Everything you need to know about insurance basics, like coverage types, limits, cost and more.
What Is Homeowners Insurance?
Your home is one of the most valuable assets you own, and having the right home insurance in place is key to protecting everything you’ve worked so hard for. Imagine if something damaged your home, like a fire or tornado. Would you be able to rebuild or replace your things out of your own pocket? Typically not. Home insurance is a type of property insurance that covers damage to your home and the items inside of it. It also provides liability coverage against accidents that take place in your home, on your property or that result from your activities.
In order to help you better understand how you’re protected, we’ve highlighted some must-know info about home insurance.
How Does Homeowners Insurance Work?
Before you can have confidence in your coverage, you’ll need to understand how your homeowners insurance works. Here’s some key information about home insurance that you’ll want to familiarize yourself with:
What Does Home Insurance Cover?
Your home insurance provides you with financial protection in the event of an unexpected accident or disaster. It covers four main incidents (we’ll dive deeper into these later):
- Interior damage
- Exterior damage
- Loss or damage of your personal assets/belongings
What Is a Homeowners Insurance Policy?
This is the legal document that entails exactly how your home is protected. Just as every home is unique, so is your coverage. Typical policies provide open peril coverage on the building and named peril coverage on personal property. If you choose to schedule some of your more valuable personal property, then it would also have open peril coverage. What do each of these mean?
Peril. For starters, a peril is a kind of risk — consider it an accident or misfortune — covered by your insurance policy, which exposes you to potential damage, injury or loss. Common perils include fire, theft, vandalism, wind and hail.
Loss. You’ll often hear the word “loss” when learning about insurance, so it’s important to understand its meaning. A loss is the injury or damage you, the insured, sustains due to a peril. The primary purpose of your home insurance is to protect you against losses.
Open perils. This type of coverage offers a wide range of protection because all perils are covered except those that are specifically excluded in the policy. For example, floods are excluded by most property policies.
Named perils. With this type of coverage, only the specific types of risks named in the policy are covered. For example, theft, vandalism, wind, fire and lightning. It’s therefore important to understand your risk and what’s covered and what’s not covered within this type of policy.
Scheduled property. Your home insurance provides coverage for your personal property, but typically will limit the dollar amount that’ll be covered for certain types of valuable property, such as jewelry, silverware, firearms or camera. Scheduled personal property coverage is an add-on coverage that offers a specific dollar limit for each item insured, as well as providing coverage for a greater number of risks (open peril vs. named peril).
Filing a Home Insurance Claim
After you face a loss, you’ll want to get things back to normal as soon as possible, right? That’s why you’ll file a homeowners insurance claim. An insurance claim is a request to your insurance company to compensate you for a covered loss. Filing a claim is as simple as calling up your insurance company’s claims department and speaking with a representative, or filling out an online claim submission.
Once you file your claim, your insurance company will usually have an adjuster come and inspect the loss. An adjuster is a company representative who is assigned to inspect your property to decide how much the insurance company should pay for the loss, based on the terms and limits of your policy.
Types of Homeowners Insurance
Your standard homeowners policy has built-in coverage to protect your property, belongings and offer liability coverage. From there you can build upon your protection by choosing additional coverages.
This includes coverage for damage inside your home, for example, water damage to your hardwood floors due to a dishwasher leak. Property coverage also protects the exterior of your home, such as a windstorm causing a tree to topple onto your roof.
Your home is more than your house, it’s all the things inside of it that make it yours. That’s why with property coverage, your personal property is also covered, like furniture, clothing, electronics, musical equipment, etc. Since the value of your personal property adds up quickly, consider creating a room-by-room inventory of your belongings. This way, you’ll know just how much your things are worth and be able to have an accurate coverage amount in the event of the unexpected.
It’s important to note that your personal property will be covered for its actual cash value, which is what your item is worth today. That value includes consideration of factors such as age and condition. For example, a 10-year-old sofa is usually not worth as much as a 5-year-old sofa. But a 5-year-old-sofa that was used every day might be worth less than a 10-year-old sofa that was rarely sat on and usually kept covered. You can opt for replacement cost value to replace your belongings, which many people choose because it pays you the amount need to replace your damaged personal property with new property of the same type, kind and quality. Learn more about actual cash value and replacement cost value.
And, a benefit to this coverage is that your belongings will be protected no matter how far from home you are. For instance, if your luggage is stolen from your hotel room three states away, your homeowners personal property coverage helps cover you for the loss up to your coverage limit. You’ll even be covered if you’re out of the United States, but there’s generally a 10% cap on your protection, so if you think you’ll want more than that, talk with your insurance agent about travel insurance.
Remember scheduled property from above? Your personal property is where you’ll decide if you’ll want more coverage for certain items (the items with limited coverage will be listed in your policy). For example, a home insurance policy typically provides limited coverage for things like your jewelry. If you need coverage above the sublimit amount, you can work with an agent to “schedule” your jewelry and increase your coverage, as well as add a broader range of protection for different types of risks.
The liability coverage on your homeowners policy provides protection if you’re found legally responsible for injuring someone or damaging their property. Let’s break it down:
Medical bills. Your homeowners policy includes liability protection for injuries to other people that happen on or away from your property. For instance, let’s say a guest slips on your icy staircase and they break their wrist, or your child accidentally runs into someone on their skateboard — your liability insurance will help pay for their medical bills.
Pain and suffering. Your liability coverage also protects you if the person you injured sues you for pain and suffering as a result of an accident. This includes not just physical pain, but also emotional, mental, insomnia, inconvenience, fear, grief or worry.
Wages. Let’s say that person who slipped and fell on your icy steps was a chef, and since they broke their wrist, they aren’t able to fire things up in the kitchen for a while. If you’re found legally liable for their injuries, your liability coverage helps pay for the wages they’re losing.
Legal costs. If you’re sued for an accident, your liability coverage helps cover legal costs, such as paying to defend you in court.
Damage to another’s property. Liability coverage also protects you against financial loss if you’re legally responsible for damage to someone else’s property, like if your future baseball star throws a ball through the neighbors window and breaks an expensive vase. This coverage offers protection to you, your family members or your pets. Find out more about dogs and homeowners insurance.
Home liability coverage typically doesn’t cover a purposefully inflicted injury you cause someone. And remember that your personal liability coverage has a set dollar limit, so you’d be responsible for paying anything above that amount. Having a personal umbrella liability policy can provide peace of mind that you have adequate coverage, since it offers an added level of liability coverage above the limits of your homeowners policy.
While your home insurance protects you in many ways, you have the option to customize it with coverages that offer even more protection, based on your own needs. Take a look at some popular additional coverage options available.
Flood insurance. It’s important to note that your homeowners policies typically don’t provide coverage for damage due to flooding or rising water. Flood insurance is available through the National Flood Insurance Program (NFIP). An agent can help obtain a flood policy should you decide it’s needed.
Personal injury. This coverage protects you against allegations like libel, slander, false arrest, detention or imprisonment, malicious prosecution, wrongful eviction or wrongful entry, and associated legal costs.
is an inexpensive option that’ll pay off if you or a family member face a lawsuit.
Roof replacement cost coverage for windstorm and hail. Windstorm and hail is one of the most common causes of damage to roofs. Having roof replacement cost coverage will pay to replace your roof rather than just the roofs actual cash value at the time of the loss.
Sewer backup, septic backup or sump pump overflow coverage. If your sewer or septic backs up or your sump pump overflows, our backup and overflow coverage can help with the cost of resulting damages. This coverage is especially important for those with a finished basement to help protect your investment.
Detached structures. This includes coverage for sheds, fences, gazebos, swimming pools, detached garages and more, if you have them.
Identity theft protection. Protect your good name and your credit with this low-cost coverage, which protects you against the high costs of restoring your finances and identity.
Is Homeowners Insurance Required?
Unlike car insurance, where almost every single state requires some amount of insurance, homeowners insurance isn’t required by law. However, if you have a mortgage on your home, you’ll almost always be required to have proof of insurance on your property before your lender will issue your mortgage. This is because your mortgage company is technically part owner of your house, at least until you’ve paid it off. And they, just like you, want to make sure it can be kept in good condition to avoid a decrease in value.
Of course, even if you don’t have a mortgage, having home insurance is a smart move and can provide peace of mind that your home and contents are protected.
Homeowners Insurance Cost
Once you decide on your levels of coverage, your premium will be determined. Simply put, a premium is the amount of money you’ll pay for the insurance policy you’re purchasing. You can choose to pay on a monthly basis, semi-annual, or you can choose to pay 100% of the premium upfront, which could earn you a discount!
How Is the Cost of Home Insurance Calculated?
There are a variety of factors an insurance company will look at when determining your premium:
Location. Your home will be subject to different risks depending on its location. For instance, if you’re in an area prone to wildfires or earthquakes your premium will reflect this.
Characteristics of your home. Certain features of your home also affect your premium, from the age of your roof to its square footage and the materials it is constructed of.
Home protection devices. Do you have a burglar alarm system, or is part of your home sprinklered? If so, you could earn a discount on your premium.
These are just a few of the factors your insurance company will look at, but what’s most important is making sure you have the coverage in place to properly protect your home.
How Is Home Insurance Paid?
You can choose to escrow your insurance premium with your mortgage payments. This is when you choose to tack on your insurance payments with your mortgage check, so your lender can pay your insurance premium out of your escrow account. Escrow is when you use a third party (someone who is neither the buyer nor the seller) to hold something of value. They act is the “middle man” to safeguard both your and your lender’s interest, and their job is to make sure that everyone sticks to their end of the bargain.
Just want to make the payments on your own? With American Family Insurance, you can choose to make monthly, semi-annual or payments in full. Not to mention, when you pay your premium in full at the time of purchase, you can earn a customer full pay discount. We make paying your premium easy with a variety of payment options, like automated payments, one-time payments, an automated phone system, mail payment or choose to make a payment electronically through your financial institution or bill payer service of your choice. And when you enroll in My Account, you can manage your bills online and set up your payments however you like.
Do you feel more confident about home insurance? We hope so! Now it’s time to shop around to compare insurance plans and pick one that works best with your needs and budget. Our advice? Connect with an American Family agent — they’ll be able to help walk you through the process and build you customized coverage that matches your specific needs. In the meantime, check out our home insurance checklist for a step by step process of what you’ll need to know when buying homeowners insurance.