Research shows that only 30% of American homeowners know about their insurance coverage and the rest are unsure what their home insurance really covers. This is alarming because homeowners insurance (also known as home insurance) is critical to protect you from many unforeseen events in life. Not only does it protect you from theft or vandalism, but also from natural and artificial disasters like fire or hurricanes. But most importantly, this is mandatory for getting loans, and banks do require it as a condition of your mortgage.
You don’t even have to own your property to get insurance; many landlords insist on their tenants having renter’s insurance. Regardless of whether it is mandatory or not, homeowners insurance gives you a sense of security and peace of mind every American should have. So here are some of the basics you should know about homeowners insurance.
Table of Contents
What is Homeowner’s Insurance?
Homeowner’s insurance is a protection that covers your home from physical damages during an assault or unintentional disasters like fire. It also covers you if you unintentionally injure someone or cause property damage.
What Does Homeowner’s Insurance Cover?
Homeowners insurance usually covers four main functions.
Damage to the Interior or Exterior of Your House
Your insurance will compensate you if your residence is damaged by fire, hurricanes, lightning, vandalism, or other covered calamities. Floods, earthquakes, and poor property upkeep are usually not covered but may be included if you purchase extra coverage. Free Standing garages, sheds, and other properties may require their own coverage, following the same guidelines as the main home.
Contents of your house like clothing, furniture, and appliances are covered if they are damaged in an insured disaster. You can also buy “off-premises” coverage which allows you to claim misplaced valuables like jewelry no matter where you lost them. However, there may be a limit on how much your insurer will pay you. Most insurance companies will cover 50 to 70 percent of the amount of your procession.
If you have a lot of expensive items, you may wish to pay more to have them listed on your policy or buy a separate policy for them.
Personal Liability for Damage or Injuries
Homeowner insurance also covers your personal liability and protects you from lawsuits filed against you. What this means is if you or someone you are responsible for, like your pet or children, causes any harm to your neighbor, your home insurance will cover the cost of that for you.
This is not limited to where the event took place, so if your dog jumps off the fence and bites your neighbor when they are on their own property, your homeowner insurance will still cover for that. The same goes with kids; if your neighbor successfully sued you on accounts that your child or pet caused them emotional pain causing pain, suffering and lost wage, your homeowner insurance has your back and covers for that too.
One important thing to consider is that personal liability insurance coverage can start at $100,000, which may be insufficient to pay off all the coverage. If you have expensive valuables or have pets or children, consider upgrading the coverage limit to 300,000. You may have to shell out a few extra dollars for this upgrade on your monthly premiums, but it’s completely worth it in the long run.
Hotel or House Rental While Your Home Is Being Rebuilt or Repaired
Homeowners insurance also has an option to be upgraded called “additional living expenses”, which covers your expenses when your house is rebuilt or renovated. This covers any hotel expenses, rent, restaurant meals or other incidental costs you incur while waiting for the renovation of your home to be complete. But do note that this coverage has some daily limits that can vary, so do contact your insurance provider before booking the hotels or getting meals.
Different Structure Of Home Insurance Coverage
Not all home insurance policies are made equal, and there is no one-size-fits-all solution. The cheaper insurance packages usually opt out of many of the coverage options that you would otherwise get in a more expensive one.
In the U.S., there are several forms of standard insurance packages designed to cater to different needs. The way they are structured is given below:
- Actual Cash Value: Covers the value of the house and its belongings after taking depreciation into account. This means the amount of money you get is based on what the product is currently worth, not how much you are paid for it.
- Replacement Cost: Cover the same coverage that you would get in actual cash value; the only change here is depreciation is not taken into account. Meaning you will get the original price of your lost or damaged possession.
- Extended Replacement Cost: This is the most comprehensive coverage you can take, and this policy takes account of inflation and whatever it costs you to repair your home or buy items you lost. Although there are policy limits, you can extend the limit with additional fees.
What Isn’t Covered by Homeowner’s Insurance?
Now that we have discussed what Homeowner’s Insurance covers, equally important to discuss what factors are not covered with your home insurance.
- Intentional Damage: Whether it’s your own house or your neighbors, intentionally damaging it will result in the termination of your insurance policy. It is also a criminal offense to intentionally damage property and claim homeowners insurance to cover up for the cost.
- Acts of God: A very popular term used to describe events that no one has any control of. There have been movies created on this, but as a rule of thumb, homeowner insurance does not cover the cost for events like flooding, earthquakes, landslides, sinkholes and things like that. However, many insurance companies have extended coverage where you pay a fixed monthly premium to add these events under your coverage.
- Damage Caused by Negligence: Any damage resulting from your negligence will also void homeowners insurance. This includes infestations by birds, vermin, fungus, mold or any wear and tear.
- Government Action: Damages that can occur due to government decisions are also excluded from the insurance coverage. Some of the most notable ones are power failure, war and things like that.
It isn’t easy to accurately generalize what instances are under your homeowner insurance coverage and when it is not. So if you have any particular questions, is it best to ask the insurance company directly. If you do require additional coverage for any specific things that you are worried about, for a small premium, insurance companies usually have additional packages to cover that up.
How Are Homeowner’s Insurance Rates Determined?
Now that we’ve discussed what your home insurance covers and what it doesn’t, let’s look at some of the factors that determine your monthly premium. According to experts, what drives the Homeowners Insurance Rates is the likelihood for you to avail an insurance claim. This may depend on your age, gender, location of your home, and many other things. Although you can not specify exactly what drives the insurance rates; however, there is some indication that can help you get a general idea.
Replacement Cost
According to Sean Harper, co-founder and CEO of Kin Insurance, one of the critical factors that drive your insurance premium’s prices is the replacement costs of your home and the money it may take to cover your premium in case of a disaster. Replacement costs are determined by various factors, including the general area of your house, local building expenses, the property’s design, distinctive features and architecture, number of rooms, etc. Generally, the insurance companies have a generalized index number, and you simply multiply your total home area by the number to get an estimate on the insurance premium.
Credit History
A good credit score reflects how trustworthy you are to pay off your insurance premiums on time. Like bank loans, credit card scores affect the premium you have to pay, as lower scores usually mean higher premiums. There is also a positive correlation between people with bad credit scores and applying for insurance claims, which increases the price.
Claims History
Homeowner Insurance companies also base the cost of their premium on other behavioral patterns like your claims history. Even if you have satisfied all the requirements, previous insurance claims will work against you and be a catalyst that increases monthly premiums.
Marital Status
Married people are usually considered to be lower risk and usually have to pay less for their insurance. Single people are usually associated with high-risk activities that can drive the prices of your premiums. If you need another reason to get married, add savings on insurance on that list.
Deductible
A deductible is the amount of money you are willing to pay out of your own pocket in case of an insurance claim. For example, if you agree on a $1000 deductible, if you have an insurance claim of $4000, the insurance company will only pay $3000, and you will pay the rest.
Agreeing to a high deductible lowers the insurance premium significantly as you are less likely to claim insurance.
Final Thoughts
These are some of the essentials you should know when considering homeowner insurance. Although not mandatory, homeowner insurance can be a lifesaver during unforeseen life events and most experts highly recommend you to have some kind of insurance package. But this article is just intended to inform you, but if you have any specific questions, consult your insurance provider as terms can greatly vary. To learn more about other types of insurance, make sure to keep an eye on our blog.
