Buying a house is one of the biggest investments you’ll ever make, so for most homeowners, maintaining a robust insurance policy is a must. But what exactly is homeowners insurance and how can you choose the right policy?
Whether you’re a soon-to-be homeowner or living in a place you’ve owned for years, it’s always a good idea to understand how to protect your property and your possessions! Read on for a complete guide to homeowners insurance.
What Is Homeowners Insurance?
Homeowners insurance offers two key areas of coverage.
Firstly, a homeowners policy pays out to help you repair and rebuild your home after almost any event causing damage or destruction. This might be heavy wind that breaks a window pane, smoke damage after a fire, or roof repair if a tree falls. Homeowners insurance also covers items within your home that need to be replaced – such as furniture, clothing, electronics and so on – whether due to natural disaster or because of theft or vandalism.
Another aspect of homeowners insurance is personal liability coverage. This means that if you inadvertently cause someone injury or damage their property, your homeowners insurance will help you cover any medical fees, replacement costs, or legal expenses for which you are held responsible. The personal liability coverage under a homeowners policy extends beyond your house—so you’re covered if someone slips on your kitchen floor and decides to sue, but you’re also covered if your dog bites someone a few blocks away or if you break a valuable item at a friend’s house.
Who Needs Homeowners Insurance?
Most mortgage lenders require homeowners insurance before they will approve a home loan. For buyers who are financially able to purchase a property without a loan, or those who own their home outright, it’s still a good idea to hold some form of homeowners insurance as substantial repair and rebuilding costs can add up very fast. This is particularly true amidst the current economic climate, in which inflation and construction costs are soaring.
What Are the Different Types?
There are two main types of homeowners insurance: actual cash value and replacement cost. Actual cash value means you receive a sum of money equal to how much the items were originally worth, minus depreciation. Replacement cost policies, on the other hand, pay out cash value without taking depreciation into account. In other words, replacement cost insurance means you’ll have more cash in hand to rebuild, repair or replace items.
Another option is an extended replacement policy—the most comprehensive homeowners coverage. Extended replacement offers a buffer for inflation, meaning the insurance company is agreeing to pay whatever it takes to repair, rebuild or replace, although there will be a ceiling built into the policy (typically 20% of the limit). The obvious benefit to extended replacement insurance is that it ensures more funds to get policyholders back on their feet more quickly after a damaging event. On the other hand, up-front costs and premiums will naturally be more expensive.
What’s Covered—And Not?
Standard homeowners insurance covers the exterior and interior of your home—from porches and chimneys, to wall paint and sinks. The furnishings inside your house are covered, as are recreational items on your property such as outdoor furniture, a fire pit, swimming pool and so on. If you have expensive valuables at home, be sure to look at coverage limits. It may turn out that you need an extended policy to fully cover more valuable jewelry, artwork and antiques.
In terms of damaging events, it’s important to be aware that earthquakes and flood damage are typically not covered under homeowners insurance. Similarly, damage that occurs due to poor maintenance is also excluded—so be sure to understand what’s expected from you as a homeowner. If you do live in a place where flooding is a concern, consider opting for additional coverage, while keeping in mind that some natural disasters aren’t covered in all areas.
How Much Does It Cost?
The cost of homeowners insurance varies depending on the age and condition of the property; where it’s located; what level of coverage you need; and your own history of past claims. If you’re looking to cut down on your insurance premiums, you might be able to do this by boosting your home security system, opting for a higher deductible, or paying off your mortgage sooner.