The best homeowners insurance is a policy that offers the right coverage at the right price. It should cover the costs of rebuilding or replacing your home in the event of a disaster.
It also should provide liability protection in the event you are sued for damaging someone else’s property.
What is homeowners insurance?
Homeowners insurance is a type of property insurance that protects your home and other structures from damage. It also provides liability protection for accidents that occur on your property.
Home insurance is an important part of the mortgage process, as most lenders require it. Your lender holds a portion of your monthly mortgage payment as an escrow account that pays for your homeowners insurance.
Standard policies provide coverage for both dwelling and personal property on an “all-risk” basis, meaning any damage is covered unless it’s specifically excluded in your policy. They generally pay (within policy limits) to replace your home or other structures on an “actual cash value” basis, which means the cost of replacement less a depreciation allowance.
Coverages vary by company, so you should read your policy and talk to an agent about exactly what it covers. Most homeowners policies don’t cover earthquakes, and if you live in a high-risk area you may want to consider additional coverages like windstorm and hail or flood insurance.
Homeowners insurance example
Typically, a homeowners insurance policy consists of six coverage parts: dwelling, other structures, personal property, loss of use, personal liability and medical payments. Each of these covers something – or a whole lot – a homeowner might want to claim. The most common is dwelling coverage, which takes care of structural damage to your house and other covered property. A homeowners insurance policy may also include personal property, or contents coverage. It’s not uncommon for a homeowner to own more than just furniture, including books, electronics, clothing and more.
The best way to determine the right type of homeowners insurance for you is to discuss your needs with a qualified insurance agent. They will recommend the coverage that best fits your needs and budget. The most common types of coverage include dwelling and personal property, but there are many more options than these. This includes the aforementioned medical and personal liability coverages, as well as additional living expenses, such as hotel stays and restaurant meals.
Homeowners insurance coverage types
There are a number of different homeowner insurance coverage types. Some are more expansive than others, and it’s important to understand what they offer.
Homeowners policies generally offer protection for the structure of a house, personal property and liability for injuries to people on your property. They also provide protection against perils, such as fire, flood and earthquakes.
HO-3: This is the most popular policy and is designed to protect your house, belongings and personal liabilities. It covers against 16 perils listed in the policy.
Special form (HO-03): This policy provides an all-risk basis – damage from any peril is covered, unless it is specifically excluded.
Personal property coverage pays for loss of or damage to your personal items, including your furniture and appliances. It can also pay for theft of those items. It typically offers replacement cost value for your personal items, meaning it would replace them with new ones, minus any depreciation that may have occurred during the time they were in use.
Homeowners insurance in mortgage
Homeowners insurance doesn’t just protect you and your lender – it also helps to prevent you from losing your home. Lenders typically require proof that you’ve bought homeowners insurance before they approve your mortgage.
When you purchase a home, your mortgage lender typically allocates a portion of each monthly payment to an escrow account where insurance payments go. This is a convenient way to pay for your homeowners insurance.
The escrow account is monitored and the lender can only take the money out when the policy is active. You may also be refunded unused premiums that you don’t send to your mortgage lender.
Depending on your home, you may choose from several coverage types for your homeowners insurance policy. The most common are HO-05, which covers all the structures of your home on an all-risk basis, and HO-08, which offers modified form coverage, generally used for homes that have a high cost of repair or rebuilding.