Buying and owning a home is often an expensive journey. Due to the various costs involved, it can be tempting to cut back on some expenses – like buying barebones homeowners insurance or even deciding that’s an expense you can’t afford.
But while it might seem like a luxury, mortgage-lender Mr. Cooper emphasizes to homeowners that home insurance will be critical to protecting you and your home against when things go wrong. Your home is likely one of your most valuable assets. That also means it’s probably not one that you can fix out-of-pocket in an emergency. With homeowners insurance, you can receive money to repair your home after damage, replace your lost valuables, or even guard against third-party liability.
If you’ve wondered about home insurance and whether it’s something you should splurge on, here’s all you should know about this topic with insights from Mr. Cooper, including what it is, what it covers, and why you should have a homeowners policy.
What is homeowners insurance?
Homeowners insurance provides coverage against any event that damages or destroys your home. Homes are often vulnerable to many risks, including fire, wind, smoke, lightning, vandalism, theft, accidents, etc. A homeowners policy compensates you if your home is damaged from any risk event covered in it.
In addition, the policy will typically pay the cost of repairing or replacing your personal belongings if they are damaged. And if you become liable for causing injury to someone else or their property, your homeowners policy can also protect you from personal liability.
Why is homeowners insurance important?
You should know that the law does not strictly require homeowners to purchase insurance on their home. But going without homeowners coverage can be a huge gamble. Apart from this, those with a financial stake in your home might insist on insurance.
Protect your home
Whether you’re buying new or have paid off the loan on your home, a homeowners policy protects your investment. It will compensate you against damage to the exterior of your house, such as the roof, eaves, outside doors, as well as the interior, including fireplaces, mantels, and ceiling.
But the policy doesn’t stop at that. Homeowners coverage can also extend to structures attached to your home, such as a garage or deck (called dwelling coverage) and detached structures like a fence, shed, or gazebo. Additionally, if someone is injured in your home, your homeowners policy can include guest medical protection coverage to pay for their hospital bills.
Disaster can strike at any time, which is more so when you live in a flood, tornado, hurricane, or earthquake-prone area. But with a homeowners policy, you can rest easy knowing that you’re covered even if the unthinkable happens.
Fulfill stakeholder requirements
Homeowners insurance may be required by various stakeholders who want to protect their interest in your home.
Before approving your loan or agreeing to finance your home purchase, your lender will likely ask if you have home insurance. Some lenders require specific protection, such as flood insurance for homes in flood-prone zones or earthquake insurance if you live on a fault line. Keep in mind that if you do not have homeowners coverage, your lender is permitted to buy a policy and charge you for it, says the Consumer Financial Protection Bureau.
Certain landlords might require that you purchase renter’s coverage to complete a home or commercial lease. Likewise, the Insurance Information Institute (III) advises that co-op or condominium owners may be required to purchase insurance.
If you desire to obtain a home equity loan, you may also have to fulfill homeowners insurance requirements. While buying a home policy because you’re required to might not feel pleasant, remember that the policy protects your interests just like it protects the stakeholder’s.
What does it cover?
Homeowners policies, usually called policy forms, come in all shapes and coverage limits. Examples include HO-3, HO-5, HO-1, and HO-2 policies. Each of these provides different levels of coverage. At their core, though, homeowners policies may be grouped into three:
- Actual cash value policies. Effectively, these policies will pay you the current market value of your home or valuables.
- Replacement cost policies. Here, you may recover up to the original value of your home or valuables.
- Guaranteed/extended replacement cost policies. These policies provide the most comprehensive protection; they pay whatever it costs to repair or rebuild your home. But they have a ceiling between 20% to 25% above your policy limit.
While these policies vary, there are specific standard terms you can expect to receive. According to the III, the typical home insurance policy covers:
The structure of your home
Your policy will pay for external and internal damage caused to your home from any risks covered in the policy. This protection extends to attached and detached structures, generally at a rate of about 10% of the total policy limit on your home.
Some policies are comprehensive enough to protect against all forms of risk, except those expressly excluded. Usually, a standard policy will exclude damage from earthquakes, normal wear and tear, or flooding. You may have to purchase additional coverage to cover flooding and earthquakes.
Your clothing, books, rare card collection, and other personal items are also protected against the risks in the policy. Those personal effects may be covered even when off-premises. But the policy won’t pay for unlimited damage to these items; only about 50% to 70% of the limit on your home.
Additional living expenses
If you are forced to live elsewhere because of damage to your home after a covered disaster, you can also recover those expenses. This includes hotel bills, transportation, meals, and other expenses above what you would typically spend, pending the repair of your home.
Lastly, most homeowners policies protect you from third-party liability. For example, if someone was injured in your home or had their property damaged, the policy will pay for this. Similarly, if you caused damage or injury in someone else’s home, the policy will also protect you here.
Although homeowners insurance may not be cheap, the odds are that it won’t be as expensive having to pay out-of-pocket for unexpected damage. By purchasing the right policy ahead of time, you help protect your home and enjoy the peace of mind you deserve.