Homeowner's Insurance 101: What It Covers And Why You Need It

Homeowner's insurance is something that many people have, but not everyone understands. In fact, many people who have this coverage have no real idea why they have it. In short, homeowner's insurance is insurance that covers a homeowner's property, as well as their liability in the event that someone is injured while on their property.

Homeowner's insurance is much more complicated than the short answer, though. The first thing to understand is that if you have a mortgage on your property, having homeowner's insurance is required. You must show proof that you have homeowner's insurance before your mortgage can be issued.

If you do not purchase it yourself, your lender will purchase it for you and the cost will be added to your monthly mortgage payment. This is convenient, but does not give you the option of shopping around for the best deal, nor does it allow you the ability to choose your own coverages.

Many times, the cost of the insurance is included in the monthly mortgage payment anyway. The mortgage company sets the portion for the insurance aside, into a special account called escrow, and when the insurance comes due, the mortgage company takes that money from the escrow account and pays it.

Once your mortgage is paid off, you are responsible for finding and paying your homeowner's insurance yourself. If your home is paid off, you're under no obligation to continue carrying homeowner's insurance, but not having it means that what may be your most expensive, and important, investment is completely unprotected.

What's covered

There are a variety of coverages that come with homeowner's insurance.

You'll be covered for property damage, both inside and outside the home. This will cover you if your home is damaged through fire, natural disaster, vandalism, or something such as a tree falling on your home. It will pay for the damage done to the home. It typically also covers other buildings on the property, such as a detached garage or shed.

You'll also be covered for replacement of your personal belongings. If the things inside your home, such as furniture, dishes, TVs, clothes, and electronics, are damaged or destroyed due to natural disaster, fire, or even theft, your insurance will pay for the replacement of those items.

Lastly, you're covered for liability. If someone is on your property and is injured, your homeowner's insurance will cover their medical bills, lost wages, pain and suffering, etc.

All of these coverages are imperative because most people couldn't afford the out-of-pocket expense to pay those things themselves.

What's not covered

Some homeowner's insurance policies do not cover damage from specific kinds of situations, such as floods or earthquakes. In those instances, you may need a special, separate insurance policy, or to add something called a rider to cover those situations. Your policy, and your agent, should be very clear about what is, and is not, covered by the policy.

Important things to note

The most important thing to know about your homeowner's insurance policy is that, like most insurances, it has a deductible. This deductible is the money that you must pay out-of-pocket toward damages or replacement when you file a claim. You will not need to show proof to your insurance company that you have paid your deductible before they will pay for your claim.

Instead, your insurance company will assess the cost of your damage. They will then subtract the amount of your deductible from the total cost of your damage. A check will then be issued for the difference, and your claim will be closed. For example, if your damage is assessed to be $5,000 and your deductible is $1,000, you'll receive a check for $4,000.

Additionally, most policies have a maximum liability limit. This limit is the most they will pay to cover your damages, should you file a claim. For example, if your home is completely destroyed by a hurricane, if your policy has a liability limit of $100,000, that is the most you will receive, even if the true cost to replace your home and possessions is more than $100,000.

Homeowner's insurance is a crucial piece to protecting the enormous investment you've made.