If you’re a homeowner, there’s a good chance your home is the most expensive purchase you’ve ever made. Having homeowners insurance is an important way to protect your investment from unexpected damages or losses.
In this article, I’ll break down the basics of homeowners insurance, why you need it and how it protects your home and belongings.
- What Is Homeowners Insurance?
- Why Do You Need Homeowners Insurance?
- What Types of Coverage Does Homeowners Insurance Include?
- Frequently Asked Questions About Homeowners Insurance
This article was updated in October 2023 and I review it annually.
What Is Homeowners Insurance?
Homeowners insurance provides financial protection for you to rebuild or repair your property in the event of covered damages or losses.
When you sign up for a homeowners insurance policy, you’re entering into a contract. You pay premiums to the insurance company, and in exchange, in the event of damage or loss to your property due to specified conditions, you get money to repair or replace your home, structures on your property and/or your belongings.
A standard policy also provides protection if you are held legally responsible for accidents that happen on your property or for injuries to people or their property outside of your home.
The company responsible for paying you is known as your insurer. If you’re the homeowner in the contract, you are the insured member whose assets are protected up to a specific amount. The total amount of coverage (or financial protection) will depend on the policy you purchase.
Typically, the more coverage you have, the higher your premium will be. Your premium is the total amount you pay for protection each month or year. You’ll also have a deductible, which is the amount you must pay toward replacing or repairing anything before your insurer will begin to compensate you.
Why Do You Need Homeowners Insurance?
If you have a mortgage, your lender will probably require you to maintain homeowners insurance until your home is paid off.
Even if you don’t have a mortgage, homeowners insurance is necessary to protect your investment and assets. Since homeowners insurance provides protection for your property and assets, you’ll want to be sure that you aren’t underinsured. Check out how much homeowners insurance you need to see if you have enough coverage.
What Types of Coverage Does Homeowners Insurance Include?
Most homeowners insurance policies offer protection in six key areas:
- Loss of Use
- Medical Payments
- Other Structures
- Personal Property
Each type of coverage has its own coverage limit. And you might be able to choose between replacement cost value (RCV) or actual cash value (ACV) coverage. What you choose will impact your premium and any payments you receive after a claim. Take a look at what’s covered under each area and examples of when each kind of coverage might be used.
|Dwelling: Pays to repair or replace damages to the physical structure of your home.||During a storm, your roof is damaged by hail. You file a claim with your insurance company to compensate you for repairing the damage.|
|Liability: Pays for medical and/or legal fees if someone is injured and/or their property is damaged and you are legally determined to be responsible.||Your child accidentally throws a baseball through your neighbor’s window. Liability will cover the cost to repair the window. If the neighbor also was hit by the flying baseball, liability would cover the neighbor’s medical bills and legal bills if the neighbor decided to sue you and you were found responsible.|
|Loss of Use: Pays for living expenses in the event that you are not able to use your home.||After a fire, you aren’t able to live in your home while repairs are being made. Loss of use coverage will pay for you to stay in a hotel or rental home of similar value to your home. Additional living expenses associated with loss of use to your property will also be covered such as increased food costs.|
|Medical Payments: Pays for medical bills if someone gets hurt on your property. Unlike liability, you do not have to be legally responsible.||A guest falls down your stairs and needs dental work as a result. Medical payments coverage pays the dentist. Unlike liability coverage, medical payments can be applied towards claims regardless of who is at fault. This coverage can help prevent legal action being taken against you if someone is injured on your property.|
|Other Structures: Pays to repair or replace structures on your property that are separate from the main building/home.||A tree snaps during a storm and falls onto your fence, leaving a section of your fence broken. This pays for repair of the fence.|
|Personal Property: Pays to repair or replace property such as clothing, equipment or furniture. This coverage can offer protection for your belongings outside of your home.||A thief breaks into your home and steals a television. Personal property coverage will pay to replace your television. This protection extends to your personal property outside of your home: If your laptop is stolen from your car, personal property coverage can be used to replace the laptop.|
Frequently Asked Questions About Homeowners Insurance
Is a home warranty the same as homeowners insurance?
A home warranty is different from homeowners insurance. Homeowners insurance offers protection for your home and belongings against unexpected damages or losses. A home warranty can offer protection to your belongings against everyday wear and tear. Think about your refrigerator. Homeowners insurance doesn’t cover a fridge that’s malfunctioning due to age. But — in this situation — a home warranty can help cover the cost to repair or replace it. That said, money expert Clark Howard is not a fan of home warranties.
Who is covered by my homeowners insurance?
Liability coverage included with most standard homeowners insurance policies will provide protection for you, your spouse and any additional household members who are relatives by blood, adoption or under full-time foster care. For unmarried couples — if both partners are named on a home’s deed — it’s common for insurance policies to cover you both. When it comes to pets, you will want to check your policy for specifics on coverage. While many insurers do cover pets, some companies will exclude pets entirely or exclude certain breeds.
What is an endorsement?
An insurance endorsement, also known as a “rider,” is an adjustment to your insurance policy’s coverage. Endorsements let you personalize your policy by adding or removing coverages. You can also change who or what your policy covers. If, for example, you have jewelry that is worth more than your standard policy will cover, you can purchase an endorsement to raise the coverage limits for your high-value items. Another example would be purchasing an endorsement to provide coverage for a roommate who is not related by blood or marriage.
What is the difference between private mortgage insurance and homeowners insurance?
While homeowners insurance provides protection to homeowners, mortgage insurance provides protection to lenders. In the event of unexpected damages or losses, homeowners insurance helps repair or replace your property. If you can’t make payments toward your mortgage, however, mortgage insurance provides a guarantee to your lender that their investment is protected. Lenders typically require you to have homeowners insurance, but private mortgage insurance is usually required only when a borrower makes a down payment of less than 20% of the home’s purchase price.