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Home Insurance 101. Everything you need to know.
When you buy a home, your mortgage company will likely ask you to provide proof that your home is insured. Your lender wants to be certain that its financial investment is protected if the property is damaged or destroyed by fire or other covered calamities.
In many states, if you don’t buy homeowners insurance on your own, the lender can buy the insurance and charge you for it in addition to your monthly mortgage payment. It’s wise to shop for your own home insurance policy or consult an insurance broker to find one for you; a policy bought by a lender may be more expensive than one you can find on your own, and it may not offer as much coverage. Keep in mind that you don't even have to own your home to need insurance; many landlords require their tenants to have at least a basic renters insurance policy.
If you’re new to the home insurance world, you may be surprised to learn that your home insurance policy will usually cover more than just your house. A standard home insurance policy typically covers your home and attached structures, such as a deck or a garage. Most standard policies cover outbuildings on a property such as a garage, or barn or shed, along with outdoor grills or fireplaces. A swimming pool might also be included, but higher risk items might require additional coverage.
Additional items that may not be included in a standard policy are artwork, jewelry, or other collectibles that are worth more than standard coverage allowances defined in your policy. This is one of the many reasons why it’s important to read and understand the limits of any policy you’re considering and, if necessary, purchase additional coverage when necessary.
In the event of damage due to fire, hurricanes, lightning, vandalism, or other covered disasters, your insurer will compensate you so your house can be repaired or even completely rebuilt if necessary. Destruction or mutilation from floods, earthquakes, or poor home maintenance is generally not covered, and you may require separate specialized coverage (called “riders”) if you want those additional types of protection. Detached garages, sheds, or other structures on the property may also need separate coverage, too.
Clothing, furniture, appliances, and most of the other contents of your home are covered if they're stolen or destroyed in a disaster or other insured event. You can even get "off-premises" coverage, so you could file a claim for lost jewelry, say, no matter where in the world you may lose it. There may be a limit on the amount your insurer will reimburse you, however. According to the Insurance Information Institute, most insurance companies will provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home. For example, if your house is insured for $200,000, insurance would provide about $140,000 worth of coverage for your possessions.
You may wonder how much you have to pay for quality home insurance. Pricing and eligibility for home insurance can also vary depending on a your home’s construction, materials, size, roof type, condition or age of the home, heating type (for example, if an oil tank is on-premise or underground), proximity to the coast, or swimming pools, trampolines, security systems, and other specialized items. Home insurance prices can also vary widely depending on the company, so make sure you shop around before you settle on a policy. It’s worth knowing that you may be able to save on your home insurance if you bundle it with another type of policy, such as a car, motorcycle, or watercraft.
Be sure to ask the right questions when shopping for home insurance so you have the coverage you need. Don’t make assumptions about what is and isn’t covered; it should all be spelled out explicitly in your policy, so be sure to read all the fine print. Most importantly, if you live in a high-risk flood or earthquake zone, you may have to purchase separate flood or earthquake policies if you need that kind of coverage. When in doubt, contact a reputable insurance broker in your area to help you find the best policy for your specific needs and budget.
When you sign up for home insurance, check out the personal liability coverage, sometimes called “umbrella” coverage. This covers you in the event that you or a family member is found legally responsible for accidentally damaging someone else’s property or injuring someone on your property. Umbrella coverage may help pay for repair costs, legal fees, and medical bills. Also look for medical protection: if a pal stops over and accidentally injures themselves on a broken porch on their way in, this coverage can help cover their medical bills. (It’s probably best to keep the porch leading to your house in good shape, anyhow!)
If you can’t stay in your house after a covered claim (such as a fire), your homeowners insurance may help with short-term costs for hotel bills and related expenses. You can pay an additional amount for coverage if you need to stay at a hotel while repairs are completed.
However, before you consider booking a post-disaster stay at the Ritz, remember that homeowners insurance always has payment limits, deductibles, and maximum payout caps. When choosing your coverage limits, be sure to consider the potential cost of rebuilding your home or replacing your belongings. That way, you’ll feel better prepared for adequate coverage in case of disaster.
Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others.
Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value. Policy rates are largely determined by the insurer's risk that you'll file a claim; they assess this risk based on past claim history associated with the home, the neighborhood, and the home's condition.
When shopping for a policy, get quotes from at least five companies, and definitely check with any insurer you already work with—current clients often get better deals. In any case, homeowners insurance shouldn’t be considered a luxury. It simply an added cost that comes with the responsibility of owning a home.