What is Homeowners Insurance?
Homeowners insurance covers damage to a person’s home and furnishings. Homeowners insurance also covers liability for accidents that occur on the property or in the home.
Understanding Homeowners Insurance
The homeowners insurance policy covers the following four types of events on the property: exterior damage, interior damage, personal property loss/damage, injury while on the property, and loss or damage to personal assets/belongings. A homeowner who files a claim on one of these events will need to pay a deductible. This is basically the out-of pocket cost for the insured.
Let’s say, for example, that a claim has been made to an insurance company for interior water damage in a house. A claims adjuster estimates that $10,000 is needed to restore the property to its original condition. The homeowner will be informed about their deductible, which is $4,000, if the claim is approved. This is according to the policy agreement. In this instance, the insurance company will pay $6,000. A homeowner’s insurance policy will have a lower monthly or annual premium if the deductible is higher than the contract.
A liability limit is a part of every homeowners insurance policy. It determines how much coverage an insured has in the event of an unfortunate accident. Standard limits are typically $100,000. However, policyholders can choose to have a higher limit. The liability limit is the amount of coverage that will be used to replace or repair damage to property structures, personal effects, or costs to live elsewhere while the property is being repaired.
Standard homeowners insurance policies usually exclude acts of war and acts of God like floods or earthquakes. If a homeowner lives in an area that is susceptible to natural disasters like floods and earthquakes, they may need special coverage. Most homeowners insurance policies include coverage for events such as tornadoes and hurricanes.
Mortgages and Homeowners Insurance
The homeowner will usually need to show proof of insurance when applying for a mortgage. You can either purchase property insurance separately or through the lending bank. If homeowners prefer to purchase their own insurance policy, they can compare several offers and choose the one that best suits their needs. The bank might offer to purchase an additional policy if the homeowner doesn’t have property insurance.
The monthly mortgage payments include any payments made towards homeowners insurance. The amount for insurance coverage is allocated to an escrow account by the lending bank that received the payment. This escrow account is used to settle the amount due once the insurance bill has been paid.
Homeowners insurance vs. Home Warranty
Although the terms may sound similar, homeowners insurance and a home warranty are different. A home warranty covers repairs and replacements for home systems and appliances, such as ovens and water heaters. These contracts typically expire after a specified time period of usually 12 months and are not required for homeowners to purchase a home to be eligible for a mortgage. Home warranty covers problems and issues that arise from poor maintenance, inevitable wear-and tear on items, situations in which homeowners insurance does not apply.
Homeowners Insurance vs. Mortgage Insurance
The homeowners insurance policy is different from the mortgage insurance. For homebuyers who have a down payment less than 20%, mortgage insurance is usually required by the bank. It is also required by the Federal Home Administration for those who take out an FHA loan. This fee can be added to your regular mortgage payments or a lump sum that is charged when you get the mortgage.
Mortgage insurance protects the lender from taking on extra risk for a home buyer that doesn’t meet the normal mortgage requirements. Mortgage insurance will compensate if the buyer defaults on their payments. Both policies cover residences. Mortgage insurance protects mortgage lenders. Homeowners insurance protects homeowners.