Homeowners Insurance: Your Guide to Coverage

Buying a home is very exciting. Buying homeowners insurance? Not so much. For as uninspiring as shopping for homeowners insurance can be, it is a must. Homeowners insurance is the single best way to protect your biggest financial investment: your new home. However, protecting your asset isn’t the only reason you need to purchase this insurance — your mortgage lender requires it.

What Is Homeowners Insurance?

Homeowners insurance is a combined property and liability insurance product that is available for private homes. You may also hear it referred to as hazard insurance or home insurance.

Repairing or replacing a home that has been damaged is expensive, often prohibitively so. Homeowners insurance helps pay for those costs. You pay an annual premium that is based on the replacement cost of the home and the value of your personal property within the home.

In exchange for paying this premium, the insurer agrees to pay out a certain amount if the home is damaged by a covered cause. Premiums will vary based on the value of the home, the value of the personal property within, geographic location and policy add-ons, but they typically run from several hundred to a couple thousand dollars annually.

In addition to property damage coverage, homeowners insurance also provides liability coverage. This protects you, the homeowner, if an accident happens on your property, such as someone getting injured or their personal property getting damaged a tree branch falling on a friend’s car parked in your driveway, for example). Without such liability coverage, you may find yourself on the hook for paying for the damages out of pocket.

What’s Covered by Homeowners Insurance?

Homeowners insurance provides coverage in six categories:

1. The Dwelling, which is the main house and anything directly attached to it, like a garage.
2. Other structures that are not attached to the house, like detached garages, fences, sheds or guesthouses.
3. Personal property, including furniture, appliances, electronics and clothing. Interestingly, the policy also covers property that is lost or damaged off-site such as at a storage facility or even with your child at college.
4. Liability costs, if someone is injured on your property.
5. Medical bills, if someone is injured on your property or injured by your pets.
6. Loss of use coverage, which helps cover living expenses while the home is being repaired.

Hazards or perils that are typically covered by homeowners policies include:

• Fire, smoke, wind, hail, lightning, explosions, or civil unrest
• Theft or vandalism
• Trees and other falling objects
• Weight of ice, snow, sleet, and freezing rain
• Rupturing and sudden overflowing of plumbing, heating, air conditioning appliances, or sprinkler system

Homeowners policies include a number of exclusions. Hazards, risks and perils that are not covered by typical policies include:

• Flooding or sewer backups
• Land movements such as earthquakes, landslides, and mudflows
• Acts of war or overthrow of the government
• Damage from pets, birds, rodents, or insects
• Pollution damage
• Deliberate damage to the home
• Normal wear and tear

Where to Buy Homeowners Insurance

If you have a mortgage on the property, you’ll have to provide proof of homeowners insurance at closing. A policy can be purchased from any of the major insurance providers.

Many people start their search with a call to their auto insurer; some companies offer discounts to customers who have both auto and home insurance with them, and some people prefer to funnel all of their insurance needs through one provider, but you can definitely shop around. It never hurts to comparison shop, especially because not all policies are the same.

Some policies cover all risks/perils unless they are specifically excluded. Others cover only those perils specifically listed in the policy. Check out our list of common terms found in home insurance policies to make understanding your policy a little easier.

What to Watch for in Homeowners Insurance Policies

Although a basic homeowners insurance policy is quite comprehensive, there are still some pitfalls to be aware of.

Covered Causes

The biggest mistake homeowners make is assuming that their policy will cover any and all damages. This is not true. Policies only pay out for “covered causes,” that is, damage caused by something specifically covered by the policy.

For example, homeowners insurance does not cover flooding. For that, you’ll need to purchase a separate flood insurance policy. Hurricanes and earthquakes are other examples. In hurricane or earthquake prone areas, you may need to buy separate coverage or purchase as an add-on. Always discuss what is covered and what isn’t with your insurance agent.

Market Value vs. Replacement Value

Homeowners policies are based on the replacement cost of the home. This is not the same thing as the market value of the home.

Market value includes the price of your land and local real estate market trends. Replacement cost is strictly the amount it will cost to replace the home. The replacement cost will almost always be lower than the market value, so don’t be alarmed when you see a lower amount than what you paid for the home. It’s a good idea to check in with your insurance agent from time to time to make sure you are maintaining enough coverage on your home.

Coverage Limits

All policies are subject to coverage limits. While the dwelling should be covered at 100 percent, other coverages are often limited. The coverage limits for personal property, other structures or loss of use are usually a percentage of the dwelling coverage limit. You can adjust these coverage amounts, but keep in mind it will affect your policy premium.

John Bodrozic, co-founder of HomeZada.com, recommends looking at this important coverage limit, “Many consumers are underinsured with the contents portion of their policy, because they have not done a home inventory and added the total value to compare with what the policy is covering.”

Deductibles

Like health insurance and auto insurance, you’ll have to pay a deductible before the policy coverage kicks in. Choosing higher deductibles can lower your premium cost, but you’ll need to make sure you can afford to pay the deductible out of pocket if you ever need to make a claim.

According to attorney Chris Johnston of Des Moines Injury Law, “Many people carry high deductibles in order to keep their yearly costs down, but these same folks often end up unable to cover the deductible [in the event that they have to file a claim], which is often a worse scenario than paying a few extra dollars per month to ensure you are protected.”

Business Uses

Homeowners insurance does not cover business use of the home. Some business-related items may be covered, such as computers and furniture, but if you use your home for business, you should purchase additional coverage.

Work With a Trusted Insurance Agent

One important point to emphasize is that even though homeowners insurance is a mainstay of the insurance industry, policies and coverage options do differ. They differ from insurer to insurer. They differ in coverage amounts and coverage types. They even differ between dwelling type; you may need a special type of insurance if you buy a condominium, for example. For all of these reasons and more, it is important to work with an insurance agent you trust.

Your insurance agent is your best resource for determining what kinds of coverage you need and in what amounts. You’ll need to discuss your home’s cost, the value of your personal possessions, how you use your home and any dangers your home may have (swimming pools and fireplaces may increase your premium cost, for example) to arrive at a suitable coverage amount and to ensure you have any additional coverage you may need like flood or business insurance.

Although most people will never have to submit a claim under their homeowners insurance policy, the peace of mind it provides is well worth the expense. Don’t hesitate to take some time to meet with different insurance agents and agencies to find the best fit for your needs.