What Does Homeowners Insurance Cover

When you're buying a home, you're going to need to start thinking of protecting your property in the event of a disaster. What does homeowners insurance cover, and do you need it?

As with any other type of insurance, homeowners insurance is designed to protect your investment in your home in the event it's lost, damaged or threatened by any injury that might occur to someone visiting your home. While you're still paying on a mortgage or a home equity loan, the investment in your home-as well as the risk of loss-also is shared with the lender, be that a bank, an investment firm or an equity agency. Usually, anyone with a financial or equity interest in the home is also named on the homeowners insurance policy as an insured party.

The question of whether or not homeowners insurance is necessary is usually a moot point for people who carry a mortgage or home equity loan, because the lender will insist on it as a way to protect the firm's investment until your debt is repaid. In most cases, you agree to carry uninterrupted insurance when you sign the papers for your mortgage or your equity loan. Should you decide to drop your insurance, refuse to pay the premiums or get canceled by your insurance company, most banks and lenders will impose insurance on you and add the cost of it to your loan. Typically, the cost of the insurance plan is added to your monthly mortgage or loan payment over the course of a year.

That's a path to be ardently avoided, since most investors will buy top-of-the-line insurance coverage and you will pay for it or risk losing your home.

If you own your home outright, there are advantages and disadvantages to carrying homeowners insurance.

Advantages

  • Most policies cover replacement value and will pay to have your home repaired and even completely rebuilt should damage or destruction befall it. For older homes, this means construction restoration. If your destroyed home was brick with hardwood floors and plaster walls, the insurance company will pay for that type of construction in repairing or rebuilding your home.
  • You can insure the grounds and outbuildings and include personal liability. If a 300-year-old oak tree in your backyard comes down in a storm and takes out your garage or injures a passer-by, you're covered all around. In most cases, insurance will also replace the tree with a newer planting.
  • You can insure personal property, such as your furnishings, artwork musical instruments and so on. Homeowners insurance can cover the replacement costs of such items. This can also include food in your refrigerator or freezer that might be lost due to a failure of power. Keep in mind that items of exceptional value, such as collectibles, rare antiques and fine art, need separate insurance because a homeowners policy typically will not provide the full replacement cost.
  • Loss of use can also be insured in a homeowner policy. That means the insurance company will pay your lodging expenses, should your home become uninhabitable, until you can safely live there again.

Disadvantages

  • Because homeowners insurance is integrally linked to the replacement value of your home, the premiums can be relatively expensive, depending on the value of your home.
  • Insurance premium costs rarely decline. Even if you live in an affordable neighborhood, policy costs are determined not by a home's sale price but by what the insurance company thinks would be required to rebuild your home in case of loss.
  • Taking advantage of your homeowners' policy by filing a claim against a loss or damage almost always means you'll pay higher premiums when your next term gets under way.
  • Some dangers are excluded. Damage caused to your home by earthquakes and floods are rarely covered in a typical homeowners policy, although you can usually buy additional policies to cover those hazards if you live in an area likely to experience them.

It's important that you be as informed as you can be about your homeowners insurance choices. Read every word of every proposed policy very carefully, and ask your insurance agent questions about exclusions, limitations, options and claims. Remember that a home is likely to be the biggest financial investment you will ever make, so choose wisely and be prepared to react to policy changes many times throughout the years.

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