Home Insurance Basics

Home Insurance Basics
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Buying a home is typically the biggest financial commitment people make in their lives. It stands to reason that you’d want someone to have your back if it were lost or damaged due to some reason beyond your control. This is where home insurance – often referred to as a homeowners insurance policy or hazard insurance – comes into play.

The coverage options under different types of homeowners insurance can be complex, however, and they’re riddled with terms you’ll have to understand before you start shopping for and purchase a policy.

What Is Home Insurance? Common Coverages

Most basic home insurance policies typically provide three types of coverage: Coverage for your home itself, your personal belongings and liability in the event that someone is hurt on your property.

Your lender will almost certainly require that you carry insurance coverage on your dwelling up to the amount of your mortgage. Your house acts as collateral for your mortgage debt, and your lender could be out a lot of money if your home is destroyed. It won’t take your word for it that you have coverage. It will want proof, usually a copy of the policy or the contract, and it might even require that it’s listed on the policy as the payee.

This portion of your coverage will typically pay out if your home is destroyed by fire or a severe weather event, or due to violence, civil unrest or vandalism. Covered natural disasters and events should be listed in the policy. Detached buildings are sometimes covered too, such as a garage, tool shed or she-shed, and many policies will also foot the bill if you must live elsewhere for a period of time because of loss of use of your home.

When you make a claim, it will be useful to have a home inventory with images and purchase dates and costs.

Your personal property, such as furniture, clothes and electronics, is usually covered, even if they’re lost due to theft rather than a fire or weather event. You might even be covered if your property is stolen or destroyed at a location other than your own home, such as in a storage facility.

You’re typically covered against injury to others on your property as well, even if your dog gets loose and bites the mailman. This type of homeowners insurance coverage will pay for legal representation if you’re sued, as well as any damages you’d be liable for paying if you lost the lawsuit, up to certain policy limits. It will also pay the medical bills of the party who was injured.

What Doesn’t Homeowners Insurance Cover?

Insurance companies are businesses, so they naturally want to place some coverage limits on the amounts they’ll reimburse on claims. They even limit the types of insurance claims they’ll honor. For example, home insurance coverage rarely pays for damage caused by earthquakes or floods.

Most home insurance policies won’t pay for property damage caused by you, such as because you failed to adequately maintain the property, or for infestations, mold or general wear and tear. And they typically limit how much they’ll pay out for pricey personal belongings, such as jewelry, particularly if it's stolen and not destroyed or lost in a disaster.

And as for Fido, some dog breeds are excluded from coverage because they have a reputation for being aggressive or due to their size.

When you get your home insurance quote, ask about the coverage for your air conditioning, damage caused by sleet or windstorms and water damage.

When You Have a Claim

Home insurance companies typically cap the amounts they’ll pay out even when a loss or damage is covered by the policy. These are typically terms that you agree to, however. You can choose the amount of coverage you want to buy and what it is for.

One such choice is between replacement cost coverage and actual cash value. Let’s say the super-duper television you purchased four years ago is destroyed in a fire. You put in a claim. Your insurance company will pay you enough to buy a brand new one at current value if you’ve elected replacement cost coverage. But you’ll only receive what that used, four-year-old TV is worth after depreciation if you choose actual cash value. Needless to say, replacement cost coverage means higher monthly premiums.

These rules typically apply to your home as well as to your belongings, but you can often purchase guaranteed/extended replacement cost coverage for your dwelling. It will pay however much it costs to rebuild your home. This can be particularly beneficial if building costs for homes with your square footage have risen since the time when you first took out the policy, perhaps even dramatically after a disaster. You'll want to be clear on how reimbursement will work for dwelling coverage if you are purchasing an older home, especially one that is not up to current building codes.

Then there are deductibles. This is an amount you agree to pay out of your own pocket when you make a claim. For example, your insurer might be willing to pay $4,000 to replace that television, but you’ll receive only $3,500 if you agreed to a $500 deductible.

When you make a claim, it will be useful to have a home inventory with images and purchase dates and prices.

You Can Add Extra Coverage

You’re not necessarily left out in the cold if your loss or damage exceeds any of these guidelines or limits in what the standard policy covers. Almost all standard homeowners insurance insurers offer “riders,” “floaters” or some type of additional coverage if you want to pay for it.

You can usually buy separate flood or earthquake insurance, and you might want to do so if your home is located in an area that’s prone to such weather events. You can get flood coverage through the National Flood Insurance Program. Earthquake coverage might be available from your insurer as a rider, or you can buy it through an insurance agent at another provider.

You might want to consider adding a special personal property floater if you own things like expensive jewelry. These items would be covered up to their full appraised value if you take this option. You wouldn’t have to worry about cash value or replacement cost.

Limits usually exist for liability coverage, usually starting at $100,000. But experts recommend that you insure against liability up to how much you stand to lose if you’re sued and lose the case. That $100,000 in coverage might be fine if you’re in a moderate-paying job and don’t have much else in the way of assets. Otherwise, you might want to purchase more coverage in the form of an umbrella policy.

How Much Does This Cost?

You get what you pay for, as the saying goes, and your home insurance premiums will naturally increase as you add coverage for the things you're insuring. But you do have some options to keep your insurance costs down.

It’s not uncommon for mortgage lenders to select and “assign” a home insurance policy to the borrower when they loan money for a home purchase. The premiums are then included in your monthly mortgage payment as the policyholder, and the lender will forward the money to the insurer on a regular basis in a process known as “escrow.” These policies are typically more expensive.

Escrow might be unavoidable, but you should have a say in what insurer you want to use. You can shop for the best policy at the most affordable terms and arrange to have your lender use this company instead.

Some insurers offer discounts as well, such as if you have fire, smoke or burglar alarms installed. You might also get a break because you’re a member of a certain organization, such as AARP. You can also typically save on all premiums if you “bundle” all your various types of policies with one company, such as your car insurance and your home insurance.

Finally, the more you’re willing to pay out of pocket when you make a claim, the more affordable your premiums will be. Go with higher deductibles on your policy, if possible.