Homeowners Insurance

Adequate homeowners insurance  is require buy your lender before the final closing and settlement when you buy a new home or existing home. Lenders require homeowners insurance to mitigate the risk of major casualties that could devalue the home and their investment in it. But even if you buy your home for cash and do not need a loan for the purchase, you should have homeowners insurance to avoid an unexpected financial nightmare in the event of a catastrophe.

Why homeowners insurance is recommended

Homeowners insurance protects the home’s owners (you and the lender) from casualties, such as a fire, that could devastate your financial status and/or savings. As long as you pay your premiums (which are often included along with taxes in your monthly mortgage payment), you won’t bear the financial burden in the event of damage to or loss of your property (in most cases). 

Depending on how your policy is written, you will be responsible for a “deductible” amount, usually between $500 and $2,500 (and sometimes up to $5,000 on (expensive homes), and the insurance company will pay the remainder of the bill to “make things right.” Depending on the extent of the damage to or loss of your property, the insurance company will pay out thousands, often ten of thousands of dollars, of dollars to settle a claim.

Of course, making things right is open to interpretation, and sometimes insurance companies don’t cover everything a homeowner thinks they should. Often, homeowners will have to dig into their savings to “make things right” over and above the amount they pay for their deductible.

And anytime you make a claim on your homeowners insurance, your rates could go up. If you have multiple claims within a designated time period, your rates will almost certainly go up.

What Does Homeowners Insurance Protect Against?

There are a variety of hazards that homeowners insurance covers. They can be divided into three main categories:

Casualty

Fire and storms are the two leading reasons for casualty (also known as hazard) claims. Depending on the extent of a fire or storm event, you may need to move out of the home while repairs are made. Casualty insurance usually covers alternative housing as well as the cost of the repairs (minus the deductible).

DON’T ASSUME ANYTHING. CHECK YOUR POLICY AND KNOW WHAT IS COVERED. Depending on the insurance company and how the policy is written, some types of damage may not be covered. For example, if a storm blows off part of your roof, the policy may cover the repair of the roof, but not the damage caused by the incoming water, which could cost more to fix than the roof. Flooding is another area where policies differ. Most regular homeowners insurance policies do not cover floods, but you can pay extra for flood insurance — and in many coastal areas of the country, flood insurance is required by a lender as a condition of writing the policy. (See “Added Coverage” below.)

Liability

Liability insurance protects you from lawsuits by people — guests, visitors, friends — who may be injured or have an accident on your property. It’s a litigious society, after all, and you should protect your assets.

Personal Property

This is generally all your stuff that’s not nailed down: Your furniture, clothes, electronic devices, appliances, artwork, knick-knacks, etc. Again, know what is covered and what isn’t. You may need added coverage to properly protect everything.

Added Coverage

Jewelry and special collections often require special insurance “riders” that you pay extra for, but are then covered if they are damaged, lost, stolen or destroyed.

Insurance companies usually treat water damage seperately from other types of damage. As mentioned above, flood insurance costs extra, perhaps even $100 or more per month, but it protects against the ravages of a hurricane (primarily storm surge) even if the hurricane does not blow off your roof. Flood insurance is recommended and often required for homes in flood-prone areas, designated flood plains and along coastal areas that have a history of major storms, such as the Atlantic and Gulf coasts. The Federal Emergency Management Agency (FEMA) provides useful information on flood insurance at its Web site, FloodSmart.gov. Also, hurricane insurance has its own deductibles and coverage limits. Other types of added coverage can be obtained to protect against wind or hail damage.

Earthquake insurance is another protection to consider by people who could be threatened by an earthquake. An earthquake policy usually excludes damages or losses from floods and tidal waves, even if an earthquake caused the water damage. Losses incurred due to the effects of an earthquake, including landslides, foundation settlement, mudflow and the rising, sinking and contracting of earth MIGHT be covered if the damage resulted from an earthquake. Earthquake insurance riders often limit the amount of coverage. CHECK YOUR POLICY AND KNOW YOUR COVERAGE LIMITS.

The bottom line is that you can never be too vigilant in protecting your new home — usually your biggest investment. Depending on where you live, you may be vulnerable to extra risks that should prompt you to seek additional coverage over and above a traditional homeowners insurance policy.

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