Everything You Need to Know About Homeowners Insurance [comprehensive guide]

House fires happen — an average of about 357,000 per year — and when they do the home and just about everything inside are damaged or destroyed. Without homeowners insurance to cover the cost of repair and replacement, the homeowner loses hundreds of thousands of dollars effectively overnight. Therefore, having homeowners insurance is probably one of the most important policies you can have.

Homeowners insurance gives you peace of mind by financially protecting you against many of life’s unforeseen and costly mishaps.

What is Homeowners Insurance?

Insurance is a form of risk management. The insured — in this case the homeowner — pays an insurance company a certain amount of money a year, called the premium, in order to transfer the cost of potential loss because of death, injury, fire, etc. The insurance protects the homeowner against the financial hardship that would be caused by any losses.

Legally you’re not required to take out homeowners insurance, but mortgage companies won’t give you a home loan if you don’t. Many require that borrowers purchase a policy that at least covers what is owed on the property. Besides, it is in your best interest to obtain a homeowners insurance policy.

You’ll have to factor in the cost of your insurance policy along with your mortgage payments and taxes to make sure that you can afford the house you’d like to buy. Shop around for the best coverage and cost, and compare the rates from a variety of different companies.

What Does Homeowners Insurance Cover?

There are four main things that a basic homeowners policy covers — the structure of your home, personal belongings, personal liability and additional living expenses.

• Structure of the Home: If your house is damaged or destroyed because of fire, tornado, hurricane or other natural or human caused disasters listed in your policy, then your insurance company will compensate you the cost of repairing or even rebuilding the house. Damage because of floods or earthquakes are not covered and must be purchased in addition to your basic homeowners policy.
• Personal Belongings: Anything damaged or destroyed in your home — furniture, appliances, electronics, clothing and most other items — by an insured disaster is covered under your homeowners policy. Although, you might not be given the full value of the damaged or destroyed item. In addition, most policies will cover 50 to 70 percent of the amount covered on the structure of the house. For example, if your home’s structure is covered for up to $200,000, then your personal belongings would be covered up to in the neighborhood of $120,000.
• Personal Liability: If you or a family member injured someone else or damaged another person’s property, then your policy would cover the cost of any legal or medical expenses incurred. Damage or harm caused by your pets is also covered. Liability coverage generally starts at about $100,000, but higher amounts can be purchased.
• Additional Living Expenses: This part of your policy covers any costs incurred if you have to live away from your home because it was damaged or destroyed by any of the insured distasters. This includes cost of a hotel, restaurant meals and any other expenses while your home is being repaired or rebuilt. The amount of coverage varies from company to company.

Are There Different Types of Homeowners Insurance?

A homeowners policy can be one of three different types of coverage — actual cash value, replacement cost, guaranteed or extended replacement cost.

• Actual Cash Value: This policy covers the home plus personal belongings up to their current value. That is, the depreciation of your personal belongings is factored in.
• Replacement Cost: This policy covers your home and belongings without factoring in depreciation.
• Guaranteed Replacement Cost: This is the most comprehensive policy and it covers whatever it costs to repair or rebuild your home. It guards against inflationary costs of repair and reconstruction.

How much homeowners insurance do I need?

You need enough insurance to cover the following:

• The structure of your home.
• Your personal possessions.
• The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs.
• Your liability to others.

More on How Much Homeowners Insurance Do I Need?