Homeowners' Insurance Explained

It might be the biggest asset you own : your house. Make sure you have a good understanding of homeowners' insurance policies.

What is homeowners' insurance?

A homeowners' insurance policy covers both property and liability. It is a total financial plan that protects your home, personal property, and personal liability. It is designed to pay for damages to your home and its contents. It can also protect you from financial liability if someone is injured on your property. A homeowners' insurance policy also protects you and your possessions when you are away from home. Basically, it extends to all your possessions no matter where you are.

Although most homeowners' insurance policies are standardized throughout the United States, there are different policies sold through hundreds of insurance companies. Most policies cover damage to both the structure of your home, as well as personal property, caused by many natural disasters, including fire, lightening, hail, explosions, smoke, theft, and falling objects. Since most everything is covered in homeowners' insurance, it is more important to understand what is not covered. The only standard catastrophes that are not covered in a homeowners' insurance policy are floods and earthquake damage.

To determine how much loss has occurred, the insurance company may use one of the following two most common methods -- actual cash value and replacement coverage. Actual cash value is the cost of replacing damaged or destroyed property with comparable new property, minus depreciation. Replacement coverage is the cost of replacing an item with one of the same kind and quality, equivalent to the actual cash value, minus physical depreciation. The objective is to place the insured in the same financial position after a loss as prior to it. If your policy does not already include replacement coverage, you can add this to your policy for an increase in premium payments. Call your insurance company or agent for more information.

Homeowners' insurance only covers the structure of your home, not the land on which it stands. Therefore, your policy should be for the value of your home.

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