What Does Homeowners Insurance Mean?
Homeowners insurance is a type of property insurance that safeguards an individual’s home, as well as the belongings and assets inside, from losses and damages. It also includes liability coverage for accidents that occur in the home or on the property.
Important Points to Remember
- Homeowners insurance is a type of property insurance that protects against losses and damages to a person’s house and belongings within the home. Typically, it covers damage to the interior and exterior, loss or damage of personal possessions, and injuries that occur on the property.
- Each homeowners insurance policy includes a liability limit, defining the extent of coverage in case of an unfortunate event.
- It’s important not to mix up homeowners insurance with a home warranty or mortgage insurance.
Homeowners Insurance Explained
A typical homeowners insurance policy generally provides coverage for four types of incidents on the property: interior damage, exterior damage, loss or damage to personal belongings, and injuries that happen on the premises. When filing a claim for any of these incidents, the homeowner needs to cover a deductible, essentially representing the out-of-pocket costs for the insured.
The insurance company typically reduces the value of the insured property considering factors like its age, usage, condition, and expected lifespan. By subtracting the depreciation from the replacement cost, the insurer determines the actual cash value (ACV) to be reimbursed to the policyholder. Including a recoverable depreciation clause in your agreement allows you to receive both the depreciation value and the replacement cost.
For instance, consider a scenario where a homeowner files a claim with an insurance company due to interior water damage in their home. A claims adjuster evaluates the cost of restoring the property to a livable condition at $10,000. Once approved, the homeowner is notified of their deductible, let’s say $4,000, as outlined in the policy agreement. The insurance company then issues a payment covering the excess cost, which in this case is $6,000. It’s worth noting that a higher deductible on an insurance contract typically leads to a lower monthly or annual premium for a homeowners insurance policy.
Every home insurance policy comes with a liability limit, defining the coverage amount available to the insured in case of an unfortunate event. Typically set at $100,000, policyholders have the option to choose a higher limit. If a claim is filed, the liability limit specifies the percentage of the coverage that would be used for replacing or repairing damage to property structures, personal belongings, and the expenses of residing elsewhere while the property is being restored.
Events like acts of war or acts of God, such as earthquakes or floods, are usually not covered by standard homeowners insurance policies. If a homeowner resides in an area susceptible to these natural disasters, obtaining special coverage may be necessary to protect their property. Nonetheless, most basic homeowners insurance policies provide coverage for events like hurricanes and tornadoes.
Homeowners Insurance and Mortgages
When seeking a mortgage, homeowners typically need to show evidence of property insurance before the lending institution disburses any funds. Property insurance can be obtained independently or through the lending bank. Homeowners who opt for their insurance can explore various options and select the plan that suits their requirements. If the homeowner lacks coverage for their property against loss or damages, the bank may secure one for them, incurring an additional cost.
Payments for a homeowners insurance policy are typically incorporated into the homeowner’s monthly mortgage payments. The lending bank, receiving these payments, designates the portion meant for insurance coverage to an escrow account. When the insurance bill is due, the owed amount is then paid from this escrow account.
Homeowners Insurance vs. Home Warranty
Despite the similar-sounding terms, homeowners insurance and a home warranty are distinct. A home warranty is a contractual agreement covering repairs or replacements of home systems and appliances like ovens, water heaters, washers/dryers, and pools. Typically lasting around 12 months, these contracts are not obligatory for homeowners to purchase to qualify for a mortgage. A home warranty specifically addresses issues arising from inadequate maintenance or natural wear-and-tear on items—matters that homeowners insurance doesn’t address.
Homeowners Insurance vs. Mortgage Insurance
Distinguishing between homeowners insurance and mortgage insurance is important. Mortgage insurance is usually mandated by the bank or mortgage company, especially for homebuyers putting down less than 20% of the property’s cost. The Federal Home Administration requires it for individuals obtaining an FHA loan.
This additional fee can either be incorporated into regular mortgage payments or presented as a lump sum when the mortgage is initiated.
Certain homeownership policies incorporate a mortgagee clause, which safeguards and compensates the lender if your home is lost or severely damaged while you have an active mortgage.
In contrast, mortgage insurance provides protection to the lender when dealing with a home buyer who doesn’t meet the typical mortgage requirements, offsetting the additional risk. In essence, while both types relate to residences, homeowners insurance safeguards the homeowner, whereas mortgage insurance safeguards the mortgage lender.