What is Homeowners Insurance?
Homeowners insurance is a type of property insurance that covers losses and damages to a person’s home, as well as furniture and other assets in the home. Homeowners insurance also includes liability coverage for accidents that occur in the home or on the property.
Homeowners Insurance Explained
A typical homeowners insurance policy covers four types of incidents on the insured property: interior damage, exterior damage, loss or damage to personal assets/belongings, and injury while on the property. When a claim is made on any of these incidents, the homeowner will be required to pay a deductible, which is effectively the insured’s out-of-pocket costs.
Assume a homeowner files a claim with his or her insurer for interior water damage. A claims adjuster estimates the cost of restoring the property to livable conditions at $10,000. If the claim is approved, the homeowner is notified of the amount of their deductible, say $4,000, as specified in the policy agreement. The insurance company will pay the excess cost, which in this case is $6,000. The lower the monthly or annual premium on a homeowners insurance policy, the higher the deductible on an insurance contract.
Every homeowners insurance policy includes a liability limit, which determines how much coverage the insured has in the event of an unfortunate incident. The standard limit is $100,000, but the policyholder can choose a higher limit. If a claim is filed, the liability limit specifies the percentage of the coverage amount that will go toward replacing or repairing damage to the property structures, personal belongings, and living expenses while the property is being worked on.
Standard homeowners insurance policies typically exclude acts of war or acts of God, such as earthquakes or floods. A homeowner who lives in an area prone to natural disasters may require additional coverage to protect their property from floods or earthquakes. Most basic homeowners insurance policies, on the other hand, cover events such as hurricanes and tornadoes.
Homeowners Insurance and Mortgages
When applying for a mortgage, the homeowner is typically required to provide proof of property insurance before the financial institution will lend any funds. Property insurance can be purchased separately or through the lending institution. Homeowners who prefer to obtain their own insurance policy can compare various options and select the plan that best meets their needs. If the homeowner does not have property insurance, the bank may obtain one for them at an additional cost.
Payments for a homeowners insurance policy are typically rolled into the homeowner’s mortgage payments. The portion for insurance coverage is escrowed by the lending bank that receives the payment. When the insurance bill arrives, the amount owed is deducted from this escrow account.
Home Warranty vs. Homeowners Insurance
While the terms sound similar, homeowners insurance and home warranties are not the same. A home warranty is a contract that covers repairs or replacements of home systems and appliances like ovens, water heaters, washers/dryers, and pools. These contracts typically expire after a set period of time, usually 12 months, and are not required for a homeowner to purchase in order to qualify for a mortgage. A home warranty covers issues and problems caused by poor maintenance or natural wear and tear on items—situations where homeowners insurance does not apply.
Homeowners Insurance vs. Mortgage Insurance
A homeowners insurance policy is not the same as mortgage insurance. Mortgage insurance is typically required by the bank or mortgage company for homebuyers who put down less than 20% of the purchase price. It is also required by the Federal Housing Administration for those applying for an FHA loan. It is an additional fee that can be incorporated into regular mortgage payments or charged as a lump sum when the mortgage is issued.
Mortgage insurance protects the lender from the additional risk of a home buyer who does not meet the standard mortgage requirements. Mortgage insurance would compensate if the buyer failed to make payments. While both are concerned with homes, homeowners insurance protects the homeowner and mortgage insurance protects the mortgage lender.