If you own a home, chances are good that you have a homeowner’s insurance policy. Even if you never see a bill or pay a premium yourself, it’s likely that your bank requires the policy as a condition of your mortgage, and even collects an escrow as part of your monthly payment to pay the premium directly to the insurance company.
So with that in mind, what is homeowner’s insurance? What does it cover? Equally important, what doesn’t it cover? How can you make sure that your home is best protected using the coverage you have?
Let’s take a look…
What is homeowner’s insurance?
Homeowner’s insurance is an insurance policy that is, more often than not, required as a condition of ownership for most or all homeowners. Most likely, it is one of the million pieces of the puzzle that went into purchasing your home – and in a lot of cases, many homeowner’s don’t ever give it a second thought.
It’s important to clarify that homeowner’s insurance is different from a home warranty. A home warranty is a third party service that covers various appliances throughout your home – if an appliance or essential system (e.g., your heating system) fails, your home warranty may cover it. For more information about home warranties and whether it’s worth it to purchase one, here’s some information from Realtor.com, the official website of the National Association of Realtors.
So what does a homeowner’s insurance policy cover?
The homeowner’s insurance policy that is most typically purchased alongside a new home is a package policy that covers against damage to the home as a result of a disaster and against liability (legal responsibility) for any damage caused at or by your property to other people. For example, if you have a friend over and they are injured by something in your home, many policies offer no-fault medical coverage, which in many cases can allow your friend to have their medical bills paid without filing a liability claim. Overall, a homeowner’s insurance policy typically offers:
- Coverage of your property in the event of a covered disaster, fire or theft (see below for possible exceptions)
- Coverage of your personal belongings in the event of damage related to a covered disaster
- Liability protection against damages, including damage caused to another person or their property by your household pets
- Living expenses incurred if you are unable to live in your home due to damages caused by a covered disaster
- Coverage for detached structures such as barns, garages, and sheds
Okay, so what does a homeowner’s insurance policy not cover?
A standard homeowner’s insurance policy does not usually protect against a flood, earthquake, or normal wear and tear. Failure to properly maintain your home is not covered in the event that poor maintenance causes damage, even if it damages the structure of the property. If your home is in a flood zone or an area prone to earthquakes, your bank will likely recommend (or require) that you obtain supplementary insurance to cover against those types of disasters.
It’s also important to know your coverage limits. For example, standard liability coverage might be $100,000 – if that’s not adequate to cover an anticipated liability, you may want to speak to your insurance provider about increasing your limits. Higher limits typically come with a higher premium, so you’ll have to decide whether it’s worth the cost.
How can I make my homeowner’s insurance policy work best for me?
The first thing to do is to meet with your insurance provider and make sure that your property has an appropriate amount of coverage. If you have made significant improvements to your property, for example, the value of your home may have gone up and would not be adequately covered under the existing policy. It’s important to update your insurance policy if you upgrade appliances, remodel, or do anything that might significantly increase the value of your home.
Additionally, you should make it a priority to take a home inventory. A home inventory involves walking through your home, documenting (preferably in writing and with photographs) all of your personal belongings. Having a recent home inventory can be important if you need to make a claim for damage to your personal belongings, in addition to your property.
Finally, it’s important to note that in the event of a catastrophe, your insurance policy either covers the market value of your property or the replacement cost. Replacement cost coverage is more expensive, because it covers the amount it would take to rebuild your home. Market value coverage is cheaper, but it only covers the amount that someone would pay for your property after the covered disaster. With this lesser coverage, you will only get reimbursed for a portion of the full value of your home in the event of a disaster, in exchange for lower premiums.
Are there any discounts?
Depending on your insurance provider, you may be able to obtain discounts on your homeowner’s insurance for taking simple steps to prevent a disaster from occurring. For example, installing deadbolts or a security system can lower your risk of being robbed, and might create an incentive for your insurance provider to discount your policy. Check with your insurance provider to see what steps you can take to lower your monthly premiums.