What Is Homeowners Insurance?

What Is Homeowners Insurance?

Home insurance provides financial protection against damage to your home and its contents. The payout from homeowners insurance can enable you to repair or rebuild your home and replace damaged or stolen possessions. Most home insurance also covers legal and medical expenses if visitors are injured on your property or a family member injures someone or damages property outside your home. Finally, homeowners insurance typically helps pay your living expenses if your home is uninhabitable during repairs for a covered loss.

What Does Homeowners Insurance Cover?

The most common type of home insurance is an HO-3 policy, which includes four types of coverage.

1. Home structure coverage pays to repair or rebuild your home if it's damaged or destroyed by fire, smoke, wind, hail, lightning, theft, vandalism and certain types of water damage. Other structures on your property, such as a detached garage, gazebo or shed, are usually covered, too.
2. Personal possessions coverage pays to replace belongings such as furniture, appliances, clothing and electronics if they're damaged, destroyed or stolen, either in your home or outside, such as in a storage space. Depending on your policy, insurance may pay to replace your possessions with similar new items or may pay out only their current cash value.
3. Liability coverage pays medical expenses if a visitor to your home is injured, such as a repair person tripping and falling down the stairs. It also covers legal costs arising from the incident. Outside your property, liability insurance covers injury your family members cause to other people or their property, such as your child throwing a football through a neighbor's window.
4. Additional living expenses (ALE) coverage pays some costs of living somewhere else while your home is being repaired or rebuilt after a covered loss. For instance, if you have to live in a hotel that costs more than your mortgage, ALE insurance covers the extra expense.

What Is Not Covered by Homeowners Insurance?

Standard home insurance won't cover every hazard that might befall your home. Here's what homeowners insurance doesn't cover.

• Damage due to floods, earthquakes, sinkholes or landslides: You'll need to buy separate insurance policies to protect against these risks.
• Damage from sewer, septic tank or drain backups or sump pump failures: You may be able to add endorsements or riders to your policy to get this coverage for an extra cost.
• Routine wear and tear to your home: Home insurance won't pay to upgrade your old electrical system or replace a worn-out washing machine. Purchasing a home warranty may provide coverage for some of these issues.
• Losses above policy limits: Most home insurance policies set limits on liability for certain belongings, such as furs, jewelry or computers. These limits are often lower than the item's full value. However, you can generally pay to raise the liability limits or purchase an endorsement to protect specific valuables.
• Losses due to unusual events: Damage or destruction caused by war, government seizure, pollution, infestation or your intentional actions isn't covered by home insurance.

Is Homeowners Insurance Required?

Homeowner's insurance isn't required by law. However, as a condition of approving your mortgage application, lenders generally require carrying at least enough home insurance to pay off the loan. By ensuring you have the money to repair or rebuild after a covered incident, home insurance protects the asset that secures the loan—your home. Home insurance is so important to lenders that they'll monitor whether you are paying your insurance premiums or, in some cases, roll your premium payments into your mortgage payments.

How to File a Homeowners Insurance Claim

When filing a home insurance claim, you can help speed the process by following these steps.

1. Call the police if a burglary, vandalism or other crime occurred. The insurance company will need a police report to support your claim.
2. Contact the insurance carrier. In most cases, you can either call the company or start a claim online. Once your claim is filed, you'll be assigned a claim number and a claims adjuster. The claims adjuster will guide you through the process and visit your property to assess the damage.
3. Document the loss. Resist the urge to clean up until you've photographed and taken videos of any damage. Make a list of items that were lost, stolen or damaged. (Having a home inventory can make this task easier.) Hold onto damaged property until the claims adjuster says you can discard it.
4. Make urgent repairs. If you need to act immediately to prevent further damage, such as boarding up a broken window after a burglary, go ahead. Just be sure to document these stopgap repairs with photos and keep receipts for any repair materials you buy or work you pay to have done.
5. Get estimates. Gather quotes for repairing or rebuilding your home from several licensed contractors. This information can help the insurance company determine the cost.
6. Receive your payout, minus your deductible. The insurance company may pay for your loss in one of several ways.
   • You might receive a check for the full amount that you can use to pay for repairs or replacing your possessions.
   • You might get partial payment now and the rest later.
   • If you have a mortgage, your lender may receive the payment, and may want to approve contractors or repairs before paying for them.
   • If your belongings are insured for full replacement value, you'll typically get a check for their cash value. After purchasing replacements and providing receipts to the insurance company, you'll be reimbursed for the full cost.

FAQ

• How Do You Pay Homeowners Insurance Premiums?

  If you have a mortgage that requires an escrow account, part of your monthly mortgage payment goes to the lender, and part goes into an escrow account that the lender manages. The lender pays your home insurance premiums for you using the money in the escrow account. Escrow accounts are required for government-backed mortgages or for conventional mortgages where the borrower's equity is under 20%.

  Homeowners who don't have an escrow account pay the insurance company directly. You can usually opt to pay your premiums annually, semiannually, quarterly or monthly. Failing to pay home insurance premiums could cause your coverage to lapse. Consider setting up automatic payments to prevent missing a due date.

• Homeowners Insurance vs. Home Warranty: What's the Difference?

  Homeowners insurance covers your home's structure, legal and medical liability, and payment for additional living expenses. It doesn't cover failure of your home's systems and appliances due to wear and tear; for that, you can purchase a home warranty.

  Home warranties may cover your home's heating and cooling system, plumbing, electrical system or water heater. When a covered element of your home breaks down, a contractor approved by your warranty company will inspect it for a service fee. If the home warranty company approves the repair, it generally pays most of the cost. However, home warranties often have lots of exclusions. It may be more cost-effective to set aside an emergency fund you can use for home repairs.

• Homeowners Insurance vs. Mortgage Insurance: How Do They Compare?

  Homeowners insurance protects you and your home from risk; mortgage insurance protects your lender from the risk that you'll default on the loan. You're generally required to buy mortgage insurance if you make a down payment of under 20% and get a conventional mortgage or make a down payment of less than 10% and get a Federal Housing Administration (FHA) loan. If you don't repay your home loan, mortgage insurance pays the lender so they don't lose their investment.

The Bottom Line

Hurricanes, wildfires and windstorms are out of your control, but purchasing homeowners insurance can provide peace of mind should disaster strike your home. To save on home insurance, shop around, compare prices and look for discounts.

Since home insurance companies may evaluate your credit-based insurance score when setting premiums, maintaining good credit can be another way to save. Credit-based insurance scores differ from regular credit scores, but are based on similar factors. The same steps that can help improve your credit score—paying bills on time, paying down debt and minimizing credit utilization—can also boost your credit-based insurance score and potentially lower your premiums.