Homeowner’s insurance is meant to protect your biggest investment. It helps you to repair and rebuild in the case of a disaster. It usually goes beyond that, too, giving you liability insurance (in case someone is injured on your property) and protection for your possessions at home and while you’re traveling.
Homeowner’s insurance isn’t required by law, unlike some insurance policies. However, if you have a mortgage, you’ll usually be required to hold homeowner’s insurance as well, at least for a certain period of time. Different homeowner’s insurance policies cover different things, and those things might not be what you assume. Often, the biggest frustration from homeowner’s insurance (and any insurance, come to think of it) is when people don’t fully understand what a policy does and doesn’t cover.
What’s Covered by Homeowner’s Insurance?
First of all, it’s important to know that insurance is meant to cover you in the case of a disaster or accident; it’s not necessarily going to pay stuff that just needs maintenance and repair as a result of normal wear and tear. That’s going to be on you, and you’ll need to budget for it each year in order to keep your house up.
There are two major different kinds of homeowner’s insurance:
HO-2, or Peril-Named Coverage. This means that it only covers what’s specifically named in the policy.
HO-3, or an Exclusion Policy. Contrasted with HO-2, Exclusion Policies cover everything except those things specifically designated as excluded in the policy.
To supplement either kind of coverage, you can add optional coverage for certain things like flooding or earthquakes.
Deductibles and Coverage Limits
Understanding your deductible is key when you’re sorting through policies and budgeting for your own emergency fund. As a general rule, the higher your deductible the cheaper the insurance is, but that also means that you’ll pay more out-of-pocket with each bill. Most deductibles for homeowners insurance are set between $500 and $1000. This means that if there’s storm damage to your roof covered by your insurance, you’ll still have to pay $500-$1000 (whatever your deductible) before insurance kicks in to cover the rest.
A coverage limit is the other bookend of your insurance. It means that your insurance will cover costs up to a certain point, and beyond that you’re on your own. When you’re setting your coverage limit, take a good look at your rebuilding costs, rather than just the value of your home. You’ll also want to calculate the costs of your possessions inside of the home, including furnishings, appliances, and personal possessions.
Is Insurance Included in My Mortgage Payments?
In order to protect the investment, many mortgage lenders require borrowers to pay homeowner’s insurance through an escrow account. This means that your mortgage and insurance payments are consolidated into one place, which usually makes it easier for you to handle.
The average annual home insurance premium in the U.S. as of 2013 was $1,096 a year. But prices can skew much higher or lower depending on location. For example, five years ago the most expensive states had premiums averaging at $1800/year, while the least expensive areas where more like $600/year.