Homeowners insurance doesn’t just provide financial protection if your home is damaged. Discover what homeowners insurance actually covers—and why it’s so important to have
Look at the value of your home, compared to everything else you own. For the average person, their home is likely to be the most valuable asset—even if it’s not paid for. Doesn’t it make sense to protect this asset?
Homeowners insurance gives you peace of mind. It provides financial protection if your home or its contents is damaged. That’s what most of us want—and in many cases are required to have—but the protection doesn’t stop there.
A mortgage changes everything
The Federal Reserve Bank of St. Louis’ reports that about 63% of people in the United States own a home, while 65% of those people have a mortgage on that home. This means they’ve arranged financing of the purchase with a financial institution.
If you have a mortgage on your home, the lender will almost always require that you have homeowners insurance. Most financial institutions will even require you to have proof of this insurance before they approve the mortgage.
This “must-have” provision by your financial institution makes sense. They have made a sizeable investment in the loan—and your house is the collateral. It needs to be protected—both for your benefit, and for the financial institution.
If you choose not to obtain a homeowners insurance policy, the Consumer Financial Protection Bureau allows financial institutions to buy insurance on your behalf and charge you for it. This bureau is a United States government agency that makes sure banks, lenders, and other financial companies treat you fairly—but it also looks out for these institutions as well.
So, if you decide you don’t want to get homeowners insurance and your lender purchases it on your behalf, you should also know two important things:
- It may be more expensive than what you could buy yourself
- This insurance may only cover your lender, which means if something does happen, you may not be personally compensated
In most cases, you’ll pay for your homeowners insurance through an escrow account set up by the financial institution, so you won’t pay the insurance company directly. Instead, you’ll pay the lender as part of your monthly mortgage payment, and they will remit your policy premium from the escrow account when it is due.
But what about if you don’t have a mortgage?
In that case, you don’t have to carry homeowners insurance. But you’re taking an enormous risk with the most valuable asset you own.
More than the house itself
Financial institutions aren’t really all that interested in the contents of your home. They just want to make sure the home itself is protected. Most standard homeowners policies offer more than protection for the structures themselves.
Homeowner insurance protection typically also includes your personal belongings—and this includes the lawnmower in your garden shed. There are certain exclusions, but generally, if it’s something you own and it’s on your property, your homeowners insurance policy will protect it.
Usually, it’s necessary for you to have a record of ownership, such as a purchase receipt. Your policy is calculated by the estimated value of the contents of your home and what’s on the property. You’ll work with your homeowners insurance agent to assure that you purchase enough coverage to protect it. This coverage offers protection against loss, which includes both damage and theft.
Work with your insurance agent to also make sure that the policy covers other structures on your property. It usually will already automatically cover things like decks and garages that that are attached to the main dwelling. Fences, sheds, detached garages, and other detached structures on your property can be included, as well.
Homeowners insurance can protect people, too
If there is damage to your property, it may also cause harm to you and your family—and perhaps even unrelated people like friends or even someone you don’t know, like a delivery person. Homeowners insurance protects people, too.
The details depend on your policy, so you’ll want to review it with your agent and make sure you understand the coverage. Often, it covers medical expenses for you (or anyone on your property) that result from damage injury that occurs in to your home or while on your property.
Homeowners insurance can also include coverage for the cost of temporary living arrangements if the damage to your home is substantial and you’re forced to stay at a hotel.
Homeowners insurance policies are not all-inclusive
While this insurance can protect your home, its contents, and your family, it’s gotit has certain limitations. There are two main things to keep in mind:
- There is a maximum amount your policy will pay you because of a covered loss(limits of your policy). In addition, your policy will not pay more than the actual cost of a covered loss(regardless of the policy limits). It’s crucial to work with your insurance agent to take into account things like the estimated cost of rebuilding your home in case of a catastrophic event, as well as the value of your belongings in case they are damaged or stolen. If you don’t purchase enough insurance coverage, you may find yourself having to pay a large amount of the loss out of your own pocket. Likewise, over insuring will only result in higher premium costs.
- Your homeowners coverage will have deductibles. This is the amount you will pay before the insurance benefits kick in to cover your claim. You’re probably used to this term because of health insurance. It works the same way with your homeowners insurance, but with one key difference: While you may meet your deductible amount yearly with health insurance, the deductible for your homeowners insurance policy applies each time you file a claim.
Not all types of damage are covered under a homeowners insurance policy. The most notable type of damage excluded from coverage is flooding. Because homeowners insurance can be purchased with many types and levels of coverage, work with an insurance agent to understand what type of homeowners insurance policy will actually keep you protected, rather than settling for the minimum coverage requirements. Not only will they help you understand the policies available to you, they can also work with you to find additional policies that can cover what your main policy does not.