Homeowner's Insurance Explained

Homeowner's insurance protects against covered perils such as fire.

Insurance is essential when purchasing a home, and it's also advisable for those who rent a home or apartment. Homeowner's insurance pays for damages that you might not be able to pay out of your own pocket, saving you from financial hardship. Factors to consider when purchasing homeowner's insurance include the type and amount of coverage that is right for you.

Function

Homeowner's insurance reimburses you for damages up to the amount specified in your policy. Covered perils can include fire, theft and vandalism, to name a few. The liability portion of a policy will protect you against a lawsuit if someone is injured on your property, such as a neighbor who trips over a skateboard that your child left on the sidewalk in front of your home.

Significance

Without homeowner's insurance, you would be required to pay for damages to your home out of your own pocket, which could cost you hundreds of thousands of dollars in the event of a disaster like a house fire. Proof of homeowner's insurance is also usually required for a home mortgage loan.

Types

There are several basic types of homeowner's insurance policies. An HO-1 policy is the the least expensive and provides the least amount of coverage, with protection against 10 perils. An HO-2 policy covers 16 perils. The HO-3 policy covers any peril except those that are specifically excluded. An HO-4 policy allows renters to cover their personal possessions. The HO-6 covers condominiums, and the HO-8 provides protection for older homes with reduced market value.

Features

The insurance company will pay your claim based on either replacement costs or actual cash value. Replacement cost is what the cost would be to replace an item based on its actual cost in the current market. Actual cash value coverage will pay you based on the current value minus cost depreciation, so the amount paid is less than with replacement cost coverage.

Warning

Although actual cash value coverage is less expensive, it might not provide the coverage you need, because it does not account for inflation. Many insurance companies give a quote with actual cash value coverage to keep the premium down when competing for your business. If you want replacement cost coverage, be sure to tell the insurers when getting quotes.

References

• Insure.com: Home Insurance Basics
• Allen Financial Group: Actual Cash Value vs. Replacement Cost