Exploring the Fundamentals of A Homeowners' Insurance Policy

Wednesday, May 17, 2023


Whether or not you own your home outright, homeowners insurance is an essential expense. Mortgage lenders typically require homeowners to maintain a policy that protects their property against unforeseen losses and disasters. But finding the right homeowners' insurance policy is a complicated process. You'll want to consider factors like the type of property coverage, the liability coverage, and whether you need a personal umbrella policy.

Property Coverage

The best homeowners insurance protects your property against the common risks of fire, theft, and severe weather. It also provides liability coverage that helps pay for legal costs and medical bills if someone is injured on your property. It's vital to get the right homeowners policy for your needs. An excellent place to start is by asking friends, relatives, and neighbors who have homeowners insurance for recommendations on companies and agents. You can also check the websites of various insurance companies to find rates and information about their policies.

In addition to insuring the house, most homeowners insurance policies contain a component that ensures personal belongings (the home's contents). This is generally known as "personal property" or HO-6 coverage. This coverage typically includes furniture, electronics, clothing, and appliances. It may include limited coverage for high-value items like jewelry and artwork. You can purchase additional coverage for these items through a rider on the policy. Most standard HO-6 policies only insure your dwelling up to 80% of its insured value or replacement cost. You can increase this percentage through an endorsement. This is often required if your home has been upgraded to meet building codes and ordinances not in effect when it was originally built.

Liability Coverage

Homeowners insurance offers protection against certain risks to help consumers protect their homes and possessions. The specifics of the policy can vary, but most policies contain similar components.

While a standard homeowners insurance policy covers the dwelling, other assets within your home, and personal liability, most also include special riders that can cover additional items. For example, you can get coverage for expensive antiques or artwork and add riders to cover swimming pools and hot tubs. Personal liability coverage typically pays for bodily injury and property damage that you or a resident of your household cause to other people while on your property. It can cover medical expenses, lost wages, and legal costs. However, it doesn't usually cover injuries sustained by guests who visit your home - that would be covered by guest medical coverage.

A standard homeowners insurance policy provides up to $1 million in liability coverage. However, the amount you pay in deductibles (the amount you must pay out-of-pocket before the insurance company starts paying on a claim) is often significantly less than that figure. Regardless, you should always consider increasing your liability coverage if you have significant assets that need protecting. It's important to discuss this with your agent. They can help you evaluate whether a personal umbrella policy is a good idea to go along with your homeowner's policy.

Additional Living Expenses Coverage

Homeowners insurance includes additional living expenses coverage (ALE), a standard component that pays for food and hotel lodging costs when your home is uninhabitable due to covered property damage. It's also typically included in condo and renters insurance policies.

ALE coverage is set at a % per your dwelling coverage limit, typically 20%. However, remember that more than this amount is needed to cover your typical lifestyle if you have to live away from home for an extended period. You'll still have your mortgage payment, plus other expenses like reasonable restaurant meals and utility bills. Your policy might also include an ordinance or law endorsement, which covers the extra cost of rebuilding your home to meet new or updated building codes that weren't in effect when your house was built. If you want this protection, talk to your insurer about it.

Umbrella Coverage

Umbrella insurance is a type of personal liability coverage that provides excess insurance over your home's and auto policies' limits. It can help protect your financial future if you are sued for a large sum or lose an uninsured judgment against you. It's common for lawsuit-happy individuals to target those with the most to lose. An umbrella policy may provide additional peace of mind and protection against potential ruin.

Umbrella policies typically have a minimum limit of $1 million to $10 million of coverage and can be purchased at an affordable rate relative to the protection it offers. However, you will typically have to have your auto and homeowners policies with the same company and at maximum limits before a carrier will issue an umbrella policy. Remember that umbrellas only offer extra liability coverage and not extra property coverage. The property damage coverage from your homeowner's policy will pay to replace or repair your personal belongings after a covered loss. An umbrella policy does not cover this type of damage. Umbrella policies only cover damage you cause to other people's property, not your own.

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