- 4 Understanding Homeowners Insurance
- 5 What Does Homeowners Insurance Cover
- 6 Homeowners Insurance and Mortgages
- 7 Homeowners Insurance vs. Home Warranty
- 8 Homeowners Insurance vs. Mortgage Insurance
What Is Homeowners Insurance?
A standard homeowners insurance policy insures your home’s structure (house,) and your belongings in the event of a destructive event, such as a fire.
Insurance for condominiums and co-op- apartments generally covers your belongings, liability, and certain parts of the interior structure as defined in the by-laws or proprietary lease.
Standard homeowners insurance protections
Renters insurance provides similar property and liability protections to those who don’t own their homes.
All forms of home insurance also provide additional living expenses (ALE) coverage for the extra costs of living away from home if it is uninhabitable due to damage from an insured disaster.
Also Read: How Do I Pick A Life Insurance Company?
What is not covered by a standard homeowners policy
While homeowners insurance covers many types of disaster-related damage, there are exceptions. For example, flood insurance and earthquake insurance are both separate types of policies, which may be desirable depending on where you live.
Poor home maintenance often contributes to disasters or accidents. Maintenance-related problems are the homeowners’ responsibility, though there are niche insurance products on the market that may be available to protect against appliance wear and tear.
Understanding Homeowners Insurance
A homeowners insurance policy usually covers four kinds of incidents on the insured property: interior damage, exterior damage, loss or damage of personal assets/belongings, and injury that occurs while on the property. When a claim is made on any of these incidents, the homeowner will be required to pay a deductible, which in effect is the out-of-pocket costs for the insured
For example, say a claim is made to an insurer for interior water damage that has occurred in a home. The cost to bring the property back to livable conditions is estimated by a claims adjuster to be $10,000. If the claim is approved, the homeowner is informed of the amount of their deductible, say $4,000, according to the policy agreement entered into.
The insurance company will issue a payment of the excess cost, in this case, $6,000. The higher the deductible on an insurance contract, the lower the monthly or annual premium on a homeowners insurance policy.
Every homeowner’s insurance policy has a liability limit, which determines the amount of coverage the insured has should an unfortunate incident occur. The standard limits are usually set at $100,000, but the policyholder can opt for a higher limit. In the event that a claim is made,
What Does Homeowners Insurance Cover
the liability limit stipulates the percentage of the coverage amount that would go toward replacing or repairing damage to the property structures, personal belongings, and costs to live somewhere else while the property is worked on.
Acts of war or acts of God such as earthquakes or floods are typically excluded from standard homeowners insurance policies. A homeowner who lives in an area prone to these natural disasters may need to get special coverage to insure their property from floods or earthquakes. However, most basic homeowners insurance policies cover events like hurricanes and tornadoes.
Homeowners Insurance and Mortgages
When applying for a mortgage, the homeowner usually is required to provide proof of insurance on the property before the financial institution will loan any funds. The property insurance can be acquired separately or by the lending bank.
Homeowners who prefer to get their own insurance policy can compare multiple offers and pick the plan that works best for their needs. If the homeowner does not have their property covered from loss or damages, the bank may obtain one for them at an extra cost.
Payments made toward a homeowners insurance policy are usually included in the monthly payments of the homeowner’s mortgage. The lending bank that receives the payment allocates the portion for insurance coverage to an escrow account. Once the insurance bill comes due, the amount owed is settled from this escrow account.
Homeowners Insurance vs. Home Warranty
While the terms sound similar, homeowners insurance is different from a home warranty. A home warranty is a contract taken out that provides for repairs or replacements of home systems and appliances such as ovens, water heaters, washers/dryers, and pools.
These contracts usually expire after a certain time period, usually 12 months, and are not mandatory for a homeowner to buy in order to qualify for a mortgage. A home warranty covers issues and problems that result from poor maintenance or inevitable wear-and-tear on items—situations in which homeowners insurance doesn’t apply.
Homeowners Insurance vs. Mortgage Insurance
A homeowners insurance policy also differs from mortgage insurance. Mortgage insurance is typically required by the bank or mortgage company for homebuyers making a down payment of less than 20% of the cost of the property. The Federal Home Administration also requires those taking out an FHA loan. It’s an extra fee that can be figured into the regular mortgage payments, or be a lump sum charged when the mortgage is issued.
Mortgage insurance covers the lender for taking on the extra risk of a home buyer who doesn’t meet the usual mortgage requirements. If the buyer should default on payments, the mortgage insurance would compensate. Basically, while both deal with residences, homeowners insurance protects the homeowner, and mortgage insurance protects the mortgage lender.