Investment Glossary – Homeowners Insurance

Like most kinds of insurance, homeowners insurance is one of those things that you want to have (and, in many situations, need), but it’s something you hope you never have to use. In this case, it means that you had significant damage to what is most likely the most expensive purchase of your life. Homeowners insurance provides financial protection from damage to your house and the things inside of it – so if a tree falls on your house and squashes the attic in which you were holding your well-preserved wedding dress, the right policy will help to pay for the repair costs and maybe even the dress.

When taking out a mortgage on a property, most lenders actually require you to purchase homeowners insurance. Why? It’s simple: if that tree does end up falling on your house or you have a hailstorm that breaks all of your skylights, your mortgage lender wants to know that you aren’t going to abandon the property because of the damage and leave them on the hook to clean up the mess and sell the place to someone else. No, they would much rather know that you have an insurance company that will foot the bill, or at least part of the bill. If you own a property without a mortgage on it, you don’t necessarily need to have homeowners insurance on the property, but once again, given the scale of the purchase and the potential dollar value of the damage to that property, most people typically opt to continue their coverage.

So what does homeowners insurance actually cover?

The vast majority of policies cover damage from fire, lightning, wind, and hail. Some natural disasters, like hurricanes and earthquakes (known as “Acts of God”) are typically not covered by most basic homeowners policies. However, if you live in an area that experiences these types of events on a regular basis, there are dedicated insurance options available to help cover damages associated with them. Flood insurance is another branch of the insurance market altogether. Though most people do not need to have it, you will be required to have flood insurance in order to purchase a home with a mortgage if you live in an area of the country that is prone to flooding.

Homeowners insurance typically contains a number of different coverage levels. The most basic level is what is called “dwelling protection,” which covers damage to the structure that you actually live in. So if a tree really did fall on your house, the damage would likely be something that is covered by dwelling protection. If a tree fell on the shed out back with your 15-year-old John Deere lawnmower named Bessie, dwelling protection won’t cover the damage. However, if you’re worried about protecting the shed (and Bessie), there is often another provision called “other structures protection.” This type of coverage helps to cover damage to other buildings that may not be attached to the main building, like sheds or garages. Personal property protection and liability protection are two other options available on most policies. Personal property protection usually covers damages to the goods inside your home, while liability protection provides assistance if someone is hurt on your property and sues you as a result.

All of these types of protection will have specific limits associated with the policy you take out, and many will also have deductibles, which are amounts that you have to pay up front before your insurance coverage takes care of the rest up to the policy limits. It’s important to make sure that you have proper coverage on your property for your specific home, as there is no cookie-cutter amount of insurance that anyone should have. It’d be smart to talk with an agent who actually understands the business because you never want to be underinsured, especially if you have major damage to your house and can’t cover the costs yourself. Don’t think that homeowners insurance is like the extended warranty on your washing machine that you probably don’t need because you could figure out how to cover the costs if it breaks. Homeowners insurance isn’t glamorous or fun to pay, and you never want to use it, but it’s something that every homeowner should have a good handle on in order to make sure they are protected properly.