What is home insurance and how does it work?

What is home insurance?

Homeowners insurance is financial protection that you buy from an insurance company. It helps payout if there is a covered disaster or other adverse event affecting your home.

A standard insurance policy protects you in several ways:

Home Structure and Property: Home insurance provides financial protection for the structure of the home as well as any property in the home in the event of a covered event.

Additional Living Expenses: Homeowners insurance generally covers additional living expenses you incur while making repairs—meaning if you need to stay in a hotel and eat out, your policy may cover these extra expenses.

Liability Protection: A standard homeowner’s insurance policy comes with liability protection. This means that if someone is injured while on your property or if you are found at fault for damage to someone else’s property, your liability coverage may step in to help pay for their expenses.

There are many types of home insurance. If you have a mortgage or other type of home loan, you will likely carry an HO-3 policy, which is the most common type of home insurance. HO-3 policies include, on average:

1.Housing Coverage

2.Covering Other Structures

3.Personal Property Coverage


5.Medical Payments

6.Additional Living Expenses

Each policy type comes with different covered risks. Understanding the risks – such as fire, water damage, and burglary – designed to cover your policy is an important step in your financial planning. Policies that cover more risks will generally cost more, but will also provide you with financial protection from a greater number of circumstances.

How does homeowners insurance work?

The home insurance journey can be broken down into several steps, each with its own set of considerations. Understanding each step can help you understand how your policy works.

Get quotes

It’s not hard to get home insurance, but there are a few things you should know while evaluating businesses.

First, you may want to research several homeowners insurance companies to find the carriers that best fit your needs. As you evaluate each provider, you may want to think about how the company’s discounts and coverages fit your situation. For a customer service review, you can search for J.D. Power’s numerous studies and AM Best can help you assess the financial strength of an insurance provider. Once you’ve chosen several companies that can fit your needs, you can contact each of them to get quotes for home insurance. You can often do this online, over the phone, or by visiting a local agency.

During the bidding process, ask about each company’s discounts. Taking advantage of home insurance discounts, which often include savings for home alarm systems, collection policies, and being claim-free, is one of the easiest ways to lower your premium.

home insurance

Learn more: Affordable Home Insurance

purchase policy

Once you have chosen the company that you feel is best for you, your family, and your home, you can purchase your policy. You may need to sign an application and make a payment before it is set in place.

Most providers offer different payment options, such as paying annually or quarterly. If you have a mortgage on your home, you may not need to pay. Your premium may be included in your monthly mortgage payments, held in your escrow account, and cashed out to your insurance company at each renewal.

If you have an existing policy and are switching to a new company, you must tell the mortgage clerk about the change. Your new insurance company will likely send the documents to the mortgage company, but informing your loan servicer about the change ahead of time allows them to take note of your file and prepare to receive the documents and a bill from the new insurance company.

maintain the policy

Once you have a policy in place, maintaining it is relatively simple. You will need to pay the premiums or, if your coverage is paid out of your escrow account, make sure your mortgage company pays the premium. If you make any changes to your home or lifestyle, such as updating your roof, renovating a room, or buying a dog, you must notify your insurance company to make sure your policy still covers you properly.

Submit a claim

If the unexpected happens and your home is damaged, you may need to file a claim. You can usually file claims online, through a mobile app, with an agent in person, or over the phone. You can expect questions about some general information such as where the damage is, the type of damage you sustained, and when it occurred. Before sending any returns, requesting that you send pictures of the damaged parts in your home or allow the claims adjuster to inspect the damage is generally standard. Once you initiate the claims process, your insurance provider will determine the next steps.

Is home insurance required?

No states legally require homeowners insurance. However, if you have a mortgage, the lender will likely ask you to get it. Homeowners insurance protects your lender from the possibility that you will not be able to repay your loan if your home is destroyed.

However, even if you don’t have a mortgage, homeowners insurance may be a good idea. Most financial advisors recommend that every homeowner purchase a policy. If your home is suddenly damaged or destroyed due to a covered peril, your home insurance can help you pay for repair or rebuilding so that you don’t have to out-of-pocket.

One of the biggest factors when it comes to how much you pay for home insurance is where you live. Every state and even every zip code has a unique profile regarding the likelihood of certain claims, which can affect your premium.

Home construction: The way your home is built can affect your premium in many ways. Some types of construction are more resistant to certain types of damage, such as wind or fire, which can lower your premium. However, repairing some types of building materials is more expensive, which may increase your premium.

Home age: Newer homes are less likely to be damaged from a variety of causes, such as weather or plumbing problems. In addition, building materials used in older homes may not comply with modern building standards, which means that additional work may be required to repair or replace them. Expenses of updating materials may lead to higher costs.

Distance to the nearest fire station: The closer you are to the fire station, the faster it will reach you in the event of an emergency. This means that emergency responders will likely be able to put out a fire faster than if you lived far away, which could reduce the damage.

Deductible: The deductible is the amount you agree to pay out of pocket if you file a claim. Choosing a higher deductible means that the insurance company will pay less if you file a claim (because you agree to pay more), so your premium is generally lowered accordingly.

Levels of Coverage Options: In general, the higher your levels of coverage, the more you’ll pay for insurance. Likewise, the more optional coverages you choose to add to your policy, the more likely you are to pay.

Credit score: In most states, your credit score affects a home’s insurance premium, as homeowners with lower credit are statistically more likely to claim homeowners with higher credit scores. However, not all states allow credit to be used as a rating factor.

Claim history: If you have made a homeowner’s claim within the past three to five years, your premiums may be higher. Even if you change insurance carriers, your new carrier can see your previous claims and may charge you accordingly.

Another factor that affects the cost of home insurance is the company you choose. Insurance companies weigh each pricing variable differently. One company might weigh your claims history more than another, for example. Shopping and getting quotes from several carriers can help you find the coverage you need at a competitive price.

Frequently Asked Questions

How much home insurance do I need?

The level of your coverage depends on your situation. Your housing coverage depends on your home’s replacement value, so more expensive homes require more coverage. Some of the other coverages — another structure cover, personal property cover, and loss of use coverage — are usually a percentage of your residency number. The level of personal liability coverage you choose also depends on individual circumstances; Most agencies recommend a higher rate if you have a pool, trampoline, or frequent guest. Working with a licensed agent can help you choose the appropriate level of coverage.

How quickly does the insurance company process claim?

Most home insurance companies seek to settle claims within 30 days, but actual payment times will vary based on the claim itself. If the claim involves an injury or a catastrophic situation where many homes have been damaged, payments may take longer.

Should you work with a national or local provider?

Both national and regional service providers have advantages and disadvantages. Reviewing each company’s coverage, discounts, policy features, and third-party reviews can help you choose the best provider for you. Getting quotes from both types of providers can help you figure out which one best suits your needs.

What is not covered by homeowners insurance?

Each type of home insurance policy covers different risks, but there are some things that a standard policy does not cover. Flood damage is usually excluded and can be obtained by purchasing a flood insurance policy, although some companies offer flood protection as support. Likewise, earthquake damage is usually excluded, but can usually be added as support unless you live in a high-risk area. In this case, you may need a separate policy.