What is Homeowners Insurance and How Does It Work?
Homeowners insurance, a type of property insurance, covers damages and losses to an individual’s house and any furnishings. Homeowners insurance provides liability coverage for injuries that may occur at the property or within the home.
Understanding Homeowners Insurance
Four types of damage are typically covered by homeowners insurance policies: damage to the interior, exterior, personal belongings loss, damage to personal property and injuries that occur while the policy is in force. The homeowner will have to pay a deductible if a claim is filed for any of these types of incidents. It is basically the outgoing costs for the insured.
An example: A claim for interior water damage to a home is filed with an insurer. An adjuster will estimate that it would cost $10,000 to restore the property to living conditions. The homeowner is informed, if approved, of the amount of their $4,000 deductible according to the policy agreement. The excess cost will be paid by the insurance company, in this instance $6,000. The deductible on an insurance contract will determine the premium for homeowners insurance.
Each homeowners insurance policy includes a liability limit. This limits the amount of coverage that the insured will have in case of an unfortunate event. The default limit is $100,000. But, the policyholder may choose to pay a higher limit. If a claim is filed, the liability limit outlines the percentage of the coverage amount that will go towards replacing or repairing damaged property structures, personal property, or living costs while the property is being worked on.
Homeowners insurance policies typically exclude acts of God or war, such as floods and earthquakes. Homeowners who live in areas that are prone to natural disasters such as floods or earthquakes might need special coverage. But, basic homeowners insurance policies will cover tornadoes or hurricanes.
Homeowners insurance and mortgages
Before a financial institution lends funds, homeowners are usually required to prove that they have insurance. The lender can purchase the property insurance separately, or jointly. Homeowners who want to own their insurance policy can look at multiple options and select the plan that suits them best. Banks may offer additional coverage if the homeowner is not covered for loss or damage to their property.
The homeowner’s monthly mortgage payment usually includes payments towards homeowner’s insurance. The payment is transferred to an escrow bank by the lending bank. The escrow account pays the balance due on the insurance bill.
Homeowners Insurance vs. Home Warranty
While they sound very similar, homeowners insurance differs from a home warranty. A home warranty is a contract that covers home systems and appliances. It can be used to repair or replace them, such as ovens. These contracts are usually valid for 12 months. They are not mandatory to be purchased by homeowners in order to be approved for mortgage financing. The home warranty covers any issues or problems that may arise from neglectful maintenance or the inevitable wear and tear of items. This is a situation in which homeowners insurance is not applicable.
Homeowners Insurance and Mortgage Insurance
Also, homeowners insurance policies are different than mortgage insurance. The bank or mortgage company will usually require mortgage insurance if a homebuyer has a downpayment of less than 20%. For FHA loans, the Federal Home Administration requires that it be purchased. This is an additional fee that can be added to regular mortgage payments or lumped charged at the time the mortgage is issued.
Mortgage insurance covers the lender in the event that a buyer doesn’t meet all the requirements for the mortgage. The mortgage insurance would cover the lender in the event that the buyer defaults on payment. The bottom line is that both cover residential properties, but homeowners insurance protects the homeowner, and mortgage insurance protects lenders.