The Basics of Homeowners Insurance

If you are like most Americans, your home, and the things inside, most likely represent your largest asset. For this reason, it is very important to have your home and its contents insured at all times. You should have insurance protecting your home and all of its contents from the damages of theft, fire, windstorm, or some other disasters. You should also be insured for personal liability. Among other things, this will cover an accident that you, or those under your policy, are held responsible for that occur inside or outside of your home.

What’s Included?

Homeowners insurance standard coverage basically provides coverage on your home and other structures on your property, your personal property, and liability insurance.  It will also pay for additional living expenses (ALE) if you are unable to live in your home because of damage from covered accidents or disasters. There are many different insurance policies depending on your needs. While damage from hail, lightning, fire, windstorm and theft are usually covered, natural disasters, such as flood or earthquake, most likely are not. You can also purchase add on insurance for items such as jewelry, artwork, collectibles, and firearms since their coverage under a standard policy may be quite limited and not reflect the true value of the items.

What’s Excluded?

Basic homeowners insurace standard coverage does not cover damage to your home from routine wear, nor does it cover losses or damages resulting from war, riots, police actions, nuclear explosion, or “acts of God.” While some of the former may seem extremely unlikely, don’t ever underestimate, the “acts of God” exclusion in your policy.  While every policy is different, the “acts of God” exclusion refers to certain natural disasters that could not be avoided through preventative measures.

Every homeowner needs to be aware of their surroundings and what, if any, types of natural disasters they could be vulnerable to. When making that determination and assessing the likelihood of an event, it may be wise to consider an endorsement (sometimes referred to as a rider) to broaden your policy and cover situations that are normally excluded, such as floods and earthquake through a standard policy. Depending on where you live, these policies may be required by your mortgage company. But, be prepared as this coverage will be more expensive than a standard policy.

What’s Liability Coverage?

Liability coverage protects you if you are sued for an accidental injury that happens at your home, or on your property. It can also cover damage to another person’s property caused by one of your family members. Having liability insurance can keep your head above water in the event of a law suit. For example, if you were sued and found responsible for the injury or death of someone caused by an accident while they visited or stayed at your home, you could be held financially liable for their care. This care can include medical bills, pain and suffering, lost wages, and even death benefits to the family of the victim of the accident. Liability insurance usually will also cover damage caused by your pets to another person’s property, or in the event of an injury caused by your pet, like a dog bite.  Most plans will provide a range of $100,000 – $300,000 of liability insurance with recommendations at the $300,000 level.

What’s a Deductible?

This is the amount you pay for a loss before the coverage kicks in. Deductible amounts will vary, but it is wise to choose the largest deducible you can afford as that will decrease your monthly premium (the cost you pay to the insurance company). Just keep in mind that you will have to pay the amount of any loss up to the deductible. Keeping an emergency fund that at least matches your deductible will prepare you for minor repairs, or the needed money to reach your deductible for larger emergencies.

How Much Insurance Should You Buy?

Because each policy is different you will need to consider several things when deciding how much coverage you need. You will need to determine the full replacement value of your home, the replacement value of your personal possessions, additional living expenses in the event of a temporary move, and the amount of coverage you will want for personal liability. You will also need to assess the need for additional insurance in areas of vulnerability.  Having a good idea on these items will help you find the best insurance policy to meet your family’s needs. Of course your policy will determine your homeowners insurance monthly costs.

Don’t Forget Mortgage Insurance

Let us not forget the pesky item of mortgage insurance. Mortgage insurance is different and separate from home owners insurance. Mortgage insurance, or PMI, protects the lender from a potential default on the loan.  If your down payment is less than 20% of the purchase price of your home, your lender will probably require you to purchase mortgage insurance. You can use our mortgage calculator with taxes, insurance, & PMI included to get an idea of your total payment each month.  If possible, avoid paying PMI as part of your mortgage payment. Pay it separately and drop it when your equity reaches 20% of the home’s value. Because mortgage insurance benefits the lender, the sooner you can drop it the more money you can save or add toward the principle of your mortgage.

Homeowners insurance is often a forgotten cost until an emergency warrants a claim.  Keeping on top of your finances with a workable budget is key when it comes to paying for the liabilities we might forget about. Make sure you stay on top of your premium and are knowledgeable about your coverage so you know what to expect from your policy when you need it the most.