Homeowners insurance is a standard lender requirement when you purchase a new home. You can either pay your annual policy premiums directly to the insurer, potentially saving 10 to 15 percent, or pay them over time in your monthly mortgage payments. In general, home insurance protects the value of your property investment, but it has a few specific functions.
From your lender's perspective, homeowners insurance is a loan requirement. Your lender is essentially a co-investor in your property. In fact, the bank usually makes a much more significant investment initially than the homeowner. To protect itself from the risks of financing your purchase, the lender insists that you carry coverage that repairs or replaces the home if it is damaged or destroyed. Your home is collateral for the loan and without it, the lender loses its leverage to make you repay.
Repair or Replacement
Just as car insurance pays for damages to your vehicle, home insurance pays for damage to your home. If a storm hits and tears up your roof or an exterior wall, your insurance benefits typically cover the costs of damages. This is a major function of homeowners insurance since the costs to repair one wall or room, or section, of your home can run into the tens of thousands of dollars. The replacement component of coverage is the amount it would take to rebuild your home using costs of labor and material at the present time. If your house is totally destroyed, this part of your homeowners insurance policy covers the rebuild.
If you like to entertain, or live in a busy area where people stop by, the liability function of homeowners insurance is critical. This part of your coverage pays for legal and medical costs and lawsuit judgments against you when someone is injured or dies on your property. Without this, you could be on the hook for hundreds of thousands or millions in major accidents where someone sues you. Protecting you against this financial devastation is a major function of homeowner insurance. It is even more critical if you have a pool or other property features that increase risks of accidents.
Another common, but optional, function of home insurance is protecting the value of your personal property and possessions in the home. Policies are typically sold with an estimate of personal property value. If you have expensive jewelry, collectibles or other high-priced items, your insurer may suggest a separate rider specifically covering those items. In standard cases, the insurer estimates an amount of coverage for personal items based on the size of the home and number of rooms. This feature covers you against theft or vandalism.
- Jupiterimages/Comstock/Getty Images