Homeowners insurance is one of the most important financial commitments you make as a homeowner. Homeowners insurance protects both you and your property from the cost of damage caused by weather, vandalism, and other homeowners. Unfortunately, not everyone understands just how important homeowners insurance is.
Many people think it only covers the value of their house, but it is far more than that. It covers not only the structures and contents inside their home but also the value of any outbuildings, storage facilities, and other properties on your land. It also covers liability — if something happens to your home, you’ll pay for it if another party is at fault. And unlike car insurance, which typically offers a few different coverage options, homeowners insurance has a host of different options to best fit your needs.
Read on to learn everything you need to know about homeowners insurance.
What Is Homeowners Insurance?
Homeowners insurance is a financial commitment to protect you in the event of a disaster. There are three main types of homeowners insurance — property damage, liability coverage, and personal property coverage. Property damage insurance protects your home and its contents against damage caused by fire, weather, theft, vandalism, etc. Liability coverage protects you if you accidentally cause damage to someone else’s property.
Personal property coverage covers your belongings in case they’re stolen, damaged, or destroyed. Homeowners’ insurance can be broken into two categories: actual cash value (ACV) and replacement cost value (RCV). Actual cash value coverage reimburses you for the cost of damaged or stolen property minus depreciation. Replacement cost value coverage pays to replace the damaged or stolen property at current prices.
How Much Homeowners Insurance is Needed?
Your homeowners insurance needs depend on a number of factors, including the cost of the home, the amount of equity you have in the home, and the amount of coverage you have for the things in the home. The two most important figures for insurance companies are the total replacement cost of your home and the amount of equity you have in it.
The cost of the home is important because it’s the basis for calculating how much coverage you need. The amount of equity you have in the home is important because it determines the amount of insurance coverage you need to have to protect yourself from loss. The amount of coverage you need basically comes down to three numbers: The amount of coverage for the house (building costs), the amount of coverage for the things in the house, and the amount of coverage for the land.
The amount of coverage for the house is basically threefold — the value of the structure, the cost of the land it’s built on, and the cost of any outbuildings. The amount of coverage for the things in the house is based on the age of the things and the cost to replace them new. The amount of coverage for the land is basically the amount of money it would take to replace the land if it’s damaged or destroyed.
5 Things You Should Know About Homeowners Insurance
- Homeowners insurance protects you from financial ruin. Without it, you would be responsible for damage that is caused by you or others on your property as well as any damage that happens to your home and its contents.
- Homeowners insurance also covers other structures on your property, including outbuildings, detached garages, and other buildings.
- Liability coverage protects you from legal action if someone gets hurt on your property and sues you for damages.
- Actual cash value coverage for your home only covers the cost of the structure minus depreciation.
- Replacement cost value coverage for your home pays to replace the structure at the current cost, which may be more than what you originally paid.
Requirements for Homeowners Insurance
Insurance companies are in the business of evaluating risk and pricing coverage based on your risk as a homeowner. Since they’re in the business of assessing risk, they have a number of requirements you must meet in order to secure homeowners insurance. These requirements are a way for insurance companies to keep their risk exposure as low as possible and make homeowners insurance affordable for everyone.
The following are basic requirements for almost every homeowners insurance policy. Homeowners must be 18 years old or older. They must live in the home. The home must be the primary residence of the insured. The homeowner must not be listed on the National Association of Insurance Commissioners’ Termination Report. Homeowners must have a valid driver’s license and car insurance.
The Insurability Test
Homeowners insurance is regulated at the state level, so each state has its own standards. You can investigate your state’s requirements on their insurance website. Homeowners’ insurance is regulated at a state level because there are so many different factors that affect risk. Your homeowners insurance company uses an insurability test to determine if you are eligible for homeowners insurance.
The insurability test is used to determine if they will provide homeowners insurance coverage to you, given your risk factors. Let’s look at an example. Let’s say that you own an older home, have a low credit score, and have no fire sprinkler system. These are all risk factors that will raise your insurance premium. If your premium goes above a certain level, you become uninsurable. This is what is referred to as being uninsurable. Homeowners insurance companies use an insurability test to determine your insurability.
Understanding Underwriting Clauses
When you apply for homeowners insurance, you are required to provide information about your home, its contents, and yourself. The information you provide is known as your “declarations page.” This page will vary slightly depending on the company you’re working with. The declarations page is what a company uses to determine your homeowners insurance premium.
The declarations page also includes underwriting clauses. Underwriting clauses are basically rules the insurance company uses to determine what your premium will be. Most insurance companies use a standard set of underwriting clauses. These clauses can vary slightly from company to company but they are largely similar.
Some common underwriting clauses found on declarations pages include:
Property Location– This is where your home is located. Typically, insurance companies will require that your home be located in a lower-risk area like a city, suburban area, or rural area. If your home is in a high-risk area, like a flood plain or a development in a high-risk wildfire area, your premiums will be higher.
Age of the home– Typically, the younger the home, the lower your premium will be. This is because newer homes are less likely to experience a major disaster than older homes.
Condition of the home– The condition of your home will vary based on the type of policy you have. If you have a policy with replacement cost value coverage, the condition of your home will be considered when determining your premium. If you have an actual cash value policy, the condition of your home will not affect your premium.
Summing Up
Homeowners insurance is a financial commitment that protects you in the event of a disaster. It can be broken into three main types of coverage: liability coverage, property damage coverage, and personal property coverage. It’s important to keep in mind that actual cash value coverage only insures the value of the house and land. Replacement cost coverage insures the house and land at their current cost.
There are a number of requirements homeowners must meet in order to qualify for homeowners insurance. These requirements vary slightly depending on the company you’re working with. There is also a test that insurance companies use to determine your insurability. This is referred to as an insurability test. The insurability test determines if you are eligible for homeowners insurance.