All About Homeowners Insurance

So you’re considering buying a home and your mortgage provider is requiring you to obtain Homeowners Insurance. But what is it, and why would it be required?

If you’ve had a chance to read our article on Home Warranties — it mentions that Homeowners Insurance is a policy that covers your home, structures and personal possessions during natural disasters and theft. Each policy written will depend on the state, the policy you choose and even the insurance company. We highly suggest that when you speak with your insurance agent you review all the types of property you will need to cover with your home — the structures, grounds and your home’s contents.

But for now, let’s go into further detail on Homeowners Insurance to find out why your lender requires it when you obtain a mortgage.

What does Homeowners Insurance cover?

Homeowners Insurance will cover either the repair or rebuild of:

• The structure of your home, from top to bottom
• Other structures on your property that are not attached to your home, such as sheds, garages, barns, etc. (keep in mind that if you add anything to your property you'll need to make sure you get the permits required or your Homeowners Insurance may not cover it)
• Personal possessions such as furniture, electronics, clothes, etc.

It will also cover:

• Liability protection against lawsuits from property damage or injury that policy holders (or their family members) may cause to other people. This includes if someone slips and falls on your property and tries to sue you.
• Damage caused by pets
• Damage caused by what the Insurance Information Institute lists as the 16 disasters:
1. Fire or lightning
2. Hurricane, tornado, wind and hail
3. Explosions
4. Riots
5. Damage from airplane
6. Damage from vehicles
7. Smoke damage
8. Vandalism
9. Theft
10. Volcanic eruption
11. Falling objects
12. Ice, snow and sleet
13. Flooding of water or steam from plumbing, heating, A/C, appliance or sprinkler system
14. Tearing, cracking, burning, or bulging of hot water heating system, A/C or fire protective system
15. Freezing of plumbing, heating, A/C, appliance or sprinkler system
16. Damage from artificially generated electrical current
• Living expenses or loss of use — if your house becomes uninhabitable due to the disasters listed in your policy, this will kick in and cover your cost of living to live away from the home until it is repaired or rebuilt. It will cover:
• Hotel
• Food
• Other normal living expenses as covered in your policy

What is not covered in typical Homeowners Insurance?

Typical Standard Homeowners Insurance will not cover:

• Damages caused by floods
• Damage caused by earthquakes
• It also will not cover neglect or poor maintenance. So for example, your insurance company may deny coverage to roof damage from a hail storm if your roof is 20 years old and they determine you went beyond the expected life of the roof without replacing it.

Can you get coverage on items not covered by standard insurance?

The short answer is YES…

• You can obtain Flood Coverage from the Federal Government’s National Flood Insurance Program, through your insurance agent. Sometimes it is required because your home is in a flood zone, and sometimes it isn’t required but may still be a good idea to get the extra policy if available.
• You can also obtain Earthquake insurance through a separate policy. Some states have mandatory insurance plans for earthquake coverage

Many insurance companies offer optional coverages, endorsements, or extended and guaranteed replacement cost policies for a separate cost.

If you live in an area prone to certain things like earthquakes and floods, if you live in an older home and need extra coverage for building code upgrades, or if you just want the peace of mind of having additional policies, you may want to look further into additional coverage. You may also want to look into add-ons called “riders” for expensive personal property items. In most cases, you can never be too cautious or have too much protection!

What types of policies Are there?

There are several different types of Homeowners Insurance Policies. According to the Insurance Information Institute, there are different policies for different coverage needs, and each state may offer different items. These typically include:

• HO-1: includes very minimal coverage against only 10 disasters
• HO-2: a basic policy and has a version for mobile homes against all 16 disasters listed above
• HO-3: the most popular plan which protects against everything except those specifically mentioned as exclusions
• HO-4: a policy for renters that covers your belongings and anything you own in the home against all 16 disasters if you are renting from a Landlord
• HO-6: coverage for condos
• HO-8: coverage primarily for older homes

What are the different levels of coverage?

There are different levels of loss settlement coverage based on:

• Replacement cost: cost to replace without depreciation
• Repair cost: market value cost, or the cost to repair with the same or similar material and use (like changing out plaster for drywall/sheetrock)
• Actual cash value price: the cost to replace minus a depreciation value

Some insurance companies will use current value and others will use replacement costs. Some offer both options, so just make sure you read over your policy carefully before you sign and agree to anything.

Final Thoughts and Tips

If you are buying your home with a mortgage, at the bare minimum, your mortgage provider will require at least a basic Homeowners Insurance policy so they will know their investment is protected until you own it completely. The last thing the bank wants is your home to be destroyed by a natural disaster which could result in a “total loss.” The bank will not get their payments from you, and you will have nowhere to live.

Each location, insurance company and policy are different, so it’s important to do your research and find the most appropriate insurance for your situation. Let your insurance agent know your particular needs and read over your policy before you sign it so that you know what is covered. Check it carefully because there could be exceptions and exclusions that you didn’t know about that may require you to add on additional coverage if there is something you need covered.

Make sure you have a correct estimate of the replacement cost value of your home. Otherwise, you may put yourself in a situation where you have to pay out of pocket for the difference. It is very important that you do not under-insure. We never know what will happen. Natural disasters are often unpredictable, so it is always better to be safe than sorry. And as time goes on and the cost of living rises, you can always go back to your insurance company and adjust your coverage amounts.

Just keep in mind that having to file an insurance claim can be a hassle to get approved by your insurance company. To reduce the possibility of needing to call your insurance agent, do things like install storm shutters, secure your home as required, clean out your gutters and complete other safety measures and home maintenance items to protect your home and your family. Not only will this keep you and your family safer, you could also qualify for a discount on your insurance policy for some of these items — such as smoke detectors or carbon monoxide detectors.

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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