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Home Insurance: An Overview for Beginners


Home insurance (also known as homeowners insurance) isn't a luxury; it's a necessity. Not just because it protects your home and belongings from damage or theft. Almost all mortgage lenders require borrowers to insure the property's full value or fair value (usually the purchase price) and will not lend or finance a residential real estate transaction without proof.

You don't even have to own your own home to need insurance; many landlords require their tenants to maintain tenant insurance coverage. But it's wise to have that protection, whether you need it or not. We explain the basics of home insurance.

What the Homeowners Policy Offers

Although infinitely customizable, a homeowner's insurance policy contains certain standard elements that indicate what the insurance company will cover.

damage the interior or exterior of your home

For damage caused by fire, hurricane, lightning, vandalism or other insurance disasters, your insurance company will pay you so that your home can be repaired or even rebuilt from scratch. Damage or damage from floods, earthquakes, and poor home maintenance is usually not covered, and you may need a separate label if you want this type of protection. Detached garages, sheds or other structures on the property may also require separate coverage, using the same guidelines as the main house.

Clothing, furniture, appliances and most other household items are covered if destroyed in a covered disaster. You can even get "external" insurance, so you can file a claim for lost jewelry, for example, no matter where in the world you lost it. However, there may be limits on how much your insurance company can reimburse you.According to the Insurance Information Institute, most insurance companies offer coverage ranging from 50% to 70% of your home structure insurance amount.

For example, if your home is insured for $200,000, your property can be insured for up to $140,000.

If you own a lot of high-value items (art or antiques, fine jewelry, designer clothing), you may have to pay extra to include them in a detailed plan, buy tags to cover them, or even get a separate policy.

Personal liability for damage or injury

Liability insurance protects you from lawsuits from others. The clause even includes your pets! So if your dog bites neighbor Doris, your insurance company will pay for her medical bills, whether the bite happened to you or hers. Alternatively, if your child breaks their Ming vase, you can ask for a refund.

If Doris slips on a broken vase and successfully sues for damages or lost wages, you are also covered as if someone were injured on your property.

 While policies can provide coverage for as little as $100,000, experts recommend at least $300,000 worth of coverage, according to the Insurance Information Institute. For added protection, a few hundred dollars in premiums can buy an additional million dollars or more through an umbrella policy.

Hotels or houses for rent when your home is being remodeled or repaired

It's unlikely, but if you have to leave the house for a while, this is without a doubt the best cover you'll ever buy. This part of coverage is called extra living expenses and will pay for rent, hotel rooms, restaurant meals and other miscellaneous expenses you incur while you wait for your home to become livable.

However, before booking a suite at The Ritz-Carlton and ordering caviar from room service, keep in mind that the policy dictates strict daily and total limits. Of course, you can expand these daily limits if you're willing to pay more for insurance.

Different Types of Home Insurance

All insurance policies are definitely not created equal. The cheapest homeowners insurance may give you the least coverage, and vice versa.

In the United States, several types of home insurance have been standardized within the industry; they are designated HO-1 through HO-8, which provide different levels of protection based on the needs of the homeowner and the type of home covered. Basically there are three levels of coverage.

Current Currency Value

Actual present value includes the cost of the home plus the depreciated property value (that is, the current value of the items, not the amount you paid for them).

Replacement Cost

A replacement value policy covers the actual cash value of your home and belongings without any depreciation deductions, allowing you to restore or rebuild your home to its original value.

Guaranteed (or extended) replacement value

This inflation buffer is the most comprehensive and will cover any cost of repairing or rebuilding your home—even if it exceeds your policy limits. Some insurers offer extended replacement services, which means they offer more coverage than you buy, but with a cap; usually it's 20% to 25% above the limit.

What does homeowners insurance not cover?

While home insurance covers most situations in which loss may occur, certain events are generally excluded from the policy, such as: B. Natural disasters or other "force majeure" and acts of war.

How are home contents insurance rates determined?

So what's the driving force behind interest rates? According to Noah J. Bank, vice president and insurance consultant at HUB International, it's the likelihood of a homeowner making a claim -- what the insurance company considers a "risk." To determine risk, home insurance companies carefully consider previous home insurance claims made by homeowners, as well as claims related to the property and homeowner loans. “Claim frequency and damage severity play a big role in setting rates, especially when more than one type of damage is associated with the same problem, such as floods, storms, etc.,” Banker said.

Insurance Tips to Reduce Costs

While it's never worth playing around with cheap insurance, there are ways to lower your insurance premiums.

Maintain security systems

Burglar alarms monitored from Grand Central Terminal or directly connected to the local police department can help lower homeowners' annual premiums, possibly by 5% or more. In order to receive the rebate, the homeowner must usually provide the insurance company with proof of centralized monitoring in the form of an invoice or contract.

Increase your deductible

As with health insurance or auto insurance, the higher the deductible a homeowner chooses, the lower the annual premium. The problem with opting for a high deductible, however, is that claims/issues that typically cost just a few hundred dollars to fix, such as cracked windows or leaking plumbing, damaged drywall, for example, are likely to be the homeowner's responsibility. These can add up.

Look for multiple policy discounts

Many insurance companies offer discounts of 10% or more to customers who have other insurance contracts (such as auto or health insurance) under the same umbrella. Consider getting quotes for other types of insurance from the same company that provides you with home insurance. You may end up saving two premiums.

Plan ahead for renovations

If you plan to build an annex or adjacent structure in your home, consider the materials that will be used. Generally, wood frame structures are more expensive to insure because they are highly flammable. Conversely, cement or steel frame structures are less expensive because they are less likely to succumb to fire or severe weather conditions.

Pay off your mortgage

Obviously, this is easier said than done, but homeowners who outright own their homes are likely to see their premiums drop. Why? When a place is 100% yours, the insurance company assumes you'll take better care of it.

Regular policy reviews and comparisons

Whatever the starting price you offer, do some comparisons, including looking for group insurance options through credit or union, employer, or association membership. Even after purchasing one policy, investors should compare the costs of other policies with their own at least once a year. Additionally, they should review their existing policies and be aware of any changes that may occur that could reduce premiums.

For example, you may have removed a trampoline, paid off your mortgage, or installed a sophisticated sprinkler system. If this is the case, simply notifying the insurance company of the change and providing evidence in the form of pictures and/or receipts can significantly reduce premiums. "Some companies provide loans for complete plumbing, electrical, heating and roof renovations," Van Jura said.