finance

Homeowners insurance

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What is an homeowners insurance?

Homeowners insurance provides financial protection should your house and the items inside become damaged. It also provides protection if you or other family members are held liable for injuries to other people or damage to their property.


Why do you need homeowners insurance?

Homeowners insurance is important for two major reasons.

  1. Insurance to protect assets. Homeowners insurance not only covers the structure and the items inside, but also your personal legal liability or responsibility for injuries to other people or their possessions while they are on your property. Examples include if a visitor trips and falls down your stairs and sues you.
  2. Insurance to satisfy mortgage lenders. Buying homeowners insurance is not required by law, but if your house has a mortgage, your lender typically will require you to purchase insurance to protect its investment.

    If you let your policy expire, your mortgage lender will purchase the insurance for you. Compared to an insurance policy you would purchase yourself, the premium likely will be much higher and the coverage will be limited to damage to the structure of your house.

    The lender typically requires you to reimburse this higher premium until you buy homeowners insurance again.


Types of homeowners policies

The homeowners policy provides two different types of coverage: standard coverage and optional coverage.

1. Standard coverage

  • Dwelling protection covers your home and the surrounding structures, such as a garage, tool shed, fence and carport.
  • Liability coverage covers your financial loss if you are sued and are found legally responsible for injuries or damage to someone else.
  • Personal property coverage pays for the repair or replacement of the items that are damaged or stolen in a covered loss -- everything from furniture to dishes to curtains.
  • Additional living expenses coverage, also referred to as "loss of use," pays some of your living expenses while your home is being repaired.
  • Medical payments coverage pays for injury treatment for visitors who get hurt while they are on your property or hurt by your pets.

2. Optional coverage

Losses from water backup are not covered by your homeowners insurance. It can be offered as an addition to the policy. Still, homeowners insurance does not cover flood damage.

Most insurance companies offer extra coverage for the structure of your home. In case your original coverage is not enough or there is a sudden increase in the cost of construction, having an enhanced home insurance coverage ensures you do not dip into your savings to reconstruct your home.


Limits of coverage

Keep in mind that the replacement value and the market value are not the same. The market value depends on the real estate market. You should review your insurance coverage regularly to make sure it does not drop below your home's replacement cost.

If it drops below 80 percent of the full replacement cost, the insurance provider may decrease the amount it pays on a claim.

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