Homeowners Insurance: What Is It?
One kind of property insurance that guards against losses and damages to a person's house, along with the furniture and other possessions therein, is homeowners insurance. Homeowners insurance offers liability protection against accidents that occur within the home or on the property.
Important Information:
- One kind of property insurance that guards against losses and damage to a person's home and other possessions is homeowners insurance.
- The coverage usually covers injuries received while on the property, loss or damage to personal items, interior damage, and external damage.
- There is a liability limit on every homeowners insurance policy that determines the amount of coverage the insured would have in the unfortunate case of an accident.
- Homeowners' insurance should not be confused with a mortgage insurance or house warranty.
The Working of Homeowners Insurance
A homeowners insurance policy will usually cover four types of accidents on the insured property: injury received while on the premises, loss or damage to personal items, external damage, and interior damage. When a claim is filed for any of these events, the homeowner will be obliged to pay a deductible, which is essentially the insured's out-of-pocket costs.
Imagine an insurance company receiving a claim for water damage to a home's interior. According to a claims adjuster's estimate, the cost of getting the property back to livable standards is $10,000. The homeowner is advised of the deductible amount, let's say $4,000, if the claim is accepted, in accordance with the signed policy agreement. The insured will receive the excess amount—$6,000 in this case—from the insurance company. The bigger the deductible on an insurance contract, the lower the monthly or annual payment for a homeowners insurance coverage.
There is a liability limit on every homeowners insurance policy that determines the amount of coverage the insured would have in the unfortunate case of an accident. In lieu of the customary $100,000 standard limit, the policyholder may select a greater amount. The liability limit denotes the portion of the coverage amount that would be applied to living expenses while the property is being fixed, personal property replacement, and repairs to the structures on the property in the event of a claim.
Most standard homeowner insurance policies don't usually cover natural disasters or acts of war, including floods or earthquakes. If a homeowner lives in a region where these natural catastrophes frequently occur, they may need to get specialized coverage to guard against floods and earthquakes damaging their house. However, most basic homeowner insurance policies include natural disasters like hurricanes and tornadoes.
Read about another popular type of insurance, Renters Insurance.
Home Mortgages and Homeowners Insurance
When qualifying for a mortgage, the homeowner will usually need to provide proof of home insurance before the financial institution will loan any money. Property insurance may be bought by the person or by the lending bank. If a homeowner would rather get their own insurance, they can examine different policies and select the one that best fits their needs. The bank may insure the homeowner's belongings against loss or damage if they do not already have it, albeit at an extra expense.
Usually, a homeowner's monthly mortgage payment includes any contributions made to their homeowner's insurance policy. The lending bank, which also gets paid, places the insurance coverage share into an escrow account. The insurance bill is paid from this escrow account when it is due.
Home Warranty vs. Homeowners Insurance
Home warranties and homeowners insurance are not the same thing, despite their similarity in terminology. A house warranty is an agreement that covers repairs or replacements for various home appliances and systems, including washers, dryers, ovens, and swimming pools. These contracts usually have a one-year expiration date, and a homeowner does not have to buy one to get a mortgage authorized. Home warranties cover faults and problems that result from natural wear and tear on components or from improper maintenance—situations for which homeowner's insurance is not relevant.
Mortgage insurance versus homeowner's insurance
A homeowners insurance coverage is not the same as mortgage insurance. Mortgage insurance is usually required by the bank or mortgage company when a buyer contributes less than 20% of the purchase price. The Federal Housing Administration also mandates it for anyone requesting an FHA loan.
This is an extra expense that can be charged in full at the time the mortgage is approved, or it can be added to the monthly mortgage payments.
When a lender takes on the extra risk of a house buyer who doesn't fit the typical requirements for a mortgage, mortgage insurance shields the lender. In the event that the buyer stopped making payments, mortgage insurance would cover the loss. Although both are related to homes, homeowners insurance typically covers the homeowner while mortgage insurance protects the mortgage lender.