5 Reasons Why You Need Home Insurance

Wednesday, July 19, 2017

Let’s first review homeowner’s insurance so we can get a better understanding of why a homeowner would need it.


What is Home Insurance?


Homeowner’s insurance protects the home, belongings, and property against damage, loss and liability.


When applying for a mortgage, the buyer must have already purchased homeowner’s insurance and produce proof. If not, the lender will not approve the application.


Homeowner’s insurance can be purchased through a local or national insurance agency and is easy to understand. The insurance will be added into an escrow account, and then a homeowner will pay the premiums when they are due. This way, there is little to worry about, just simply pay the mortgage. Or, a homeowner can purchase a policy from an insurance company and pay the premiums on their own without using an escrow account. Normally, the higher the policy’s deductible, the lower the annual or monthly premium.


According to the Federal Reserve Bureau, the average annual cost for homeowner’s insurance is between $300 and $1,000. A homeowner can estimate the cost themselves by dividing the value of the home by 1000, then multiplying by $3.50.


Each coverage that a home insurance policy offers has a limit, which reflects the full amount the policy issues after a covered loss. When choosing limits, make sure to consider the likely cost of replacing your belongings should a vandal ever destroy them or a disaster causes loss of valuables.


If a homeowner’s insurance policy is ever canceled, found to be insufficient, or left unpaid until it lapses, the mortgage company or bank will supply a policy called forced coverage, or lender’s placed insurance. Such policies are costly and protect only the mortgage company.


What Does Homeowner’s Insurance Cover?


Homeowner’s insurance essentially:


  • Covers damage to the structure of the home
  • Provides protection against damage to other structures on your property (fences, garage, sheds, etc.)
  • It also provides protection against damage to the inside of your home


When a claim is made, the homeowner will pay the deductible/out-of-pocket costs. For example, if a homeowner has a policy with a $4,000 deductible and has a house fire, they must pay out of pocket before the insurance will cover any losses. For example, a claims adjuster estimates that it will cost $20,000 to make the home livable again, so if your claim is approved, you will be reimbursed $16,000.


Every Homeowner’s Insurance Policy also has a liability limit, which defines the total coverage per incident. $100,000 is the standard limit, but some may choose to elect a greater one.


Most policies protect against destruction and loss caused by vandalism, fire and weather events such as lightning, hail, and windstorms. Earthquakes and floods, however, are not typically covered and some may want to purchase separate policies for those. Speak to your agent or lender and let them know your needs.


For flood insurance, contact the federal government’s National Flood Insurance Program. To cover valuable items, such as art, furs, collectibles, sporting equipment, weapons, and jewelry, a homeowner may need a separate endorsement or rider. Speak to your agent about these items.


Homeowner’s policies do not cover destruction purposefully caused by the homeowner.


Why You Need Homeowner’s Insurance


We already went over one of the most important reasons –  to obtain a mortgage. And, really, unless you have a lot of cash lying around, it will be difficult to buy a home without it.


Here are five more reasons:


  1. Equity. The home will always be the single biggest investment. Homeowner’s insurance safeguards it by protecting its equity or value. A home’s equity represents its worth over and above the mortgage and other liabilities. As a homeowner continues to make payments, renovate, and improve their home and property, they increase its equity. Homeowner’s Insurance makes sure that, if something bad happens, the homeowner won’t lose what has been invested or be forced to begin all over again.


  1. Disaster Assistance. If a home is destroyed or so badly damaged that the owner needs to seek shelter, their policy’s “loss of use” benefit will pay to relocate them and reimburse them for meals, hotels, and all other living expenses. Most insurance companies will pay up to 20 percent of the coverage price for “loss of use” expenditures. For example, if your home is insured for $200,000, the “loss of use” benefit is approximately $40,000. (don’t simply think this is a benefit reserved only for hurricane and tornado prone states. Hurricane Sandy hit New Jersey quite hard).


  1. Coverage for Assets Inside the Home. Homeowner’s insurance protects the belongings inside the home, should a fire or other covered event harm them or a vandal steal them. It will also help pay to replace or pay to repair them. Such belongings include furniture, appliances, clothing, etc. Interestingly, said belongings don’t need to be in the home, they can be in storage, at school, etc. Check with your policy for details.


Some policies offer a choice on how to insure belongings. The owner can either get actual cash value or replacement cost coverage. Most possessions depreciate over time. Actual cash value offers the amount expected should the item be sold, less the depreciation amount. Replacement cost coverage allows the owner to recover the amount expected if the item is sold, minus the depreciation. This allows the owner to replace their insured personal property for what it would cost them to buy new and is more expensive.


  1. Liability Protection. This offers protection against lawsuits for property damage or bodily injury that the owner, family members, or pets have caused other people. It pays for both the cost of defending you and any court awards, up to the policy limits. This is extremely vital.


  1. It Pays for Medical Bills. Should anyone have an accident or hurt themselves on the property or inside the home, home insurance policy will pay their medical bills. “Guest medical coverage” is usually included in most policies and pays for services such as ambulance, surgery, x-rays, hospital stays, and even funeral expenses. (remember liability protection? It handles the lawsuits that arise from whatever caused these medical bills).


Of course, as a homeowner, you hope you never have to use your home insurance, but if you ever do, it can save you a lot of money. You’ll be glad you have it.