What is home (property) insurance or home loan insurance?

What is Home Insurance?

Home insurance, also known as homeowners insurance, is a type of property insurance that covers a private residence. It protects the home itself as well as the possessions inside against damage or loss from events like fires, storms, floods, vandalism, theft, and more.

There are several components to a standard home insurance policy:

• Dwelling coverage - This pays to repair or rebuild your home if it is damaged. It covers the structure itself including permanently attached elements like drywall, flooring, built-in appliances, plumbing, wiring, windows, roof, and foundations. The amount of dwelling coverage should be enough to completely reconstruct the home.
• Other structures coverage - This covers unattached structures on the property like garages, sheds, fences, driveways, sidewalks, and swimming pools. It pays to repair or rebuild these in the event of covered damage.
• Personal property coverage - Also called contents coverage, this pays to repair or replace your possessions inside if they are stolen or damaged. This includes furniture, electronics, clothing, kitchen items, decorations, and more. You can choose actual cash value coverage which pays the depreciated cost or replacement cost coverage which pays the full amount to replace.
• Loss of use coverage - If your home becomes unlivable due to a covered loss, this provides additional living expense funds for costs like hotel, restaurant meals, laundry, etc. while you cannot live in the home.
• Personal liability protection - This covers injuries that happen to other people on your property. It pays for their medical bills as well as any legal judgments up to the policy limit.
• Medical payments coverage - This pays for medical expenses resulting from injuries sustained on your property by anyone regardless of fault. This coverage is for minor injuries and is usually a small limit of a few thousand dollars.

In addition to the structure and possessions, home insurance also covers additional living expenses if the home becomes uninhabitable after a loss. The policy may also include liability coverage in case someone gets injured while on the property.

What Does Home Insurance Cover?

A standard home insurance policy will cover your home and possessions for most common and major perils except those specifically excluded in your policy contract. Covered losses may include:

• Fire - Covers damage from fire and smoke. Many policies also cover explosion damage under this peril.
• Wind and hail - Covers damage to the home and property within from high winds and wind-driven debris. May include hurricane and tornado damage depending on the area.
• Lightning - Direct lightning strikes that start a fire or cause electrical and structural damage.
• Weight of ice and snow - Loss or damage when accumulation is extreme and causes collapse.
• Electric power surge damage from artificial changes in electrical power.
• Smoke - From agricultural smudging or industrial operations.
• Vandalism and malicious mischief - Covers deliberate property damage from vandals or angry perils excluded from a tenant policy.
• Theft - Coverage for stolen personal property and possessions.
• Falling objects - Trees, towers, lampposts or other things that fall and cause damage.
• Riot and civil commotion - Damage from riots, civil disobedience or political unrest.
• Volcanic eruption - Flow damage excluding underground lava.
• Leakage or discharge from plumbing, heating and AC systems.

Exclusions vary by insurance company but may include floods, earthquakes, nuclear disasters, neglect, war, and government seizure of property. Be sure to read all exclusions before purchasing a policy.

What is Covered Under Home Loan Insurance?

Home loan insurance, also called mortgage insurance, is separate from homeowners insurance. While home insurance covers damage to the property itself, mortgage insurance primarily protects the lender providing the home loan.

There are several common types of mortgage insurance:

• PMI or Private Mortgage Insurance - This is insurance lenders require from most buyers who have a conventional loan with a down payment of less than 20%. PMI protects the lender if the borrower stops making payments. It allows buyers who don’t have a large down payment to qualify.
• MIP or Mortgage Insurance Premiums - This is similar insurance required by the FHA (Federal Housing Administration) if you have an FHA loan with less than a 20% down payment. It also reimburses the lender if the borrower defaults.
• Credit life insurance - Some lenders offer optional credit life insurance which pays off part or all of the mortgage if the borrower passes away before the home is paid off. This protects heirs from losing the home.
• Mortgage protection policies - Borrowers can purchase these separate insurance policies which pay off the remaining balance on the mortgage if certain events occur like death, critical illness, disability/accident/illness and involuntary unemployment.

The main type of mortgage insurance is PMI or MIP which protects the lender, not the homeowner. Optional credit life insurance and mortgage protection does benefit the borrower. But in general, home loan insurance covers banks, not people or properties.

Why Get Home Insurance?

There are many important reasons to have home insurance protection in place for your most valuable asset:

1. It's often legally required - Most mortgage lenders require you have an active home insurance policy if you have a mortgage, to protect their investment in case of loss.
2. You cannot afford to self-insure - The average homeowner does not have the personal funds to cover rebuilding their property if it is completely destroyed. Nor can they easily replace all their possessions. Insurance covers very large losses you couldn't pay for out-of-pocket.
3. It provides complete coverage - Comprehensive insurance like National Flood Insurance isn't usually included but can be added to cover all major disasters from earthquakes to floods. Without it, you risk major gaps in protection against common homeowner losses.
4. Peace of mind - Knowing you have insurance allows you to sleep better at night and not worry about a fire, tornado, theft or liability lawsuit taking away your home and financial security.
5. Maintain your lifestyle - Additional living expense coverage keeps you in hotels, rental homes and restaurants if disaster strikes so you can maintain a normal lifestyle instead of imposing on friends and family.
6. Rebuilding costs - Construction costs, labor and materials are very expensive and always rising. Home insurance guarantees full payment to cover those costs no matter how high they rise over time.
7. Home equity & investment - Your property is likely your most valuable asset and largest investment over time. Protecting that equity and value requires securing it against loss.

How Much Home Insurance Do I Need?

Determining adequate home insurance limits requires adding up the true full replacement cost of your home, assessing the value of possessions inside then adding appropriate liability coverage. Most experts recommend:

1. For dwelling coverage, make sure you have guaranteed replacement cost coverage of at least 100% of the cost to completely rebuild your home. This accounts for rising construction costs over time.
2. For personal property coverage, insure to value of 80%-100% of all your contents. Do a home inventory to estimate possessions & their worth.
3. Purchase loss of use coverage for at least 20% of dwelling coverage so you have plenty to cover hotel & meals if needed.
4. For liability, experts recommend $300,000-$500,000 minimum policy limits. Higher net worth individuals often carry limits of $1 million or more.
5. Consider adding additional coverages like flood, earthquake or jewelry insurance if you need specialized protection.
6. Review policy limits annually for inflation to ensure adequate coverage over time.

Underestimating the full replacement value of home & possessions risks being vastly underinsured after a major covered loss. When limits are too low, you must pay the difference to fully repair or replace your property. Getting accurate estimates prevents major shortfalls.

How Much Does Home Insurance Cost?

Home insurance rates vary widely based on location, size & age of home, coverage purchased and other factors. The national average cost for home insurance is around $1,200 per year but can range from $800 on the low end to $5,000+ per year for luxury homes.

Here are some of the main factors that influence yearly premiums:

• Location/zip code - Costs are higher in areas prone to hurricanes, wind/hail storms, floods, sinkholes or wildfires. Homes in risky areas pay more.
• Age of home - Newer construction with updated electric and plumbing lowers risk while older homes are viewed as higher risk. Premiums rise for homes over around 50 years old.
• Construction materials - Frame homes are most common but brick & cement lower risk from fire & storms so may garner discounts. Flammable materials like cedar shake roofing can increase premiums.
• Insurance score - Insurers refer to your credit-based insurance score ranging between 250-990. Homeowners with lower scores pay more for being viewed as higher risk.
• Claims history - Too many claims at an address can signal higher risk so some insurers raise rates. But others forgive claims from catastrophic events.
• Discounts - Most insurers offer multiple discounts like multi-line, loyalty, security systems, mortgage-free that can reduce premiums beyond the base rate.

The best way to find affordable home insurance is to shop around comparing quotes from both agents & insurers directly.

How to Save Money on Home Insurance

The insurance industry is highly competitive so there are many ways to save money on superior home insurance protection:

1. Comparison shop - Get at least three quotes from insurers and agents before choosing coverage. Rates for the same home & coverage amounts can vary by hundreds from A rated insurers.
2. Choose higher deductibles - This makes the homeowner share more risk in the event of a claim. But for major losses, the bulk of costs will still be covered. Higher deductibles substantially drop rates so this offset is usually worth it.
3. Improve home security - Things like alarm systems, video surveillance, fencing and lighting can qualify for premium discounts by reducing property crime risks.
4. Maintain good credit - Most states allow credit-based insurance scores to factor into rates. Keeping scores over 760 ensures the best premiums on a new policy.
5. Bundle with auto insurance - Purchasing policies from the same insurer earns multi-line discounts between 5-20% off total costs. Adding umbrella liability boosts savings further.
6. Exclude expensive possessions - Scheduling items like jewelry, art & collectibles on separate floating policies keeps main policy limits lower.
7. Seek group discounts - Alumni, association, employer and occupational discounts are common. Just having multiple policies with an insurer can trigger savings too.

There are also ways to potentially lower costs when renewing like reinspecting home value or making approved improvements that reduce risk. Overall costs vary but diligent homeowners can save 20% or more by putting in effort to find affordable premiums.

Conclusion

Protecting your residence with adequate home insurance is a wise investment that safeguards your family and your financial future. Taking time to understand different coverages, accurately value possessions, assess risk factors and shop multiple companies ensures appropriate protection at the best possible rate. Review policies annually as home value and life circumstances change over time. With appropriate dwelling, liability and loss of use limits in place, homeowners gain peace of mind knowing their most valuable asset is secured from disaster.

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