Takeaways
- Homeowners insurance covers damages and losses to your home and property.
- Homeowners insurance covers furniture, art, clothes, and other assets.
- Homeowners insurance is property insurance that has a coverage limit or cap.
- Homeowners can purchase coverage beyond this cap for added protection.
- Homeowners insurance also covers expenses if you are sued for injuries that can occur on your property or at your home
Buying a home is a major life milestone that requires years of diligent savings and planning. From saving for a down payment to understanding all the future costs of homeownership, getting financially prepared to become a homeowner will help you out in the long run.
Homeownership has hidden costs and responsibilities, like regular maintenance, repairs, and upkeep. One of the recurring costs of homeownership is paying to protect your home, property, and personal belongings from unexpected disasters. A homeowner’s insurance policy offers that protection.
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What Is Homeowners Insurance?
Homeowners insurance is an insurance policy that provides financial protection for your home, property, furniture, and other personal belongings. Homeowners insurance is a contract between you and an insurance company in which you pay the insurance company a yearly premium. In the event of a covered claim, the insurance company agrees to cover losses to your home, belongings, and property structures.
Most mortgage lenders like banks and credit unions require homeowners to get homeowners insurance as part of their closing contract. This ensures that the original mortgage lender is made whole in case of disaster. Additionally, you will receive funds to rebuild your home and structures or purchase new belongings.
How Homeowners Insurance Works
Different types of homeowners insurance policies are available, but the basic principle remains the same. You pay a premium to the insurance company monthly or annually.
If a covered event damages your home, you file a claim with your insurance company. The insurance company will investigate the claim and, if approved, will issue you a payout to help cover the costs of repairs or replacements.
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Understanding the Claims Process
Filing a homeowners insurance claim can seem daunting, especially after a disaster, but most companies have streamlined procedures to make the process as smooth as possible.
The first step is to contact your insurance company and report the damage. They will assign an adjuster to assess the level of damage and determine the extent of the coverage. If possible, be prepared to provide detailed information about the damage, including photos and receipts of belongings.
Once the adjuster has completed their evaluation, they will work with you to determine a settlement amount. It's essential to review the settlement offer carefully and understand what repairs or replacements will be covered.
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Choosing the Right Coverage
Not all homeowners insurance policies are the same. When selecting a policy, it's vital to consider your specific needs and the value of your property. Factors to consider are dwelling coverage limits, personal property coverage amounts, and the types of covered events (e.g., explosion, theft, smoke).
For example, you may need additional insurance if you live in an area prone to natural disasters like hurricanes, tornadoes, or earthquakes. It's also critical to understand your insurance deductible, which is the amount you are responsible for paying out of pocket before your insurance company begins to contribute.
What Does Homeowners Insurance Cover?
Homeowners insurance typically covers a variety of events that can damage your property, structures, or belongings, including:
- Fire and lightning
- Wind and hail
- Theft and vandalism
- Explosions
- Riots and civil commotion
- Accidental release of water or smoke
- Damage from aircraft or vehicles
Not all events are covered by homeowners insurance. For example, damage caused by floods or earthquakes typically requires a separate policy for coverage. Carefully review your policy homeowners insurance documents to understand exactly what is in coverage and out of coverage.
How Much Is Home Insurance?
Homeowners' insurance policies vary by variable, such as what is covered and the replacement cost of your home, structures, and personal belongings. Additionally, individual factors like where you live, your claims history, and your home's characteristics (new or old construction) can alter the cost of a policy.
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According to Progressive, $999 to $1,655 was the average 12-monthly policy in their networks. [1]
Is Home Insurance Required?
Homeowners insurance is not required by law. However, mortgage lenders require you to get homeowners insurance as part of their financing agreement. Lenders want you to get a homeowners insurance policy because they view your house as an income stream of interest payment and want to protect their investment.
Do You Need Home Insurance if Your House Is Paid Off?
Much of people's net worth is tied up in the value of their homes. It can make perfect sense to keep paying for home insurance even after being mortgage-free. Plus, home insurance can give you legal protection if you are sued for accidental injuries in your home or property.
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7 Key Homeowners Insurance Terms
Understanding insurance terminology will help you navigate your policy, talk with your broker, and make the best decision. Here are several definitions to understand:
- Dwelling Coverage: Covers the structure of your home, including the walls, roof, and attached structures like garages.
- Personal Property Coverage: Covers your belongings inside your home in case of theft or damage from a covered risk.
- Loss of Use Coverage: Pays for additional living expenses, such as hotel stays or rental costs if your home becomes uninhabitable due to a covered event.
- Other Structures Coverage: Covers detached structures on your property, such as sheds or fences.
- Medical Payments Coverage: Covers medical expenses for someone injured on your property, regardless of fault.
- Liability Coverage: Pays for lawsuits if someone gets injured on your property.
- Deductible: Your out-of-pocket expense before your insurance policy contributes to a covered loss.
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When Is Homeowners Insurance Required?
While not mandatory everywhere, homeowners insurance is highly recommended. Here are some situations where you might be required to have it:
- Mortgage: If you have financed your home with a mortgage, your lender will likely require you to carry homeowners insurance. This protects their investment in the property.
- Homeowners Association (HOA): If you live in a community with a homeowners association, they may require you to have a certain amount of homeowners insurance coverage.
Homeowners insurance can be a smart investment even if you don't have a mortgage or live in an HOA. It can provide valuable financial protection for your home, belongings, and personal liability.
Homeownership is a journey, whether buying your first home or rental property. A prepared homeowner is a secure homeowner. Feel free to consult with a qualified insurance professional to discuss your specific needs and find a homeowners insurance policy that offers the right balance of coverage and affordability. A few minutes spent understanding your policy today can translate to significant financial protection.
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Smart Summary
Getting homeowner’s insurance is an ordinary course of business expense for a homeowner and is a smart money move. The value of your home often makes up much of your net worth. Safeguarding your home, property, furniture, and personal belongings will give you the financial security you need to plan for expanding your net worth even further by investing in stocks, bonds, and other real estate assets.
What is your Net Worth today? Try out our Net Worth Calculator to see where you land.
Frequently Asked Questions
Homeowner policies are usually for 12 months. After this term, they are renewed annually. They can fluctuate in price based on rising material costs to replace a home, the increased age of the house, or other inflationary pressures.
Homeowner policies cover your home, personal belongings in your home, structures (e.g., garage) on your property and medical payments for injuries on your property. Homeowners policies can vary, so make sure to read the fine print when you are signing up for insurance coverage. You can always consult a financial advisor to assess how much home or supplemental coverage you want.
Generally speaking, homeowners insurance is not tax-deductible. Like with most tax situations, exceptions apply. When you file your taxes, consult with a tax professional to see if you qualify for a deduction.
(1) Progressive. How much does homeowners insurance cost? Last Accessed January 14, 2025.
