A Beginners Guide to Homeowners Insurance A Beginners Guide to Homeowners Insurance

Buying a home is likely the biggest financial investment you'll ever make, and making sure you have the right coverage is not only important to protect your investment but also is likely required by your mortgage lender. Homeowners insurance policies cover your property and provide financial support in the event that something unexpected happens and your property is damaged or destroyed.

Below we'll dive into everything you need to know about homeowners insurance (also known as home insurance) including why it's important to make sure you have the right coverage, how to shop for the right policy, how to get discounts by bundling your insurance, and more!

Quick Links

• What is Homeowners Insurance and How Does Homeowners Insurance Work? 
• Is Homeowners Insurance Required?
• What is the Difference Between Homeowners Insurance and Mortgage Insurance?
• What Does Homeowners Insurance Cover?
• What Isn't Covered by Homeowners Insurance?
• What is a Claim?
• What is a Deductible?
• What About Bundling?
• How Do I Shop for Homeowners Insurance?

Key Takeaways:

• By paying an insurance company a fee called a premium, the company will issue you a homeowners insurance policy that protects your property and belongings.
• Homeowners insurance is not required by law but is almost certainly required by your mortgage lender.
• Standard policies protect against sudden, accidental, or unexpected damage.
• You may need to purchase additional coverage to protect yourself in the event of a natural disaster like a flood or earthquake.
• You may be able to save on your policy by bundling it with other insurance policies – for instance home and auto insurance.

What is Homeowners Insurance and How Does Homeowners Insurance Work? 

Homeowners insurance is coverage that protects you and your home against certain types of damages and liabilities. You pay an insurance company a fee, called an insurance premium, and in return, the company will issue you a policy that provides certain financial protection to your personal property and personal belongings in addition to liability coverage in the event that you damage someone else or their property. 

While coverage will vary by policy, homeowners insurance products provide four types of coverage:

• Repairs to your home, yard, landscaping, or other structures on your property
• Repairs or replacements for your personal belongings
• Covering hotel or house rental costs if you need to vacate your house due to repairs (also known as additional living expenses)
• Covering legal costs if you're found responsible for damage or injury to someone else

Is Homeowners Insurance Required?

Property insurance isn't required by law, but if you have a mortgage your lender likely requires homeowners insurance because they are financially invested in your home. Even though it's not technically required if you don't have a mortgage, property insurance is a prudent purchase because it protects you in the event your property is damaged or you face liability due to damage or injury to someone else or their property. 

What is the Difference Between Homeowners Insurance and Mortgage Insurance?

Homeowners and mortgage insurance are commonly confused, but they serve very different purposes. While homeowners insurance is typically designed to provide protection as outlined above, mortgage insurance is often required by lenders if you make a down payment of less than 20% on your home loan. You also may be required to get mortgage insurance if you get a Federal Housing Administration or other federal loan regardless of the amount of your down payment. Mortgage insurance reimburses your lender in the event you default on your loan.

What Does Homeowners Insurance Cover?

As mentioned above, homeowners insurance coverage provided by standard policies includes protection against sudden, accidental or unexpected damage. For instance, typical homeowners insurance may not cover a routine repair to your shower but if a weather-related event damages your roof, your policy will most likely help cover the costs of repairs.

Similarly, personal possessions inside your house like furniture, appliances, and clothing are generally covered if they are damaged in an insured event. 

It's important to note that a homeowners insurance policy may not cover all accidental or unexpected damage to your home. Most standard homeowners insurance policies don't cover damage as the result of earthquakes or floods unless you buy additional coverage (referred to as earthquake or flood insurance). 

And if you have freestanding structures on your property like a garage, shed, gazebo, or fence you'll likely need what's called "other structures coverage" to ensure they are protected against unexpected damage. 

Your policy also may offer a certain amount of personal liability protection which protects you in the event you face claims or legal costs as the result of injury to another person or their property where you are at fault. For instance, if your neighbor trips and falls on your property and injures themself your policy will likely contribute to their medical expenses. And if your neighbor successfully sued you for pain and suffering or lost wages as a result of their fall, your policy will likely cover you for that as well. 

As previously mentioned, most homeowners insurance will also cover living expenses like some hotel or house rental expenses if you are displaced due to repairs or rebuilding (also called loss of us coverage). Called additional living expenses, this part of homeowners insurance usually covers hotel costs, rent, restaurant meals, and some other costs. It's important to note that policies will have certain coverage limits for these expenses.

What Isn't Covered by Homeowners Insurance?

Standard homeowners policies will cover a range of incidental damage or loss as outlined above, but there are certain things your policy doesn't cover. A common example of something not covered by homeowners insurance are natural disasters like floods or earthquakes. The good news is that if you live in an area that is more prone to one of these events, most insurance providers also provide coverage and types of home insurance like earthquake insurance and flood insurance to ensure you're fully protected.

What is a Claim?

So you've experienced damage or loss to your home that is covered by your policy. How do you go about getting reimbursed by your insurance company? Insurance claims are the formal request you submit to your insurance company to be reimbursed under the stipulations of your policy. Usually you can file a claim with your insurance company by contacting your provider online or by phone and you'll be asked to provide details about the extent of the damage or loss to your property. Your insurance provider will then evaluate your claim and deny it (if they determine the damage or loss wasn't covered by the terms of your policy) or pay it (if it was a covered event). 

What is a Deductible?

This is essentially the amount you're willing to pay out of pocket for any claim you make on your policy. Your insurance professional will subtract this amount from the money you are owed if a claim you file is approved. For instance, if you have a $2,000 deductible and file a claim for $10,000 worth of damage to your home your insurance provider will pay you $8,000 toward the cost of repairs and you'll be on the hook for the remaining $2,000. 

When purchasing a policy, there are usually several deductible amounts to choose from. If you choose a higher deductible, you'll generally pay less for your premium and vice versa. 

What About Bundling?

A great way to cut down on homeowners insurance costs is to think about bundling. For instance, your home insurance company may offer you a discounted rate if you purchase homeowners and auto insurance through them. The average savings for this kind of discount is about 20% off each policy -- great savings for your family! Most providers will also offer a range of other kinds of bundling discounts.

How Do I Shop for Homeowners Insurance? 

Want to make sure you're getting the right policy at the best rate for your home? Homeowners policies can be complex and when you're shopping around for policies it can be difficult to compare different coverage options and rates to ensure you get the coverage you need at a fair price. Some things to consider when shopping for a policy are group coverage options through credit or trade unions, employers, or other associations you may belong to. 

It's also important to make sure you're conducting a regular review of your policy to make sure it still meets your needs. For instance, if you used to have a pool but filled it in it's important to make sure your insurance policy reflects that because that change would likely bring your premium down.