Homeowner’s insurance is an important part of protecting your personal finances. However, there are many people who don’t understand homeowner’s insurance, how it works, and why they need it. Owning a home without homeowner’s insurance is a huge risk. Follow along with this guide to better understand homeowner’s insurance, who needs it, and where to get it.
What is homeowner’s insurance?
Homeowner’s insurance is an insurance product designed to protect homeowners from a financial loss in the event of a disaster at home. Natural and manmade disasters can happen at any time. Fires, broken pipes, tornadoes, hurricanes, and other disasters surprise people every day.
If a major storm blew a tree over in your yard, would you be able to afford the tens of thousands of dollars in repairs? Most people don’t have that kind of cash standing by, even if they do have an emergency fund. That’s where homeowner’s insurance comes in.
Homeowner’s insurance pays for the repairs in the event of a disaster at home and even covers the value of the contents of your home. Each policy is different and certain disasters, like earthquakes and flooding, require an additional policy on top of a standard homeowner’s insurance policy. Flood insurance typically comes from a Federal government insurance program. But for most other situations, homeowner’s insurance will pay for home repairs and contents up to the policy limit.
Neal Frankle, a Certified Financial Planner and editor at CreditPilgrim.com, shared why homeowner’s insurance is so important for homeowners: “Damage to the home you own from fire, windstorms, hail or if your home gets vandalized or broken into and your possessions are stolen, it can be very expensive to remedy. If you have this coverage, you shift that risk to the insurance company.”
The value of the property, deductible, in-home and nearby safety features like fire suppression systems and fire hydrants, and the location of the property all influence the premium. A premium is a monthly, quarterly, semiannual, or annual payment to the insurance company for your insurance coverage. Whether your home ever has damage or not, paying a premium is required for homeowner’s insurance. However, in many cases your insurance premium is bundled with your mortgage payment so you don’t have to make any additional payment just for insurance.
How homeowner’s insurance works
If a tree does come crashing down on your roof and you have homeowner’s insurance, getting repairs paid for is not as simple as calling an agent and letting them take care of everything. You have to get an estimate, approval from your insurance company, and pay a deductible before insurance kicks in.
A deductible is an out-of-pocket expense you must pay before your homeowner’s insurance kicks in. If you have a $1,000 deductible and $750 in damage, you must pay for the damage on your own. However, if you have a $1,000 deductible and $10,000 in damage, you only have to pay $1,000. Insurance covers the rest.
Most insurance companies require that an employee of the insurance company or an approved service provider assess the damage and approve a specific payout amount for that damage. The repair business you choose, or one suggested by the insurance company, must complete repairs within that budget.