What Is Homeowners Insurance? A First Time Home Buyer Guide (2024)

Protect Your Belongings With The Right Home Insurance Policy

Last updated on May 13th, 2022 Luke Skar Leave a comment2,581 views

What Is Homeowners Insurance? A First Time Home Buyer Guide (1)

For thefirst time home buyer there is a lot of information to learn and understand before signing a mortgage. One item of importance is the homeowner’s insurance policy.

Considering the enormous cost of an average home, it goes without saying that the majority of people could not afford to pay for the replacement of a house in the event of a disaster. That is why it is so important to have a good insurance policy that takes care of all your needs.

Learn what makes up a homeowners insurance policy so that when the time comes to purchase one, you have a better idea of what coverages you’re looking for.

Meeting Lender’s Requirements

Although there is no state or federal law requiring homeowners to have a specific insurance policy, if you finance a home the lender will indeed require an insurance policy. In the event that your home is paid off, it is still a very good idea to have an insurance policy for your property.

Here are the main ways that an insurance policy can benefit you:

  • Protect you in a case of a liability – If your pet bites a visitor, or if a neighbor happens to fall in your walkway and sustain an injury, you could be responsible for paying the medical costs. Your homeowner’s insurance policy would take care of the costs
  • Fix damage to the home and other items on the property – If your home is damaged in a natural event, such as a thunderstorm or tornado, the homeowner’s insurance policy would pay for the repairs.

Breaking Down The Home Insurance Policy

Your policy will be comprised of various coverages. Some of these coverages will be applied automatically while others are options that you may choose to add

Standard Coverage

  • Dwelling: This takes care of any damage that may be incurred on your

    What Is Homeowners Insurance? A First Time Home Buyer Guide (2)

    What Is Homeowners Insurance? A First Time Home Buyer Guide

    physical home as well as any building connected to the home, such as a garage.

  • Personal property: This takes care of either the price to replace or fix any item in the home that may be damaged. Personal items include clothes, dishes, furniture, appliances, curtains, etc.
  • Medical coverage: this will pay for the necessary medical treatments for someone that happens to be injured while at your home
  • Additional structures: if you have items such as a toolshed or a fence on your property, this coverage will repair or replace those structures in the event of damage
  • Loss of Use: if the damage to your home forces you to temporarily live in a hotel or some other arrangement, this will cover extra expenses like meals and moving costs while you wait for the repairs to be finished.

Add on Coverage

  • Scheduled property – This type of coverage is designed for higher-priced items like artwork or jewelry
  • Water damage – if you live in an area where burst pipes are a problem, this would be a wise add-on option to purchase. This is different from water damage caused by floods, rain, or other natural disasters
  • Enhanced property coverage: this covers you in the event that construction prices take a significant hike and the price to rebuild your home is more than your original coverage.

Items Covered, and NOT Covered, By A Homeowners Insurance Policy

The two most common types of policies for homeowners are the HO-3 and the HO-2. The HO-2 will only cover a certain list of items. These items are:

  • Theft
  • Damage caused by an aircraft
  • Lightning or fire damage
  • Objects that fall on the home
  • Vandalism
  • Riots
  • Damage from smoke
  • Discharge or the overflow of water
  • Damage from hail or windstorm
  • Damage caused by artificial electrical current
  • Damage created by a vehicle crashing into property
  • Explosions
  • Eruption of volcanoes
  • Unexpected bulging, tearing, or cracking of the home
  • Snow, sleet, and ice damage
  • Freezing of household system

An HO-3 policy will go beyond the items listed above. Generally speaking, the HO-3 policy will cover all risks. But, the insurance company can exclude specific types of peril and they will be spelled out in the policy.

The policy that has the widest type of protection is called an HO-5 policy. This policy will cover not only your home but also your personal items for almost any situation.

However, there is a major caveat. Certain circ*mstances are not covered by any policy. These situations include:

  • Earthquake
  • Infestations
  • Flooding
  • Mold
  • Nuclear Hazard
  • Normal wear and tear
  • Government action
  • Landslide

In areas where earthquakes or flooding are prevalent, it is possible to buy a separate policy against those events.

Determining The Home Insurance Deductibles And Limits For Your Situation

What Is Homeowners Insurance? A First Time Home Buyer Guide (3)

Homeowners Insurance Guide: What First Time Home Buyers Need To Know

You should always have a policy that will pay for the actual cost to rebuild your entire home. This figure is different from the price paid to buy the home as well as the market value of the home. The price to rebuild is factored in the costs of construction rates in your area. If you only have the market value for your policy it may not cover the actual cost or it may be too much value and cost you a higher policy premium.

Your insurance agent should have access to the construction rates in your area. They can use the rates, along with the square footage of the home, to determine the replacement cost.

As a rule of thumb, the personal property coverage will start at 50% of the dollar amount for the dwelling. You have the option of lowering that amount if you do not have as much value in your belongings or you can choose to raise the amount to cover higher-priced items.

This is why it is a good idea to have an accurate home inventory record. The record can tell you how much it would cost to replace all of your belongings and help you provide documentation to your agent in the event of damage or loss.

How Home Insurance Deductibles Work

As the name implies, a deductible is an amount of money subtracted from a policy claim. Most insurance agencies will allow you to have a generic deductible amount whether it is for a window damaged by a hail storm or the replacement of a roof due to heavy snowfall.

When you file a claim with the insurance company, the deductible amount will be removed from the claim. For example, if the price to replace the damaged roof is $10,000 and you have a $1,500 deductible, then you will receive a check for $8,500.

Choosing the deductible amount is a personal preference. Generally speaking, higher deductibles will allow you to save money on the monthly premium. However, it also means you are responsible for more of the financial outlay in the event of a claim.

Summing Up What A Homeowners Insurance Policy Is

Hopefully, you will never need to use your homeowner’s insurance policy to its fullest extent. However, in the event that you do, it is one of the best investments you can make to protect your home.

Additional Homeowners Insurance Resources
Insurance Podcast via Paul Sian
Home Insurance For First Time Buyers: What You Need to Know via Bill Gassett
What Is Covered by Standard Homeowners Insurance? via Insurance Information Institute

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What Is Homeowners Insurance? A First Time Home Buyer Guide (2024)

FAQs

What Is Homeowners Insurance? A First Time Home Buyer Guide? ›

Dwelling coverage: A homeowners insurance policy covers the structure of your home and any other attached buildings, like a garage or porch. Other structures coverage: This covers other structures you may have on your property, such as a detached shed or a fence.

What is homeowners insurance in simple terms? ›

Homeowners insurance is a form of property insurance that covers losses and damages to your residence, along with furnishings and other assets in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.

What is homeowners insurance quizlet? ›

Homeowners insurance is designed to protect your home from what are called "perils." A peril is your exposure to risk or something that causes loss or destruction. ... Homeowners 2 (HO2): This policy protects your property against 18 perils (including 11 perils from Homeowners 1).

What is the most common basic homeowners insurance policy? ›

The most common type of homeowners insurance policy is the standard HO-3 policy. HO-5 policies offer the broadest coverage of all policy types. Open peril coverage means losses are covered unless specifically excluded, while named peril coverage means only named loss types are covered.

What is homeowners insurance and why buy it? ›

Key Takeaways. Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others. Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value.

What is the most important part of homeowners insurance? ›

At a glance: Dwelling coverage is the most important part of an homeowners insurance policy and can be covered by: actual cash value, replacement cost, and guaranteed replacement cost. Losses to other structures on your property are typically covered for 10% of the value of the home.

What is the first step to consider when buying homeowners insurance? ›

Decide what you want to cover. Determine how much homeowners insurance you need. Choose an insurance company. Choose a policy.

What is another name for homeowners insurance? ›

In certain cases, homeowners insurance is referred to as "hazard insurance," "dwelling coverage," "HO-3 insurance," or "HO-5 insurance." These terms are used interchangeably to describe the same essential protection that safeguards a homeowner's property against various risks and liabilities.

Why do people have homeowners insurance? ›

Homeowners insurance protects you from the unexpected burden of paying to rebuild your home should you suffer a loss or a disaster strikes. Should something happen to your home, are you financially capable of replacing it? Insurance can help you during such unpredictable events.

Which of the following are covered by homeowners insurance? ›

Well, homeowners insurance helps protect you, your home and your belongings from all sorts of unexpected events. And with a standard policy you'll get four key types of coverage: dwelling, other structures, personal property and liability.

What two types of damages does a typical homeowners insurance not cover? ›

Certain catastrophes, like flooding or earthquakes, are generally not covered by basic homeowners policies and require specialized insurance.

What is the difference between homeowners insurance and property insurance? ›

Home insurance protects your house, covers liability, and protects additional property structures, such as detached garages and backyard sheds. In comparison, property insurance protects your home structure from many natural perils, except floods or earthquakes.

What happens if you have a mortgage and no homeowners insurance? ›

If you have a mortgage or other home loan, keeping an insurance policy in place is likely a requirement of your loan agreement. Your lender will be notified of policy renewals and cancellations. If you fail to purchase coverage or let it lapse, your company may send your mortgage into default.

How does homeowners insurance work when you have a mortgage? ›

Your homeowners insurance premium is included in your mortgage payment if you have an escrow account. When you pay your mortgage, a portion of the overall payment is set aside in your escrow account to pay for your homeowners insurance and property taxes (and mortgage insurance if your lender requires it).

How do homeowners insurance make money? ›

The insurance company underwrites a policy, stipulating the covered risks and conditions for paying for an insurance claim. In return, the insurer earns revenue by charging an annual or monthly premium to the individual or business.

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