What is Homeowners Insurance and How Does it Work


homeowners insurance

Homeowners insurance protects the most expensive purchase of your life and is required if you have a mortgage.

If your home is damaged, your homeowners policy will repair it.

This article looks at homeowners insurance, what it is, how it works, what’s covered, and how to get the lowest premium.

Current Mortgage Rates (December 2020)

Loan Term

Interest rate

APR

30-year fixed-rate

3.05%

3.28%

15-year fixed-rate

2.91%

3.06%

5/1 adjustable-rate

3.05%

3.25%

What is Homeowners Insurance?

Homeowners insurance, also referred to as hazard insurance, provides coverage to repair your home if it is damaged. It also covers items inside the home, such as artwork and furniture, and provides health coverage if someone other than yourself is injured while on your property.

Buildings on your property, such as a separate garage, shed, or barn, is also protected by most hazard insurance plans.

If you have expensive artwork or collectibles worth more than standard coverage allowances, you may need to get a separate insurance policy to cover them.

Earthquake and flood damage are not included in most standard insurance policies.

How Does Home Insurance Work?

  • When your home is damaged, you will first have to file a claim with your insurance company.
  • They will send an adjuster to inspect the damage and provide the estimated cost to repair the damage.
  • Your insurance company sends you a check, minus your deductible, to cover the costs of repair.

 

How Can I Lower my Homeowners Insurance?

Compare Rate Quotes 

The cost of homeowners insurance is determined by the home’s location, the square footage, and the market value. But the rate will vary depending on the type of coverage and the insurance company. It’s best to get quotes from at least three or four different insurance companies to ensure you’re getting the most competitive deal.

Bundle Your Insurance

Most companies that offer homeowners insurance also offer policies on everything from car insurance to life insurance. If you have all of your insurance policies with the same company, they will offer discounts for bundling your policies.

Have a Security System

A home with a burglar alarm installed that alerts the police will help reduce your premium. You will need to provide proof of service by sending a copy of your bill or agreement to your insurance provider.

Have Good Credit

Insurance companies will perform a soft credit inquiry to help determine the rate. If you have bad credit, your premiums will be higher. Work to improve your credit score to get the lowest rate quotes.

Raise Your Deductible

Your deductible is the maximum amount you will pay out of pocket on any claims. A higher deductible means the policy will be cheaper, but you may pay more out of pocket.

Pay off Your Mortgage

If you pay off your mortgage, you are more likely to take proper care of your property, which homeowners who own their home outright get a discount on their policy.

What Homeowners Insurance Covers

Structure of the Home

The home structure is covered if damaged by fire, hail, or other disasters listed in your policy. Detached structures such as sheds and garages are also covered by standard homeowners insurance. Standard policies don’t cover earthquakes, floods, or normal wear and tear.

Personal Belongings

Items inside the home such as furniture, art, clothes are covered if stolen or destroyed in your property. Expensive items like art, jewelry, and collectibles are covered but only up to the standard limits.

Car Coverage

If your car is broken into or stolen from your property, it will be covered by your homeowner’s policy. If you’re backing out of your garage and instead of putting it in reverse, you drive through your house. Insurance will cover the cost of repairing your home but won’t cover damage to the car itself.

Liability

If someone that does not live in the property ever sues you because they were hurt on your property, you are covered. Liability covers the cost of defending you in court, plus the cost of any awards. The standard liability insurance coverage is $100,000. If you want more liability protection, you should speak to your insurance company about your coverage limits and how to increase them.

Additional Living Expenses

If you cannot live at home due to damage, ALE will pay hotel costs and other living expenses incurred while the home is being repaired. You will be reimbursed for any missed rental payments if you rent out a portion of your home.

What Home Insurance Does Not Cover

Earthquakes and Water Damage

Most states do not include coverage for flooding and earthquakes. Coverage for earthquakes is extra in every state except for California. Flood insurance is only available through the government-run National Flood Insurance Program. Other forms of natural disasters may or may not be covered depending on the location of the home.

Maintenance Issues

Not taking proper care of your property can cause certain issues not to be covered. Damage for general wear and tear is not covered.

Not covered:

  • Termites and other infestations
  • Water and mold damage
  • Normal wear and tear

Massively Destructive Events

Acts of war and nuclear accidents are usually not covered by standard homeowners insurance policies. You may be able to purchase coverage for an additional premium.

Normal Wear and Tear

Damage from termites, birds, rodents and rust, mold, and wear and tear items isn’t covered. Defective items in the house are usually excluded from coverage.

Frequently Asked Questions

How much is homeowners insurance?

The average cost of homeowners insurance varies by state. Some states, such as Oklahoma and Kansas, where tornados are most active, have the highest rates, but the national average is $1,550. You can expect to pay $35 per month for every $100,000 of home value.

What does homeowners insurance cover?

Standard homeowners insurance covers the home’s structure, personal belongings inside the home, such as furniture and clothing, liability, and additional living expenses.

Does homeowners insurance cover water damage?

If the water damage is sudden and accidental, most standard homeowners insurance policies will cover it. Common causes of water damage covered are water heater ruptures and broken water pipes that cause the home to become saturated with water.

Why do I need homeowners insurance?

If you have a mortgage, then homeowners insurance will be required by your lender. Even if your mortgage is paid-off, having homeowners insurance can protect you from a total loss of the biggest investment in your life.

Is your homeowners insurance included in your mortgage payment?

Yes. Your lender will most likely have an escrow account set up where a portion of your monthly payment is held to pay for homeowner insurance and property taxes.

Is homeowners insurance the same as hazard insurance?

Yes. Homeowners insurance is also called hazard insurance; they are synonymous.