The most expensive thing most Americans will ever buy is their home. The median-priced home in America is currently going for around $200,000, a figure so high that most people need a mortgage loan to buy one and with this comes the need for Homeowners Insurance. And for most Americans, home is a critical part of life (think, shelter). So what would you do if your house burned down, got flooded, or was sucked up in a tornado? Most of us never experience any of these things, but because nobody is completely immune to such catastrophes, we put certain precautions in place to help ourselves out in the rare event our home is unexpectedly damaged or destroyed.
Insurance lets us all share the risk
With insurance, a whole bunch of people chip in a little bit of money, and if something horrible (and horribly expensive) happens, that pooled money goes to cover the costs. None of us can afford to pay it all ourselves, but all of us combined can easily afford to pay for the rare catastrophes. If you become the victim of a catastrophe, others’ insurance premiums (the payments they make into the pool) cover the costs. If nothing terrible ever happens to you…well, you won’t get your premiums back, because they paid for others’ misfortunes. But that’s what you really want, isn’t it?
You probably already have life insurance, health insurance, and car insurance. If not, you should probably think hard about getting it. If you own a home, homeowners insurance is pretty much a no-brainer. Most homeowners insurance policies will pay for a number of eventualities. Bear in mind that every policy is different–they cover different repairs and different causes of damage–for instance, floods and earthquakes are almost always excluded from a standard homeowners policy, and must be bought separately. Be sure to ask a lot of questions when you’re shopping for insurance, especially if you live in a place with lots of floods or earthquakes.
This pays to repair or even completely rebuild your home, including structure, exterior, windows, interior finishes, electrical wiring, plumbing, and heating and air conditioning. Causes for the loss might include fire, windstorms, hail, lightning, theft or vandalism. Your policy probably has a max coverage value on it, so if your home worth $150,000 burns down, they won’t bankroll the rebuilding of your dream mansion on the same lot.
If a tornado destroys your house, it’s probably going to wipe out everything else on the lot. This coverage takes care of garages, sheds, fences, pump houses, and funny little outbuildings such as cottages on your property. If you build a $50,000 greenhouse of the future, make sure your Other Structures coverage is sufficient to replace it. Hail storms are to greenhouses as toddlers are to china shops!
Personal property coverage
If your house is on fire, get out with your life. Your clothes, toys, furniture, electronics, and fancy dishware can all be replaced. Especially if you have Personal Property Coverage!
Loss of use coverage
If your house is obliterated by a hoard of roaming Mongols, your mortgage payment won’t get put on hold. But you will have a bunch of new expenses, such as hotel stays (hopefully with free continental breakfasts) resulting from not being able to sleep in your own home. A decent policy will pay you money to cover such unfortunate realities.
If the neighbor kids are jumping on your trampoline and one falls off and breaks his arm, you’d better hope your neighbors are cool, because otherwise, they might stick you with the medical bill. If they’re extra uncool, they might go so far as to take you to court. Liability insurance will cover the costs of any lawsuits or judgments resulting from other people getting damaged while on your property.
If you’ve got insanely valuable, dangerous, or fragile stuff, your insurance carrier probably has additional riders to cover it. You might be surprised at how many odd things have been insured over the years.
Interestingly, backed up sewers and drains are often considered add-ons to standard policies.
Since most of the things that go wrong with any given house on any given day are small, inexpensive to fix and much more likely to occur than catastrophes, just about every policy has what’s called a ‘deductible’. That’s the first little bit of money toward a repair that the homeowner has to pay. For instance, if a broken window will cost $300 to replace and the policy has a $500 deductible, the insurance won’t even cover the repair. If two windows costing $300 each need to be replaced, the homeowner will pay $500 and the insurance company will cover $100. But on the bright side, if the entire house is knocked down by a stray dinosaur, the homeowner will only pay $500 and will get a brand new house. And hopefully one heck of a photograph.
Insurance adjusters keep everyone honest
If your house gets egged by an irate coworker, don’t go thinking you can send your insurance company a bill for a new stone facade. When you make a claim, they’ll send an adjuster out to take a look at the damage. Adjusters tend to know how much it costs to fix things. They might even require you to use specific, approved contractors to get the work done.
Your lender probably requires you to have homeowners insurance
It’s important to remember if you’ve got a mortgage, your lender is an investment partner in your home. You benefit from the arrangement by being able to buy a home without hundreds of thousands of dollars in cash; rather, you’ll pay that amount–with interest–over the course of many years. Your lender benefits from the interest you pay them each month. If something dreadful happens to the house, your lender’s life won’t be in turmoil, but they certainly stand to lose a lot of money. After all, if your home isn’t habitable, you’ll likely be spending money each month on a rental or a new home, and there could be a substantial amount of pressure to stop paying that mortgage. You might actually find it completely impossible, with the added expense.
For this reason, practically every lender in the country requires their borrowers to carry an adequate homeowners policy. That way, if something happens to the property, their investment is covered financially.
How do I get and pay for my homeowners insurance?
If you don’t have an insurance agent in mind, your lender, real estate agent, or settlement agent will be happy to recommend one. You can also use the phone book, except you probably won’t even know where to find one these days. Simple search online for “homeowners insurance agent” or “P&C agent” (P&C stands for “property and casualty”) and you’ll be bombarded with the best marketers in your area, and hopefully the best agents.
Homeowners policies are billed annually–they must be renewed year after year, and your agent, who makes money on renewals, hopefully won’t let you forget. Your lender is also probably requiring a renewal certificate each year. But remember, not everyone is perfect at their job, so you’ll want to stay on top of this yourself.
You insurance carrier will probably let you make monthly or quarterly payments, though you’ll save some money if you pay the year in advance. Like your property taxes, your premiums can be escrowed with your mortgage so you don’t forget, and so you don’t have to keep track of a ton of bills.