5 Things to Know About Homeowners’ Insurance

Whether it’s homeowners’ insurance in New Jersey, California, Florida, or anywhere else in the country, this type of coverage is important to understand. If you’re planning to buy a home or you’re a new homeowner, you need to understand what your policy covers and also what it doesn’t.

Below are five critical things everyone should know and understand about homeowners’ insurance.

1. The Basics

Homeowners insurance is coverage that will pay out if a covered event under your policy causes damages to your home or belongings or destroys it. Your homeowners’ insurance might, in some circumstances, provide coverage if you injure someone else or cause property damage too.

There are four primary reasons for homeowners’ insurance.

The functions of this insurance include paying to repair your house, other structures, and your landscaping and paying to repair or replace personal belongings. Homeowners’ insurance may pay for you to live somewhere else while your home is being repaired, and if you’re held legally responsible for damage or an injury to someone else, it may cover personal liability.

Homeowners’ insurance is not mortgage insurance, and this is a key distinction to make. Mortgage insurance is what you might have to pay for if you buy a house with a down payment of less than 20%.

Some federal loans, like FHA loans, may require mortgage insurance, no matter your down payment.

Homeowners’ insurance protects you, and mortgage insurance serves to protect your lender.

2. Are You Legally Required to Have Homeowners’ Insurance?

You aren’t required legally to have homeowners’ insurance, but if you have a mortgage on your home, the lender is more than likely going to make you insure your home. This is so the lender can ensure it’s protecting its investment.

Even for homeowners without a mortgage, this type of insurance can be smart because you have property and liability coverage. It’s a good safety net, and you never know when you might be glad you have it.

3. The Coverage

The following things that standard homeowners’ policies will usually cover include:

• Dwelling: This covers any damage to your home and structures that are attached, like a porch. The typical amount of coverage is enough to cover rebuilding your home.
• Other structures: Homeowners’ policies might cover structures on your property that are stand-alone, like sheds, and the limit is usually 10% of dwelling coverage.
• Personal property: With this type of coverage that’s often part of homeowners’ policies, it pays for repairing or replacing belongings that are damaged or stolen. The typical amount ranges from 50% to 70% of dwelling coverage.
• Loss of use: This is a reference to coverage for paying temporary living expenses if you have to leave while your house is being repaired, and it may be around 20% of your dwelling coverage.
• Personal liability: This coverage is what would pay if you injured someone or you unintentionally caused property damage. The coverage amount can be anywhere from $100,000 up to $500,000 in most cases.
• Medical payments: If someone is hurt on your property, no matter who’s at fault, this coverage would pay to treat them. Medical payments coverage can also pay if you or someone in your family hurts someone away from your home. The coverage amounts can range from $1,000 to $5,000 for most policies.

General things that are usually covered with homeowners’ insurance are:

• Coverage for personal items taken from a car. Your comprehensive auto coverage might also be used for this.
• If your home is destroyed completely by a fire, most standard homeowners’ policies will cover it and the cost of other living expenses you accrue.
• Some natural disasters are commonly covered by homeowner’s insurance, but not all. Inclusions for natural disasters can be thunderstorms, hail, and hurricanes, as well as lightning. Earthquakes aren’t usually covered, and you may need additional, separate flood insurance.
• If you have flooding that’s caused by problems inside the house, like a leaking pipe, it’s probably covered by your homeowners’ insurance. Floods from outside conditions, like rising rivers or flash floods, are not covered by most homeowners’ insurance policies.

4. Levels of Coverage

There are three basic coverage levelswith most policies.

One is the actual cash value. Actual cash value covers the cost of a house and the value of your belongings once depreciation is deducted. Depreciation refers to how much your items are currently worth rather than how much you paid.

Replacement value policies will cover the actual cash value of your homeand also your possessions without deducting for depreciation. You’d be able to rebuild or repair your home up to its original value.

The third level of coverage is guaranteed replacement cost/value, also known as an extended replacement. This is a type of policy meant to protect against the effects of inflation. Among levels of coverage, it’s the most comprehensive. Your policy would pay the cost to rebuild or repair your home, even if that ends up being more than your policy limit.

5. How Rates Are Determined

The perceived risk is what the rates for homeowners’ insurance are based primarily on. To determine risk, a company will consider past insurance claims submitted by the homeowner and claims related to the property. Insurers also look at the credit of the homeowner.

If someone has had several claims in the past few years, or the home has had claims made by a previous owner, then your premium is probably going to be priced higher. In some situations, a person could be ineligible for homeowners’ insurance because of their past claims.

The crime rate, the neighborhood, and the availability of building materials also factor into rates.

Coverage options like deductibles and the amount of coverage you want are part of the premium too.

Finally, your home’s condition may mean you have to pay more for homeowners’ insurance. If your home isn’t in good condition or well-maintained, the insurer is going to see it as a potentially riskier property and a higher likelihood they’d have to pay a claim for damage.