What is homeowners insurance: The complete guide
Homeowners insurance offers the added security of financial protection against property damage or loss of personal belongings.
In the event of a fire or natural disaster, this type of insurance reimburses the homeowner for repairs or replacement of lost property.
This coverage also protects the homeowner from legal liability in the event that a property loss, injury or death should occur on the property.
How does homeowners insurance work?
No matter what type of mortgage you apply for, lenders will usually require prospective homebuyers to provide proof of insurance coverage.
Buyers have the choice to provide their own homeowners insurance or acquire coverage via their lender through an affiliated insurance company. If coverage is obtained through the lender, the first year is paid in full at closing. The lender then collects a portion each month as part of the monthly mortgage installments. Those funds are then moved to the insurance provider to retain coverage.
While homeowners insurance is intended to protect the borrower’s investment, it does not provide the same coverage as mortgage insurance, which is designed to protect the lender’s stake in the property.
Mortgage insurance is usually required when the buyer's financial situation does not meet the typical standards for a loan.
If a homebuyer makes a smaller down payment, for example, the lender may feel that the borrower is a higher risk and may not be able to afford a long-term mortgage loan. To protect against this added risk, lenders will take out a mortgage insurance policy, which provides reimbursement in the event of a foreclosure.
While mortgage insurance policies protect the lender’s stake in a property, fees for this coverage are paid by the borrower and folded into monthly mortgage installments.
What is covered by homeowners insurance?
Insurance companies provide compensation in the event of specific disasters that could potentially impact a property. Fire, vandalism, weather damage and theft can all be covered with a homeowners insurance policy. Personal possessions or other assets kept inside the home or on the property are also eligible for coverage under most policies.
These insurance policies also protect the homeowner from lawsuits that arise due to incidents that occur on the property. If the policy holder is sued for loss of assets, injury or death, insurance companies help cover resulting liability payments.
What isn’t covered by homeowners insurance?
While homeowners insurance is designed to protect against the cost of damage to a property, there are several scenarios that these policies do not insure and additional coverage may be required:
If damage is caused by external factors like floods, the repair costs are usually not covered by typical homeowners insurance plans. Some plans might stipulate that flooding must occur from broken pipes or overflowing drains in order to be covered. Many providers offer flood insurance which can be purchased as an additional policy if necessary.
Damage caused by natural disasters such as earthquakes, hail and hurricanes may not be covered by typical homeowner’s insurance policies. Homebuyers in high-risk areas for earthquakes or hurricanes will usually take out a policy for catastrophe insurance to cover these potential costs.
Costs stemming from neglect or poor maintenance of a property will also not be covered by homeowners insurance.
This can include damage caused by insects, animals, mold or general deterioration that goes unchecked by the property owner.
Hazard insurance vs homeowners insurance
Hazard insurance is a portion of your homeowners insurance policy that covers damage to the property’s structure itself. While your general policy will cover damages such as additional property loss or personal liability, hazard insurance only applies to the home itself.
Rather than set a requirement for homeowners insurance, some lenders will specify that borrowers must purchase hazard insurance in order to be eligible for a mortgage. However, the two cannot be purchased separately. Hazard insurance is just an aspect of the coverage within your overall homeowners insurance policy. In order to fulfill your lender’s requirement for hazard insurance, you’ll still need to pay for a homeowners insurance coverage.
As the part of the policy that protects the home itself, hazard insurance covers potential issues such as:
- Fire damage
- Weather damage
- Fallen trees
- Car crashes
Just like your overall policy, hazard insurance does not protect you against damage caused by flooding. For that coverage, you’ll need to purchase a separate flood insurance policy.
Benefits of homeowners insurance
When closing on a home sale, you might see homeowners insurance as just another cost in an already expensive endeavor. Adding to your monthly mortgage payment might not seem like it will bring you peace of mind, but when you consider the benefits of homeowners insurance, it becomes clear that these policies are well worth the coverage they offer.
- Home & detached structures protection
- Personal property coverage
Home & detached structures protection
The main reason lenders require borrowers to pay for homeowners insurance is to protect the structure itself. In the event of a fire or weather damage, the most expensive repairs will be incurred by bringing the home back to its original state.
Detached structures, like sheds and garages, are also protected by homeowners insurance. Your policy probably won’t cover the full value of these buildings, but it can be customized to add additional coverage on detached structures.
Personal property coverage
Not only can these policies help repair your home in the event of damage, but they can also help pay for the replacement of lost property. Anyone with expensive electronics or valuable jewelry will benefit from this aspect of homeowners insurance.
In addition to property loss caused by fire or natural disasters, this policy will also protect your belongings should they ever be stolen from the property. Insurance companies tend to put a limit on how much repayment can go towards possessions, usually around 50% - 70% of the policy’s coverage.
While homeowners insurance will protect the property owner against certain repair costs and liabilities, it is important to understand the limitations of that coverage and the differences between other property-associated policies
Buyers should always check with their insurance provider to be certain whether additional policies, such as title insurance, are necessary for the loan’s approval.