Homeowners Insurance Explained


A home is typically your biggest investment so it’s important to have it properly insured. Unfortunately many people don’t know what their policies do and don’t cover. It’s important to understand that there are 4 primary components to homeowners insurance and to understand what those components are.

The first component is the structure itself, the building including the garage and deck as well as unattached structures such as a shed. When you buy the home you typically have the home insured for the amount you paid for it, or you have it insured for the rebuild value. This means that if your home is a total loss the policy will provide a reimbursement up to the policy limit to replace the structure. You want to have your home insured for enough that you can totally rebuild it, this is the replacement value.

A problem that many homeowners face is that they are underinsured and don’t have enough insurance to cover repairs to their home, or replacement of the home, if they face significant damage. An accurate appraisal of your home should be completed so that an accurate replacement cost can be determined. Your insurance company will be able to help you determine this amount.

The next component is for personal property. Most companies insure the personal property in the home for about 60-70% of what you insure the house for. For example, if a home is insured for $200,000 then the personal property is typically insured for about $140,000-$150,000. The personal property insurance can be raised if the belongings in the house are worth more. However this could be at an additional fee. There is no charge for keeping it proportional to the insurance on the structure but when you raise the personal property insurance there will be a small fee.

Personal property insurance typically covers things such as furniture, clothes, toys, and home accessories such as home décor. There are frequently limitations set on jewelry, fine arts, furs, expensive rugs, electronics, etc. These more expensive items should frequently be covered by a personal property rider.

Other than not knowing what is covered by an insurance policy many homeowners don’t know what belongings are inside the home. Not having a home inventory is a big mistake when it comes to insuring your home. Know what you have and keep 2 copies of the inventory, one for a fire-proof safe in the house and another copy for a different off-premises location, such as a safe deposit box. This will come in handy should the unexpected occur.

Another component of homeowners insurance is liability coverage, this is a very important component. If you are sued or if someone files a claim against you or if the court holds you accountable for someone else’s injury or property damage then your insurance policy will provide some liability coverage. Liability coverage protects the owner from personal liability, damage to someone else’s property, and medical expenses for injury to others.

The final component of a typical homeowner’s insurance policy is the additional living expense. If you become displaced from your home due to a loss that is covered by your homeowners insurance policy, like a fire or frozen and broken pipes, etc. then this portion of your insurance will help to pay for your hotel or apartment expenses. So, not only should your insurance pay to repair the damage to your home but it should also reimburse you for additional living expenses while the repairs are being completed.

Do be confused and think that your homeowners insurance only covers the home itself. There is a lot of coverage in your homeowner’s policy that can come in handy in times of need. Other than the liability insurance and the additional living expenses insurance, if you have a loss of personal property when you are off the premises your standard insurance policy may cover the loss. For example, if you have suitcases stolen while you are away on vacation, you are probably covered.

Many people purchase homeowners insurance but they don’t read through the policy carefully to understand what it is that they have purchased and how much coverage they have. For example, you want to make sure you have enough insurance to cover rebuilding your house after a fire not just enough insurance to cover what it would sell for on the market right now.

When you’re working with an insurance company be sure to ask what isn’t covered by the policy. Most standard insurance policies do not cover earthquake damage, flood damage, or hurricane damage. Floods can be covered by additional insurance through the National Flood Insurance Program if you want flood insurance. Sewage backup is also not covered but can be added to your insurance policy with a rider. Mold, fungus, rot, and bacteria are also typically not covered by a standard policy

If you have built your dream house plans you want to keep your property safe. Be sure to read your policy. The homeowner’s insurance policy will tell you how it’s supposed to work but you have to actually read the policy to know how it will work.

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