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How does home insurance work? The beginner’s guide

Unpredictable events can happen at any moment, even in your brand new home. That’s why it’s important to plan ahead and prepare for the unexpected.

Whether you are buying your first home or moving into your forever home, it's important to protect your investment. Homeowners insurance, otherwise known as home insurance, helps alleviate some of the stress and financial burden for homeowners when they are faced with a major incident such as a fire or theft.

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What is homeowners insurance?

Homeowners insurance is a form of property insurance that covers the losses or damages to your home. It provides liability insurance for homeowners in case any damage or accidents happen to the home or on the property. Think of it like an extended warranty plan, but for your house.

In most cases, homeowners are required to provide proof of insurance before the bank will loan any funds for mortgages. This is to help protect the investment by ensuring that no matter how catastrophic the incident, your property is fully covered and you aren’t financially responsible for the damages.

What does homeowners insurance cover?

There are a few key elements that are covered under a home insurance policy, no matter the policy you choose.

Property damage coverage

In the event that your house suffers damage so severe that it is uninhabitable, the costs for a hotel room, meals, and other incidental expenses will quickly add up. Home insurance can help to cover living expenses while your home is being rebuilt or repaired. It is important to note that each policy has limits on compensation, so be sure to read the fine print.

Loss of personal assets

If you are someone that owns a lot of high-value items, like fine jewelry, artwork, heirlooms or antique furniture, you may want to pay for additional coverage. These are irreplaceable luxury items that you may have inherited or are one of a kind. You can purchase ‘Off Premises’ coverage, allowing you to be compensated if these items were to be damaged or lost.

Coverage for injuries on your property

Having a home insurance policy goes further than just protecting your house. It can also protect you in the event that someone gets injured on your property, as you can be held liable for their injuries. If your dog bites a neighbor, home insurance can help cover their medical bill. No matter the severity, if someone injures themselves on your property, you will be financially covered.

Levels of coverage

All insurance policies are not created equal. Not everyone has the same needs or requires the same coverage. That’s why there are three main types of home insurance coverage you can choose from, allowing you to decide the level of coverage that makes the most sense for you.

Actual Cash Value 

Actual Cash Value (ACV) in insurance means that it will cover the cost of the house, with the addition of all the belongings in the house after depreciation. Remember that this is only what the assets are valued at today, not how much you paid for them. You are usually required to carry insurance equal to at least a certain percentage of the property’s ACV, known as coinsurance. Your insurance provider will be able to assist you to insure your home to the appropriate value.

Replacement cost 

The replacement cost is to help cover the actual cash value of the house before the deduction of depreciation. This is offered to help cover the cost of rebuilding or repairing your home.

The benefit of purchasing replacement costs is that it helps to fill the gap caused by inflation and depreciation. When a claim is made, the item is assessed at the current fair market value. Replacement cost coverage ensures you are able to replace an item that is lost with a similar item.

Guaranteed replacement cost/value  

Some people refer to this as the inflation buffer policy. This will cover the cost to repair or rebuild your home, even if it goes beyond your policy limit. They will typically cover up to 20% to 25% higher than your current limit. This will provide a cushion if the replacement and construction prices were to rise.

Covering most scenarios, however, Acts of God or Acts of War are typically excluded. Make sure to look at what the policy covers, and if you live in a flood or hurricane area, you may want to consider an additional policy.

What are the different types of home insurance?

With the variety of home sizes, the risk they impose, and the level of protection people are looking for, there are eight types of home insurance offered. They range from HO-1, being the most basic and limited form, to HO-8, which is high risk homeowners insurance and designed specifically for higher-risk homes. Learn more about the levels of coverage here.

Some offer a limited amount of coverage and are only recommended for small families or homes. Others offer coverage specific to the property type, like a condo or mobile home. Additional coverage is available depending on the level of financial support you desire should damage occur and you need to file a claim. Each type is crafted for different styles, sizes, and features of the home.

How much does home insurance cost?

Just like many things, the more you are willing to pay, the more you are able to receive. Home insurance works in the same way. The more you pay, the more protection you have. However, this will all depend on how much you value the level of protection over the cost. 

The annual premium and deductible you pay will depend on a few different factors. The size and age of your home, different coverage policies, and condition of the roof are key elements when determining your premium. Past claims on the house can also affect your coverage options and premium. Before buying a house, it is important to look at the previous claims to see how that may impact your coverage.

How much homeowners insurance do I need?

After an incident happens, a homeowner will file a claim with their insurance company. Once the claim is assessed, the homeowner will pay a deductible, and the insurance company will cover the rest. This means you spend less out of pocket when an accident happens. The more you pay in your monthly fee or annual premium, the lower your deductible will be.

For example, if a house were to incur water damage on the interior, a claim will be made. The cost to repair the damages and return the property back to livable conditions is estimated to be $10,000. The homeowner is responsible for paying $4,000, the price of their deductible. The insurance company will cover the rest.

It is important to remember that home insurance has a liability limit. This determines the amount of coverage the insured homeowner is allowed if an unfortunate event were to occur. The coverage may include separate per-claim and annual liability limits; make sure you understand what the plan includes upfront. The standard liability limit is usually $100,000, however the homeowner can opt for a higher limit if they want. If a claim is made, the liability limit will determine the amount of coverage for replacing or repairing the damage.

Home insurance you can afford

We’re always looking for ways to help you save, and when we find great coverage we want you to know about it. When it comes to your home, we are here to help you understand the different types of insurance coverage available, and guide you toward policies that give you the coverage you need at an affordable price. Click here to see how much you could save by switching home insurance providers.

And for all the products in your home, subscribe to Mulberry Unlimited. You'll get comprehensive coverage for almost all your online purchases under the same product protection plan, for just $9.99 a month. File unlimited claims, access 24/7 customer support, and more, for the ultimate peace of mind.

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We are on a mission to help consumers protect everything they buy. Mulberry is an innovative product protection platform that enables businesses to seamlessly embed a customized protection program, delivering a unique user benefit for customers.

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