A Homeowner’s Guide To Homeowner’s Insurance
If you’re a new homeowner, you may be wondering how to navigate the space of homeowner’s insurance (HOI). With so many options for policies and coverages, this can seem like a daunting task. But it’s important to know your plan options, the factors that affect your premiums, the average cost of homeowners insurance in your region, and your policy’s limits so you adequately avoid unexpected financial burdens from disasters.
In this article, we’ll cover each of these topics and others to help you find the best homeowner’s insurance policy for your new primary residence.
Note: If your property is an investment property, you’ll need a different type of policy: Landlords insurance. Read more about landlord insurance here.
What is Homeowners Insurance (HOI)?
Homeowner’s insurance, or HOI, is insurance designed to cover property-related losses, damages, and liabilities. Every homeowner needs a homeowner’s policy, which is why most mortgage lenders require borrowers to obtain a homeowners insurance policy before they can be approved for financing.
Homeowner’s insurance typically covers damage to your primary residence, its exterior, interior, furnishings, or other assets you may keep inside your home. It can also cover medical or legal bills (“liability” expenses) if an accident were to occur on your property.
How Does HOI Work?
A standard homeowner’s insurance policy includes the following:
- The yearly premium
- Your monthly payment amount
- The deductible amount
- Coverage types and limits (including damage, liability, and personal property coverage limits)
Each homeowner’s insurance policy has an annual premium, divided up into monthly payments. It will list the amount of your deductible, or what you’ll need to pay out-of-pocket before your insurance kicks in. Your policy will also list the types of losses that are covered and the coverage limits for each one, which are maximum values your insurance will cover for a given coverage type (e.g., liability).
If you experience a loss or damage, you’ll need to pay your deductible before your insurance kicks in. After your deductible is used up, your insurance company will pay to cover either the actual cash value or replacement value of the items you lost or repairs needed, according to your coverage.
Each policy will have a maximum liability amount determining how much coverage you have. If you make a claim, the liability limit will inform how much of your coverage amount will go towards replacing or repairing whatever needs to be done after the disaster occurred.
Exclusions
Many HOI policies have “exclusions,” or types of losses that specifically aren’t covered by your policy. Typical exclusions from standard homeowner’s insurance policies are acts of war or so-called acts of God. Floods and earthquakes will fall under these categories.
If you live in an area where earthquakes or floods are likely to occur (such as California, where renters also need earthquake coverage), you can get special coverage that will increase your protection against these issues. You will need to purchase a separate flood insurance or earthquake policy. In some areas, other types of coverage (like volcano coverage or extra coverage for your valuables) is also necessary.
Being aware of these limits can help you assess whether your coverage adequately protects your assets. If you find that your current limits may not be sufficient, consider discussing options with your insurance provider to adjust your policy accordingly.
Types of Coverage Available
One of the most important aspects of acquiring a homeowner’s insurance policy is realizing what kind of coverage your policy offers, which impacts its overall price. The average cost of homeowners insurance varies depending on your policy.
Some policies will offer replacement cost coverage, while others offer actual cash value:
- Replacement cost coverage provides the policy holder with new and similar versions of what was lost or damaged. This type of policy is typically more expensive since it entirely replaces what you lost.
- Actual cost value coverage only covers the depreciated value of the item in question, or what it was actually worth at the time of the loss or damage.
Replacement cost coverage is pricier, but if you find yourself filing a claim, you will receive more from the insurance company than you would with an actual cost value policy.
Homeowner’s insurance coverages are also classified by type of loss covered. What does homeowners insurance cover? The most common types of coverage included in homeowner’s insurance policies are dwelling coverage, personal property coverage, and liability coverage:
- Dwelling coverage will cover most kinds of damage to your home, except those that are specifically listed as exclusions. Depending on your coverage amount, you could either be paid out for the actual cash value of the damage, or you could be paid out the cost of the replacement or repair.
- Personal property coverage helps replace or repair your belongings if they’re damaged or stolen from your home. Some plans only cover the types of damage that are listed on your policy, while others protect your belongings from all kinds of problems, minus those specifically excluded.
- Liability coverage is essential in case someone gets injured on your property and decides to sue. Liability insurance can pay for judgements that may be decided against you, alongside any legal defense costs you or the other party that you’re legally liable for may incur. It’s a good idea to have enough liability coverage to cover at least your assets and savings in case you’re sued.
Importance of Homeowners Insurance
As with all kinds of insurance, homeowners’ insurance is there to be a safety net for different kinds of losses and damages that could occur to your home. Homeowner’s insurance also covers assets within your home and provides liability against any accidents that could happen on the property.
Without insurance, you risk facing significant financial losses that could be devastating. It is well worth the monthly cost to know you’re well protected in case anything from a minorly inconvenient loss to worst-case scenario damage were to happen.
Factors Affecting Premiums
How much will homeowners insurance cost? Several key factors influence how much you’ll pay for your homeowner’s insurance policy.
Whenever the homeowner experiences any of the four kinds of incidents covered in their policy (interior damage, exterior damage, loss or damage of assets, or injury), they must pay a deductible. If you have riders that increase your coverage for certain events or for high-value property, you could have a lower deductible amount. However, when supplementing your policy with these additions, you could have a higher premium.
The age and condition of your home also play a significant role in determining the premium. Older homes or those in poor condition may have higher premiums due to the increased risk of damage.
The location of your property also impacts the cost, with areas prone to natural disasters or high crime rates typically incurring higher premiums.
Additionally, your coverage limits, deductible amount, and the presence of safety features like smoke detectors and security systems can all influence the final cost of your homeowner’s insurance.
Tips for Selecting the Right Policy
Be sure to choose a policy that aligns with your specific needs and budget when selecting homeowner’s insurance. The best way to do this is to assess the coverage options carefully to ensure they meet your requirements, considering factors like the value of your home, personal belongings, and any additional structures on your property.
A lot of homeowners regret not buying enough coverage. You should get an accurate estimate for how much it would cost to rebuild your home in case of disaster—if you insure for less than that number, you will be short the money you need to replace or repair all damage caused. Your insurance company will be able to give you an accurate estimate for how much rebuilding would cost.
Also, if you’re planning on doing renovations to your home, you could end up being underinsured after you complete those high ROI renovations. If you are remodeling your home, it may be time to reevaluate your policy coverage.
That being said, don’t pay more than you need to. Many insurance companies offer home insurance discounts for special features. Ask your insurance agent if you qualify for any of them.
Overall, evaluate the level of liability coverage provided to protect you in case of accidents on your property. Look for any exclusions or limitations in the policy that might affect your coverage and compare quotes from different insurance companies to find the best balance between coverage and cost.
Lastly, it’s also a good idea to review the reputation and customer service of the insurance provider to ensure they’re reliable. By taking these steps, you can select a homeowner’s insurance policy that offers you the right protection at a price you can afford.
Conclusion
Homeowner’s insurance is a crucial protection for your home and belongings. It offers peace of mind in case of unexpected events like natural disasters or theft. Once you have a policy that you’re satisfied will protect you, make sure to review it regularly and update it if your needs or situation changes.
