Meaning and Purpose of Homeowners Insurance

Having homeowners insurance means you have protection for your most significant financial investment: your home. These policies offer coverage for various potential damages and liabilities, ensuring financial protection against unforeseen events. Understanding how homeowners insurance works and its different components can help you make informed decisions about the coverage you need.

Homeowners insurance is a type of property insurance that covers losses and damages to an individual's house and assets stored there. It also provides liability coverage against accidents in the home or on the property.

There are five key coverages in homeowners insurance:

• Dwelling coverage
• Other structures coverage
• Personal property coverage
• Personal liability coverage
• Loss of use coverage

You have a “package” when it comes to homeowners insurance, meaning policies typically include the above coverage components by default.

Having dwelling coverage means that the physical structure of your home, including the walls, roof and built-in appliances, is protected in case of damage or loss. This coverage ensures you can repair or rebuild your home after a significant loss.

When assessing dwelling coverage, it's wise to determine the replacement cost of your home, which is the cost of rebuilding your house with similar materials and craftsmanship. Keep in mind that low dwelling coverage limits lead to cheap home insurance, but it may not be sufficient for your needs.

Other structures coverage is a part of your homeowners insurance that covers buildings on your property that are not attached to your main house. This typically includes:

• Detached Garages: Structures not connected to your home but used for vehicle storage.
• Sheds and Workshops: Separate buildings used for storage or hobbies.
• Fences and Gazebos: Structures that enhance your property's aesthetics and functionality.

The coverage amount for other structures is usually a percentage of your dwelling coverage, typically between 10% and 20%. However, you can talk to your insurer about increasing your limits if you need more coverage.

Personal property coverage in homeowners insurance ensures that you can replace your belongings if they are damaged or stolen, providing peace of mind and financial protection.

Some things to keep in mind about this coverage include:

• Replacement Cost vs. Actual Cash Value: Replacement cost covers the cost of replacing items with new ones, while actual cash value accounts for depreciation.
• Off-Premises Coverage: Personal property coverage often extends to belongings outside your home, such as items in your car or with you on vacation.
• Special Limits: Some high-value items, like jewelry or electronics, may not be typically covered by standard policies. Valuables might require additional riders or endorsements for full protection.

We recommend buying personal property insurance based on the value of your possessions and how much you own. Most homeowners policies provide 50% to 70% of the structure's insurance coverage, but you can increase or decrease this based on your needs. Use the personal property calculator below to calculate how much you might need.

Personal liability coverage is a critical component of homeowners insurance that protects you from financial loss if you are legally responsible for injuries or property damage to others. In other words, it protects your assets and ensures you can cover the costs associated with accidents or injuries on your property. This coverage includes:

Loss of use coverage, also known as additional living expenses (ALE) coverage, helps pay for living expenses if your home becomes uninhabitable due to covered perils. It ensures that you can maintain your standard of living and cover necessary expenses while your home is being repaired or rebuilt. Expenses this coverage can pay for include:

• Temporary Housing: Pays for the cost of renting a home or staying in a hotel while your home undergoes repairs.
• Increased Living Expenses: Covers additional costs such as meals, laundry and transportation that you incur while living away from home.
• Loss of Rental Income: If you rent out part of your home and it's uninhabitable due to a covered loss, loss of use coverage can compensate for the lost rental income.

Consider the potential costs of temporarily relocating you and your family to determine the level of coverage appropriate for your needs.