Basics of Homeowners Insurance

June 16, 2017

One of the first things you need to do when you buy a home is purchase homeowners insurance, which is property insurance that will protect you in the event of losses related to your home. Homeowners insurance can also provide you with liability coverage if a third party is injured, or you injure them, on your property.

Homeowners insurance is almost certainly required by your mortgage lender if you borrowed money to buy your home. It may even be collected as part of a monthly escrow payment, which you are generally required to make if your down payment at the time of purchase was less than 20% of the purchase price.

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When shopping for homeowners insurance, you should look for “replacement cost” coverage. That way, in the event of a loss, the insurance will cover the cost to replace the loss or damage rather than just its value. The cost of the premium for homeowners insurance is determined by the location of the property and the types and extent of coverage purchased. Premiums are usually paid annually, although you may be able to spread the payments out over time.

What Homeowners Insurance Generally Covers

Structures: This includes the building itself, as well as other buildings on the property such as a detached garage.

Personal property: You should conduct a thorough home inventory, including a video record of the contents of your home, which you should store in a separate location such as a safe deposit box at a bank. Your personal property coverage extends to items that belong to you but are located somewhere else, such as your child’s property in their college dorm (although limitations may apply).

Jewelry and other expensive items: Coverage for individual items typically has a limit under your homeowner’s policy so expensive items such as jewelry may not be insured for their full value. If you have valuable items such as an engagement ring, you should consider whether you need to purchase an additional policy.

Loss of use: If you can’t live in your house to due an insured event like a fire, your homeowner’s policy will provide you with living expenses during that time.

Liability coverage: Most policies include limited liability coverage for an injury you cause to another person or their property. However, because the coverage is limited, you may want to consider getting an additional umbrella policy.

Medical payments: Most policies also include medical payments for anyone injured on your property.

When purchasing homeowners insurance, you should pay attention to what types of losses are covered. A “named perils” policy that only provides coverage for losses due to certain causes such as fire may be cheaper than an “open perils” policy, but the latter offers greater protection since it will cover more types of losses.

You should also pay attention to what is excluded from the policy so you know what’s not covered and what you might need specific insurance for, such as earthquakes, floods, windstorms, and hailstorms. You may also want to purchase extra coverage for losses due to causes such as sewer or drain backup, damage to foundation, mold remediation, and water damage. If you are buying a condo or house that is part of a homeowners association, you should also know what’s covered by the HOA insurance and what you will be responsible for.

Reducing the Cost of Homeowners Insurance

To reduce the cost of homeowners insurance, look for discounts. For example, you may get a discount if you have a security system or other types of insurance with the same company. A higher deductible typically means lower premiums, although you’ll want to be sure that you can pay the higher deductible if you need to make a claim. Finally, be sure to shop around and compare not just premium rates but customer satisfaction ratings, since you’ll want to know that the insurance company will come through if you need them.

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