Homeowners Insurance

For most American consumers, their home is their largest single investment and most expensive purchase. In order to protect against the financial loss of a home and its contents due to unforeseen circumstances like a fire, certain acts of nature, theft, vandalism, or other perils, the vast majority of homeowners will want to purchase a homeowner’s insurance policy, also commonly called hazard insurance.

While a homeowner is not legally required to have this type of coverage, most lenders will not finance a mortgage on an uninsured, private residence. This is because, in most cases, the lender is technically the owner of the home until the home loan is fully repaid, and the bank or mortgage company wants its property to be protected. A little over 80 percent of all homes in the country are currently covered by owner-occupied homeowner’s policies.

Homeowner’s insurance policies generally contain five types of coverage – dwelling and structures, personal property, personal liability, medical payment, and additional living expenses:

Property damage coverage helps pay for damage to the main house as well as other structures on the property, such as a detached garage or outbuilding.

Personal property coverage will pay for household furniture, clothing and other personal belongings destroyed or damaged.

Personal liability coverage insures against accidents or injury to others on the homeowner’s property or at the hands of the homeowner within the policy territory. Personal liability also pays for the legal defense costs incurred by an insured homeowner should he or she be sued for negligence.

Medical payment coverage pays the costs if someone outside the homeowner’s family is injured on the insured’s property, regardless of fault.

Additional living expenses will pay a percentage of the costs incurred if the homeowner must move into a motel or apartment temporarily because of damage caused by a peril covered in the policy.

Filing a Claim

When a home sustains any damage that is covered under the policy, it is the responsibility of the homeowner to contact the insurance company as quickly as possible in order to file a claim. After the claim is filed, the company will send out an adjuster to assess the extent of the damage, and based on the adjuster’s report, the company will then offer a sum of money to repair the damage and settle the claim.

Covered losses under a homeowner’s policy can be paid on either an “actual cash value basis” or a “replacement cost basis” depending on how the policy is structured. When actual cash value is used, the policy owner will be repaid only the depreciated value of the damaged property. For example, a roof that cost $10,000 when it was installed ten years before is no longer worth the same amount, as it has suffered a decade of wear and tear. Under replacement value, however, the homeowner would be reimbursed the necessary amount to replace the roof with one of similar type and quality at current prices.

Shopping For a Policy

Just as a homeowner has probably shopped around before purchasing his or her current home, so should he or she shop around for the best and most appropriate insurance policy for that home.  It is important to get quotes from several different companies and compare the combinations of price and protection that works best for the homeowner’s budget and possible future needs.

Research each company’s financial stability, how long it has been around and what friends and neighbors may say about it. A good insurance agent can walk a homeowner through the process, get multiple quotes and make sure that, should disaster strike, the policy owner  will be adequately covered.

While the average annual premium for a homeowner’s insurance policy in 2010 was around $900, the price of a policy premium can vary greatly due to many different factors:

  • The value of the home and the amount it would take to rebuild it if it were entirely destroyed.
  • The age of the home and the type of its construction – generally wooden frame homes will cost more to insure than those with brick or stone walls.
  • Any mitigation that the homeowner has made to make the structure more resistant to damage from wind or other natural disasters. Reinforced roofs, modernized electrical systems, or hurricane windows, for example, will generally lower the premium.
  • The home’s location. For instance, homes in an earthquake zone or near an ocean shore will be more expensive to insure, as will homes in certain localities or communities, such as high crime areas.
  • The policy’s various deductible schemes – the higher the deductible the more money can be saved on the premium.
  • Any riders or “endorsements” to the policy for particular kinds of extra coverage such as debris removal, damage to trees and shrubs, earthquake or flood coverage, insuring expensive jewelry or other valuable possessions, etc.
  • The quality of the insuring company’s services and how well and quickly it has historically responded to claims. Large, established companies may charge more.
  • Various discounts for things like a homeowner’s age (retired homeowners sometimes can save money on premiums) or credit history (good credit can cut insurance costs). Smokers may pay more than nonsmokers.
  • Protective devices such as burglar alarm systems, smoke detectors, sprinkler systems, fire extinguishers and deadbolt locks can all help lower a premium.
  • A homeowner with a history of claims on his or her insurance policy may pay a higher premium.
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