What Is Homeowners Insurance?

Owning a home comes at a cost. Besides the initial purchase costs, such as real estate agent fees and property taxes, you will need home protection after moving in. In some cases, mortgage facilities will also require you to have a home protection policy in place before they approve your home loan. Although homeowners can have many policies to protect their homes and properties, homeowners insurance stands out as the best.

So, what is homeowners insurance, and how does it work? 

As an aspiring home buyer, here are all the basics you should know about home insurance and how it provides financial peace of mind.

What Is Homeowners’ Insurance?

Homeowners’ insurance is a property coverage that protects, repairs, or replaces your home and belongings if they are stolen or damaged. The policy also provides personal liability protection to someone injured on your property, medical cover for the injuries, and additional living expenses that exceed your normal costs if you need to move out during repairs.

A standard home protection policy covers damages to all your interior and exterior belongings and mechanical appliances. These include furniture, clothing, jewelry, furnaces, air conditioners, garages, sheds, swings, and outdoor grills. However, high-risk structures like swimming pools and expensive belongings like vehicles may require extended coverage.

Although homeowners’ insurance is not a legal requirement, most lenders ask for it during the mortgage approval process. That is because home insurance also protects the financial interest they have in your property. Also, when contemplating whether to take home insurance or not, it is crucial to remember that the policy protects you from substantial financial losses and unforeseen accidents that may occur on your property.

How Does Homeowners’ Insurance Work?

Homeowners’ insurance might seem not to work until you face the damage outlined in the policy. Before choosing the coverage, you need to understand the primary categories of damages the policy protects you against. These include:

1. Dwelling And Other Structural Coverage

Dwelling and other structural coverage promises to repair or rebuild your home and other structures damaged or destroyed by any covered disaster. The policy covers all the replacement or reconstruction costs based on the current construction expenses in your neighborhood. However, it may not cover destruction or manipulation from uncovered disasters such as floods or damages due to poor home maintenance and natural disasters.

2. Personal Property Coverage

The policy pays to repair or replace stolen, damaged, or destroyed personal items such as jewelry, furniture, and clothing. Most insurance companies set a coverage limit on personal property since evaluating all the items in your house is sometimes challenging. The limit is usually 50% to 70% of the dwelling coverage. That means the policy may not cover expensive belongings, and you may need additional insurance to cover many items.

3. Personal Liability Coverage

The policy covers someone injured or their property damaged on your property. For example, it can foot all the medical bills and legal fees if you, your family member, or someone gets injured in your home. It also protects you from all lawsuits made by others in case your pets bite or damage their property. Personal liability coverage can cover an average of as low as $100,000 or as high as $1 million. The point is to get extra protection, especially if you have more net worth. Your assets will be put in line to cover personal damages or injuries.

4. Additional Living Expenses Coverage

The policy is handy when your home is not habitable due to a covered disaster. For example, your insurance company will pay for your temporary living place, such as a hotel or rental home, as it rebuilds or replaces all the damaged items in your home. It will also cover all the additional expenses above your standard living costs, including food and transport. In most cases, additional living expenses (ALE) coverage is usually 20% to 30% of your dwelling coverage.

What Does Homeowners’ Insurance Cover?

Homeowners’ insurance policies are not created equal. The type of insurance policy you purchase determines the deductible you pay and the coverage it provides. For instance, the least costly insurance policy 

(HO-3)

1) provides the least coverage while the most

comprehensive policy (HO-8) provides the most coverage.

Most homeowners go for a particular home insurance policy (HO-3), which offers structural and personal property protection against the following primary disasters:

? Fire, lightning, or explosions.

? Falling objects.

? Frozen pipes.

? Riots.

? Theft and vandalism.

? Accidental AC, plumbing, or heating overflow.

? Damages caused by aircraft, vehicles, or electric current.

? Smoke.

? Weight of ice, snow, or sleet.

? Volcanic eruption.

The policy, however, does not cover damages caused by natural disasters or poor home maintenance. These include flooding, earthquakes, or water damage. To cover damages caused by natural disasters, a homeowner needs to obtain additional coverage or add-on policies such as flood and earthquake insurance.

How Much Does Homeowners’ Insurance Cost?

The cost of home insurance varies based on several factors, such as the insurance company and the size of the home. In Toronto, Canada, homeowners can pay as high as $2,500 annually or $424 monthly for an insurance policy. However, the cost can go as low as $1000 annually depending on the following factors:

? The neighborhood: Neighborhoods with higher chances of disasters like fire, floods, and crime have higher insurance rates than those with fewer disasters.

? Age and condition of the home and attached properties: Older homes and properties are challenging to replace; hence, they attract higher insurance rates.

? Deductible: The higher the deductible a homeowner is ready to pay, the lower the monthly premiums.

? Credit score: A good credit score means a homeowner has the overall ability to pay monthly premiums, home maintenance, and other mortgage costs. This will keep their premiums low.

? Claim history: More claims on the property indicate higher risks, leading to higher premiums.

? Home security: A home with installed security features such as burglar and fire alarms attracts lower premiums.

The Bottom Line

Buying a homeowners insurance policy may sound like an additional cost to your home ownership process. However, it offers financial security and peace of mind, knowing that your home, possessions, and family are protected from unforeseen dangers. Therefore, when looking for the right home insurance policy, it is vital to vet insurance companies based on their customer satisfaction reviews, rates, available coverage options, and claim processes.