Homeowners Insurance Basics
Jun 22 2021
- What Homeowners Insurance Covers
- What Homeowners Insurance Does Not Cover
- Budgeting During a Crisis (Financial or Otherwise)
- How Much Coverage to Buy (& What It Might Cost)
- Additional Coverage Options to Consider
- Get a Homeowners Insurance Quote
What You Need to Know About Homeowners Insurance
Your home is often your single biggest investment. Homeowners insurance helps you pay for damage to your home, property and other structures caused by a covered event, such as a fire, theft or certain natural disasters. Additionally, it helps pay to repair or replace many personal belongings, and it covers personal liability costs if you’re considered responsible for harm to another person.
Not to be confused with mortgage insurance, which protects the lender if a borrower defaults on their loan, homeowners insurance protects you against financial loss. Not all loans require mortgage insurance, but most lenders require borrowers to have homeowners insurance. Both homeowners insurance and mortgage insurance can be paid from your escrow account as part of your monthly mortgage payment.
What Homeowners Insurance Covers
Sometimes called “hazard insurance,” homeowners coverage provides financial protection against loss from some disasters, theft and accidents. Typical policies provide coverage for:
Your home’s structure
This includes detached structures such as a garage, fence or gazebo (generally for 10% percent of the amount of insurance you have on your home’s structure).
Your personal belongings
While your personal belongings, such as your clothes, furniture and appliances, are covered, there may be limits on certain valuables. Even your trees, plants and shrubs are typically included – and the Insurance Information Institute (III) notes you also often have coverage for up to $500 in unauthorized credit card charges.
Your policy covers your personal property anywhere in the world – including in your college student’s dorm room, your rented storage unit and with you on vacation. However, there’s usually a 10% limitation on “off-premises belongings.”
Note: The best way to make sure your belongings are covered is to create a home inventory – or documentation of your belongings. The easiest and most effective way to do this is to go throughout your home, taking a video of what you own. Include each item’s value and the serial numbers of appliances, if possible. Make sure you keep your inventory somewhere you can easily access it – even if your home is destroyed.
Liability protection covers your legal obligations for bodily injury or property damage to others that you or your family members (including pets) may cause.
Your policy also provides medical payments coverage, which reimburses for some medical, hospital and funeral costs for people injured on your property who are not part of your insurance policy.
Additionally, your policy pays some living costs if you have to relocate while your home is being fixed or rebuilt following an insured event.
Most homeowners insurance policies pay to repair or rebuild your home if it’s damaged or destroyed in events, such as:
- Fire (including wildfires)
- Vandalism (including riots)
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What Homeowners Insurance Does Not Cover
Flood and earthquake damage are typically not included in homeowners policies, but you can find separate policies that cover those. Insurance also does not cover neglect or normal wear and tear on your property.
Note: Even if you do not live in a flood zone – or if you live in an area with a diversion or other flood-control measures – you could be at risk. Snowmelt, rapid rain accumulation, poor drainage systems and broken water mains can all lead to flooding.
Homeowners insurance policies often have coverage limits on valuables such as jewelry, firearms and collectibles. (Learn how to protect these items here.)
How Much Coverage to Buy (& What It Might Cost)
Homeowners insurance rates vary widely based on a number of considerations including where you live, the condition of your home, your credit score and even whether or not you’re married. Companies also factor in the types and amount of coverage you may need and your deductible (a set dollar amount or percentage of the value that must first be subtracted from the total damage incurred before determining what the insurance company will pay). The higher your deductible, the lower your rates, but that also means you’ll have to pay more out of pocket following a covered event.
Nationwide, home insurance premiums average $2,305 a year (or just over $192 a month), Bankrate says. That’s based $300,000 in dwelling coverage and personal liability, with a $1,000 deductible.
There are ways to lower your insurance costs, including:
- Insuring your home and vehicles with the same company
- Increasing your deductible
- Taking advantage of paid in full discounts or using automatic withdrawal
- Asking if discounts are available for alarm systems, deadbolt locks, fire extinguishers, a new roof, or updated wiring
When it comes to homeowners insurance, you have a lot of options, and the best policy isn’t necessarily the cheapest – or the most expensive. The best insurance policy is personalized to your specific situation. That’s why it’s so important to meet with an agent who will get to know you and your circumstances to come up with a plan that best fits what you need – and help you find all the discounts your insurance company offers.
Additional Coverage Options to Consider
While additional coverage options cost more, they also provide more protection – in both the amount and circumstances covered. With certain types of jewelry protection, for example, you can buy coverage for accidentally losing your wedding ring. This type of coverage, known as a rider, floater, endorsement or scheduled coverage, may also come with a lower or zero deductible on the covered items.
You might want to consider adding coverage for valuables such as:
- Outdoor “toys” like boats, snowmobiles or ATVs
- Special computer hardware or software coverage or electronic equipment
- Photography equipment
- Some types of sports equipment
- Musical instruments
- Collections of things like stamps, coins and rare baseball cards
Diamonds Are Forever – If You Protect Them
Consider additional jewelry coverage for any jewelry that meets one or more of the following criteria:
- Items that are regularly worn (such as wedding rings)
- Jewelry valued over $2,000
- Items with rare or unique features not easily replicated
- Items you worry about losing or damaging
There are typically 2 coverage options for jewelry:
1. Replacement coverage is added to your policy with an appraisal that provides a detailed description and value. If the item is lost, your insurance company will use a jewelry replacement service firm to find an item of the same type and quality, based on the information in the appraisal.
2. Agreed value coverage follows the same process as replacement coverage, except the insurance company sends you a check for the value stated in the policy. You can then decide to replace the item, buy a different item or keep the check. Agreed value coverage is more expensive, but it gives you more flexibility.
Note: Consider getting updated jewelry appraisals every 3 years. Because the price of gold and silver changes, it might cost more to replace an item than the value you have listed on your policy.
There are numerous options to provide coverage or increase a standard policy’s coverage. An agent can help you review your policy’s limitations and exclusions to make sure you have the coverage you need. Additional areas to consider modifying include:
- Replacement cost coverage on both your home and belongings
- Sewer and water backup
- In-home businesses of all types, including part-time or seasonal “hobby” businesses
- Extension of liability coverages to farmland or other property you own
- Increased limits for other buildings or structures on the premises
If you have a backyard pool, trampoline or swing set the III recommends you consider increasing your liability coverage with an umbrella policy in case someone is hurt while on your property.
If you have a dog, check your homeowners liability limit. We recommend having a minimum $500,000 limit, but usually for less than $2 to $3 more a month, you can increase that to a $1 million limit. It’s also a good idea to consider an umbrella policy for that added level of protection in case the worst does happen.
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