Homeowners Insurance Insurance Insurance Basics

Do you Need Homeowner’s Insurance?

Written by Eric Rosenberg

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.

When damage takes place, the process of getting the repairs completed and paid for is called a claim. Each claim is assigned a claim number. All damages related to the specific incident are assigned to that claim and you can reference that claim when working with your insurance company to get everything fixed up.

Who needs homeowner’s insurance?

Virtually everyone who owns a home needs homeowner’s insurance. If you have a mortgage loan on the property, most banks require homeowner’s insurance to protect their interest in the home. Even if you own your home free and clear, homeowner’s insurance is generally a good idea.

If you have so much money that you could afford to completely rebuild your home and replace everything inside without a financial worry, you could hypothetically afford to go without homeowner’s insurance. However, even the wealthiest Americans often prefer to use homeowner’s insurance rather than “self-insure” against losses. By signing up for homeowner’s insurance, you are limiting your risk of losses to the deductible.

What happens if you don’t have homeowner’s insurance?

If you don’t have homeowner’s insurance and you face a disaster, you have to pay for everything yourself. While you do not have to pay to replace the land the home is sitting on, the cost to repair or rebuild a home can be huge!

I recently sold a home in Portland, Oregon. While I paid over $400,000 to buy the home and the lot it sits on, the estimated cost to replace the home in the event of a total loss was around $365,000. My homeowner’s insurance policy had a $365,000 value, which was the maximum the insurance company would pay in the event of a claim. I don’t have anywhere near $365,000 in the bank and can’t afford that expense. In addition, my mortgage provider required I had homeowner’s insurance.

Because I lived in Portland, an area expecting a massive earthquake sometime in the future, I chose to purchase an additional earthquake insurance policy, as earthquakes were specifically excluded from my main homeowner’s insurance policy.

I lived in that house for a little less than two years and never had a claim. I paid a lot of premiums and got nothing in return. But knowing that if the big earthquake hit or we had a freak house fire I would be covered, made it completely worthwhile.

Frankle warns homeowners of the risks of going without homeowner’s insurance. “If you don’t have the coverage and you suffer one of the problems above, you’ll have to come out of pocket for 100% of the damage. If you don’t have the money to address the problems, you could find yourself in serious debt – or lose your home.”

Where to get homeowner’s insurance

If you need homeowner’s insurance, you have many options to choose from. Most of the largest insurance companies in America offer a homeowner’s insurance product, but the cost can vary widely between insurers. Some of the most popular companies for homeowner’s insurance include AllState, Farmer’s Insurance, State Farm, and others.

If you already have auto insurance, you may be able to save money by choosing the same insurance company for your homeowner’s insurance. This is called a “bundle discount.” However, it is still a good idea to shop around as the bundle discount may not be enough to make up the difference in cost compared to a much less expensive insurance policy.

Insurance costs often go up each year, so it is a good idea to shop around on occasion to decide if you want to change insurance companies. You can switch companies at any time and get a prorated refund for pre-paid months that you have not used. If you have a mortgage, be sure to update your bank so they know where to send the premiums when due.

Homeowner’s insurance is an important part of your finances

Very few Americans could afford to rebuild their house and rebuy everything inside if their house burns down. No one wants to write a big check from a tree branch that crashed through a wall. If a hurricane hit and broke your windows and destroyed your kitchen, electronics, and flooring, you would probably want help paying for it, that’s what homeowner’s insurance is all about.

While the odds of a catastrophe hitting your home are very low, anything is possible. That’s why it is so important to have homeowner’s insurance. Going without is just too risky, and with a solid insurer standing by, you can rest easy that your home and finances are protected from a worst case scenario.

About the author

Eric Rosenberg

Eric Rosenberg is a finance, travel, and technology writer originally from Denver, Colorado living in Ventura, California. When away from the keyboard, Eric he enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and baby girl. You can connect with him at his own finance blog Personal Profitability.

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