What Exactly Is Homeowners Insurance and How Does It Work?

What Exactly Is Homeowners Insurance?

Homeowners insurance is a kind of property insurance that covers losses and damages to a person’s house, as well as furniture and other items in the home. Homeowner’s insurance also includes liability coverage for incidents that occur in the house or on the property.

KEY LESSONS

  • Homeowners insurance is a kind of property insurance that covers losses and damages to a person’s home and possessions. 
  • The coverage often covers interior and exterior damage, loss or damage to personal goods, and injury that occurs on the property.
  • Every home insurance policy has a liability limit, which defines how much coverage the insured gets in the event of an unfortunate incident.
  • Homeowners insurance is not the same as a house warranty or mortgage insurance. 

Homeowners Insurance Explained

A typical home insurance policy covers four types of accidents on the insured property: interior damage, outside damage, loss or damage to personal assets/belongings, and injury while on the property. When a claim is filed on any of these incidences, the homeowner will be asked to pay a deductible, which is effectively the insured’s out-of-pocket expenditures.

Assume a homeowner files a claim with his or her insurance for interior water damage. A claims adjuster estimates the cost of restoring the home to habitable conditions at $10,000. If the claim is granted, the homeowner is notified of the amount of their deductible, say $4,000, as specified in the insurance agreement. The insurance company will cover the extra cost, which in this instance is $6,000. The smaller the monthly or yearly price of a home’s insurance coverage, the bigger the deductible on an insurance contract.

Every home insurance policy has a liability limit, which defines how much coverage the insured gets in the event of an unfortunate incident. The normal limit is $100,000, but the policyholder may choose a greater maximum. If a claim is filed, the liability limit specifies the proportion of the coverage amount that will go toward replacing or repairing damage to the property structures, personal possessions, and living expenses while the property is being worked on.

Standard home insurance plans often exclude acts of war or acts of God, such as earthquakes or floods. A homeowner who lives in a region prone to natural catastrophes may want additional coverage to protect their property from floods or earthquakes. Most basic home insurance plans, on the other hand, cover disasters like hurricanes and tornadoes.

Mortgages and Homeowners Insurance

When qualifying for a mortgage, the homeowner is often asked to present evidence of property insurance before the financial institution would lend any cash. Property insurance may be purchased independently or via the lending institution. Homeowners who choose to get their own insurance coverage may examine several options and select the plan that best meets their requirements. If the homeowner does not have property insurance, the bank may purchase one for them at an additional expense.

Payments for a home’s insurance policy are often included in the homeowner’s mortgage payments. The percentage for insurance coverage is escrowed by the lending bank that receives the payment. When the insurance bill arrives, the amount owing is deducted from this escrow account.

Home Warranty vs. Homeowners Insurance

While the names seem similar, homeowners insurance and house warranties are not the same. A house warranty is a contract that covers repairs or replacements of home systems and equipment such as ovens, water heaters, washers/dryers, and pools. These contracts typically expire after a certain amount of time, generally 12 months, and are not required for a homeowner to purchase in order to qualify for a mortgage. A house warranty addresses difficulties and problems caused by inadequate maintenance or natural wear and tear on items—situations where homeowners insurance does not apply.

Mortgage Insurance vs. Homeowners Insurance

A homeowners insurance coverage is not the same as mortgage insurance. Mortgage insurance is often required by the bank or mortgage company for purchasers who put down less than 20% of the purchase price. It is also required by the Federal Housing Administration for anyone applying for an FHA loan. It is an additional cost that may be included in recurring mortgage payments or levied as a lump amount when the mortgage is granted.

Mortgage insurance protects the lender against the additional risk of a house buyer who does not match the standard mortgage standards. Mortgage insurance would reimburse if the buyer failed to make payments. While both are concerned with homes, homeowners insurance covers the homeowner while mortgage insurance protects the mortgage lender.