What is homeowners insurance and how does it work?

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If you want to choose the best homeowners insurance policy, you need to understand what you’re getting. By doing some research, you will be able to buy a policy with confidence that you’re making the right choice for you and your home.

What is homeowners insurance?

Homeowners insurance is financial protection that you purchase from an insurance provider. It helps pay for damages if a disaster affects your home.

A standard insurance policy protects you in a variety of ways:

  • Home’s structure and belongings: Home insurance protects the structure of a home as well as any belongings in the home in the case of a covered event.
  • Additional living expenses: It also covers any additional living expenses you incur while repairs are being done— meaning should you need to stay in a hotel and dine out, your policy will cover those additional expenses.
  • Liability protection: Lastly, a homeowners insurance policy comes with liability protection. This means should someone get hurt while on your property, their medical costs and your legal fees will be covered up to a certain amount.

There are many types of homeowners insurance, but if you have a mortgage your lender will require you to have an HO-3 at minimum, which provides the following:

  • Home protection
  • Personal property protection
  • Liability
  • Medical payments
  • Living expenses

When choosing the best policy for your home, look at covered perils. If you have a lot of earthquakes in your area, for example, you may need to purchase additional protection.

How does homeowners insurance work?

The first step to getting homeowners insurance to work is getting a policy that meets your needs. Then, you can use your insurance when you need it.

Getting a policy

Homeowners insurance isn’t difficult to get or use. First, research the best homeowners insurance companies. Contact each one, tell them what type of home you have and what you want to insure and get a personalized quote. Then you can compare the cost of premiums.

If you get similar quotes from multiple carriers, take your research further and see how third parties rate each company.

J.D. Power and AM Best provide some of the best information. J.D. Power rates customer satisfaction and AM Best rates a company’s financial strength. You want a strong combination of both. A company may be financially strong and available nationwide, but that doesn’t necessarily mean its customers are happy with its services.

Asking about discounts

Discounts are another variable to look at before you purchase home insurance. Many insurance companies offer a range of discounts that you can use to lower your premium (such as bundling with car insurance).

On paper, a company may appear to be more expensive. But once you apply all of the discounts you would receive, it could actually be a lot cheaper than its competitors. Applying discounts can sometimes get tricky, so you may want to call an agent before finalizing your decision.

Paying for a policy

Once you’ve chosen the company you feel is best for you, your family, and your home, you’ll need to sign the agreement and submit your payment information.

Most providers offer different payment options, such as paying annually or quarterly. If you have a mortgage on your home, it may be included in your monthly payment and your loan servicer may distribute payments on your behalf.

Filing a claim

When it comes time to file a claim, you’ll likely be able to do so either online, over a mobile app or through an agent in person or over the phone. It usually takes only a few moments of your time. You may be asked to allow a claims adjuster to inspect any damage before any payout is sent, or to submit pictures of your home. Once a claims process is initiated, your insurance provider will determine the next steps.

Is homeowners insurance required?

Homeowners insurance is not legally required by your state. However, if you have a mortgage, your lender will most likely require you to have it. Yes, it’s protecting their investment, but it also protects you.

Should your home need sudden repairs, you’ll be far less likely to miss payments if you have homeowners insurance. If you don’t miss your payments, you’ll be less likely to go into foreclosure after an emergency.

How much does a home insurance policy cost?

There are a lot of variables that influence the cost of homeowners insurance. Some of these factors include:

  • What state you’re in
  • Location of home
  • Construction of home
  • Age of home
  • Distance to nearest fire station
  • Deductible
  • Amount of liability protection
  • Credit score
  • Marital status

Another factor that influences the cost of homeowners insurance is which company you choose. Insurance companies weigh each pricing variable differently. One company may put a lot of stock in your credit score, while another won’t. This is why it’s so important to shop around for the best policy.

Frequently asked questions

How much homeowners insurance do I need?

It really depends on your home and how at risk you consider it to be. Is flooding a regular occurrence where you live? What about earthquakes, forest fires, sinkholes, or storms? If mother nature is routinely in the news for your area, make sure your home is protected from the types of perils that regularly attack homeowners near you.

Liability is equally as important. If you have a pool or pet, you should strongly consider purchasing additional protection. You should also consider purchasing more if you consider there to be anything unusual or potentially dangerous about your home or property, such as a steep embankment or sudden drop in your yard.

How fast do insurance companies process claims?

It depends on the claim itself. If it’s an expensive claim, expect your insurance company to be more cautious and require extensive documentation. If you file a claim and don’t hear back from them, speak with an agent to make sure everything was received by the appropriate parties.

Should you work with a national or local provider?

Both have their own pros and cons. The only drawback to working with a local provider is finding reputable third party reviews. J.D. Power, which ranks customer satisfaction, often isn’t able to rate smaller companies each year. This means you will have to dig around to figure out how people feel about it.

Just keep in mind that, more often than not, the only people inspired to write reviews are those who feel they’ve been slighted. This often happens when homeowners don’t understand what is covered with their policy and what isn’t.