Not a lot of people get excited when they hear the word insurance. But buying a home without a homeowners’ insurance is nearly impossible unless, of course, you are an all-cash buyer. Nearly all mortgage lenders ask their borrowers to buy insurance because they want to ensure that their investment is safe.
Consider this situation: The house you bought with a mortgage got destroyed. Who will suffer the biggest loss in this case? Of course, it is the bank because nearly 80% of the value of the house was contributed by them.
Who needs homeowners insurance?
You might need homeowners insurance even if you don’t own a house. Many landlords ask their tenants to buy insurance. And if you are planning to buy a house, getting a home insurance is imperative.
A regular homeowners insurance will provide protection against the following:
1. Any damage to the exterior or interior parts of your property
If your home suffers damage in insured disasters such as fire, hurricanes, and lightning, the insurer will bear the cost of repair or reconstruction. Damage caused by earthquakes, floods, and poor maintenance is not normally covered.
2. The loss of personal belongings
If your personal belongings like furniture, clothes etc., get lost or damaged in a disaster, the insurance company will reimburse you although you can’t expect to get the full value of the items.
3. Injuries or damage caused by you, your family or your pets
Homeowners’ insurance policies usually come with this clause. So if your pet dog bites your neighbor, your insurance company will pay for her medical bills, even if the bite occurred outside your premise. What if your son breaks your neighbor’s windows? That is covered, too.
4. Rental and other expenses
If your home gets completely destroyed in a disaster, the insurance company will reimburse you. Hotel rentals and cost of meals are usually covered. Remember that insurance policies come with strict daily spending limits. But if you are willing to pay higher premiums, you will be able to exceed those limits.
Different Types of Insurance Coverage
All insurance policies are not the same. They are not equal either. If you buy a cheap homeowners insurance policy, you can’t expect to get a large coverage.
Insurance policies typically provide 3 levels of coverage:
- Actual cash value- In this case, the insurer will reimburse the actual value of your property and belongings after making adjustments for depreciation.
- Replacement cost- The insurer will reimburse the amount you will need to rebuild or repair the house so that it recovers its original value. In this case, the loss of value due to depreciation is not considered.
- Extended (or guaranteed) replacement cost- This type of insurance provides the most comprehensive coverage. It protects you against inflation and pays the amount you will need to rebuild or repair your home. It doesn’t matter whether that amount exceeds your policy limit.
Cost of home insurance
In 2008, the average annual premium cost of US homeowners’ insurance was $791. That said, premiums vary and depend on several factors. The actual premium you pay depends upon the amount of coverage you buy.
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