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Homeowners Insurance: What You Need to Know

Learn the basics so you can get the best coverage for the right price.

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If you own your own home, there’s a good chance it is your biggest and most important investment. Therefore, it makes sense to do everything you can to protect it—including carrying homeowners insurance.

Whether you are looking to purchase homeowners insurance for the first time or you’re in the market for a better deal than your current policy, you’ll find key information below to help you make the right decision for your situation.

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Why Is It Necessary?

Nobody likes to buy things they hope they’ll never use. (Except for some of the people who build shelters and buy gallons of bottled water to prepare for the end of the world—some of those folks seem to get a kick out of that.)
So, why should you invest in homeowners insurance in the first place?

The most likely answer is that you’re required to. Of course, homeowners insurance is not usually required by law in most states, as is the case with car insurance. However, if you have a mortgage on your home, then your lender will likely require you to purchase homeowners insurance.

Beyond the requirement, a home insurance policy is a good investment because it protects both your home and the people living in it! It gives you peace of mind when things are going well, and it makes sure you’ll have the help and support you need if something does go wrong.

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What Does Homeowners Insurance Cover?

The first thing covered by your homeowners insurance policy is your actual home—whether that’s a house or a cabin or a condo and so on. And that coverage includes all the major pieces of your home, including plumbing, electrical, the roof, and more. You’ll also be covered on any additional structures that are part of your property such as fences, a garage, or even a fancy “she shed.”

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Homeowners insurance will also cover your belongings

That includes your furniture, clothes, jewelry and other valuables, electronics, and more. Better yet, most policies will cover your items even if they are lost or damaged away from your home. Meaning, if your laptop is included in your policy and it gets stolen from your car at the grocery store—you’re likely covered.

Most homeowners policies also include liability coverage

so you are protected against lawsuits from people who are injured or incur damages on your property. Note: this typically includes any injuries caused by your pets, as well.

Living Expenses

Finally, good homeowners policies will also include money to cover living expenses away from your home if it is damaged or if you are forced to leave for another reason.

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What Does Homeowners Insurance Protect Against?

There are a lot of bad things that can happen to your home. Thankfully, you don’t have to handle them alone when you’ve got the right coverage—you get financial help and more. Here are the most common dangers covered by homeowners insurance:

Note: with most homeowners policies, you’ll need to purchase extra coverage for natural disasters such as hurricanes, floods, and earthquakes. So be sure to work with your insurance company to make sure you’re covered if you live in an area where disasters are a possibility.

Also, as with most insurance, there are different levels of coverage for different prices. So again, make sure you have coverage for the things you need, and make sure you avoid coverage for whatever you don’t need.

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Damage from people, including theft and vandalism.

Fire or lightning

Wind

Hail

Damage from snow and ice, including falling trees and branches

Smoke

Damage caused by vehicles (even if you’re at fault)

Water damage (other than flooding)

What Happens When I Make A Claim?

When you suffer loss to your home or your possessions, you’ll be reimbursed by your insurance company—as long as you are carrying the appropriate coverage. There are three options for how that can go:

Actual Cash Value:

your insurance carrier will reimburse you for the actual value of your home or household items, minus any depreciation that may have occurred. For example, if your ten-year-old TV is included on your policy and gets destroyed, you won’t receive a check for the cost of a brand-new TV. You’ll be reimbursed based on what a ten-year-old TV is worth.

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Replacement Cost:

with this level of coverage, your carrier will pay to repair your home or replace household items based on their original cost. So, if that ten-year-old TV gets destroyed, you’ll receive a check for what you originally paid for that TV ten years ago.

Guaranteed or Extended Replacement

this is the highest level of coverage because it guarantees that you’re carrier will pay to restore your home to whatever condition it was in before a claim—even if the cost of doing so exceeds your limits.

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Homeowners Insurance and Natural Disasters

What you need to know to stay covered against floods, earthquakes, tornados, and hurricanes Every year, we are bombarded with images and videos of communities destroyed by natural disasters. It’s a sobering reality that nature is a force we are not able to control, and it can dramatically affect our lives and our homes. So, are you prepared for such disasters? Are you covered if they target your home and your family? You need to be, and the information below can help you get started.

The Most Important Thing You Need to Know

The most important thing you need to know about the connection between insurance and natural disasters is that most basic homeowners insurance policies and renters insurance policies do not include coverage for floods, earthquakes, tornados, and hurricanes. Coverage is available for these and other disasters, but it is typically an add-on to the policy. So, if you have not specifically directed your agent or your insurance company to add these coverages to your policy, it’s likely you are not covered. And that could be a big problem if disaster does strike your community. The solution, of course, is to review your policy and connect with your agent to make sure any gaps are covered.

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Floods and Homeowners Insurance

It’s important for homeowners and renters to think specifically about flood insurance because flood damage affects more homes in the United States than any other type of natural disaster.

If you’re surprised by that, you’re not alone. Many people believe floods are limited to the coasts, but that’s not the case. Floods can occur in all geographic regions—and they are actually very common in landlocked states such as the Midwest of America. That’s because floods are often caused by rivers and creek beds that overflow during seasons of high rain or melt-off from other regions.
When flood damage does occur, it’s almost always expensive to fix. Floods cause immediate harm to structures and possessions, of course, but they can also leave lasting damage through molds and other consequences. So, it’s critical to be prepared.

The good news is that flood insurance is managed by FEMA and the National Flood Insurance Program. That makes flood insurance relatively easy to purchase because it is managed by federal guidelines.

So, do you need flood insurance? Check the FEMA “floodsmart” tool to see the risk of flooding in your area. But even if you’re not in a high-risk region of the country, flood risk may be a wise investment—studies have shown that up to a quarter of the damage caused by flooding each year occurs in areas of low or moderate risk.
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Insuring Against Other Disasters

Other than floods, natural disasters are more typical in specific regions of the country. The East Coast is susceptible to hurricanes, the Midwest is affected by tornados, and the West Coast is often targeted by earthquakes and forest fires. As a result, state governments in specific regions will often make specific rules requiring different types of insurance against common disasters. And insurance carriers will often have special policies offering coverage against disasters in those specific regions.
So, do you need your homeowners insurance to cover against hurricanes, tornados, earthquakes, and other disasters? The answer starts with the legal requirements established where you live. Even if not required, insurance against these disasters may be a good investment—talk to your insurance company or agent to find out.

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How Much Homeowners Insurance Do You Need?

4 steps to determining the right amount of coverage for your specific situation

Balance is a great goal for many things in life, including homeowners insurance. You need to have enough coverage to make sure you can rebuild and replace anything that’s damaged, but you want to avoid paying more than is necessary.

So, how can you figure out the perfect amount of homeowners coverage for you and your family? There are four steps you should follow based on the four key elements of what your homeowners policy will actually cover:

Dwellings and structures

these are the actual buildings on your property, starting with your home and also including fences, sheds, and so on.

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Personal belongings

This includes all your “stuff”—furniture, clothing, jewelry, electronics, family heirlooms, and more.

Liability

this coverage protects you in the event of a lawsuit if someone is injured on your property.

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Living expenses

if you are forced to move out of your home for a time because of a claim, your policy will often cover you for temporary housing costs, food, and so on.

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With that in mind, let’s look at each of those elements to determine how much homeowners insurance is right for you.
Dwellings and Structures

The biggest puzzle piece you need to figure out when determining the amount of your homeowners-insurance coverage is the replacement cost if your home is destroyed. Now, that’s not the same as the price you paid for your home, or even the appraised value—because those include your property as part of the price.

Determining the replacement cost for your home means figuring out how much it will cost to rebuild your home and all other structures—garages, fences, sheds, etc. Be sure to include labor in addition to materials.

So, how do you figure out your home’s replacement cost? You can start by doing the math yourself, looking up the average cost per square foot to build a new home in your community, and then multiplying that number by the amount of square feet in your home specifically. You can also hire a professional to give you an appraisal on the replacement cost for your home.

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Personal Belongings

If it sounds like a daunting task to go through all of your personal belongings and figure out how much everything is worth—or how much it would cost to replace each item—don’t worry. You don’t have to do that.

Why? Because most homeowners-insurance policies determine the value of your personal belongings based on a percentage of your home’s dwelling/structure coverage. Typically, that number is between 50 and 75 percent of your dwelling coverage, which is adequate for most homes.

There is one question you need to answer, however: do you want a policy that covers the “actual cash value” of your household items or the “replacement cost”? There’s an important difference.

The actual cash value is determined by how much your possessions are worth today. For example, if you bought a bed for $1,500 ten years ago, it’s not worth $1,500 any longer.

The actual cash value will be much less. So, if that bed is destroyed, and your policy offers reimbursement at the actual cash value, you will receive significantly less than the $1,500 it took to purchase that bed originally.

On the other hand, basing your homeowners coverage on “replacement cost” means you will be reimbursed the amount needed to purchase a brand new version of whatever is lost. So, if your $1,500 bed is destroyed, a policy based on replacement cost will reimburse you the full $1,500 to purchase a new bed. Of course, that extra coverage costs extra money.

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Liability

Similar to covering personal belongings, most homeowners policies use a benchmark amount as a starting point for liability coverage—typically $100,000. If you’ve ever been involved in a lawsuit, however, you know things can get very expensive very quickly. So, it may be in your best interest to boost your liability coverage by a significant amount. This is especially true if you have valuable assets that could be targeted through a lawsuit.

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Living Expenses

The amount covered for additional living expenses in a homeowners policy is also typically based on the amount of dwelling coverage for that policy. So, if you can spend some extra time to get a balanced amount of coverage for your dwellings and structures, you can feel confident you’ll have the coverage you need for the rest of the elements in your home—including temporary living expenses should you have to move out for a period of time.

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