Homeownership offers many advantages, but it also comes with several responsibilities. And having home insurance — or homeowners insuranceWhat is homeowners insurance? Homeowners insurance covers damages and losses to a home and the... — is one of the most important among them. So while taking out a home insurance premium isn’t a legal requirement, it’s something that you really shouldn’t skip.
What might seem like a thrifty cost-cutting choice could soon end up costing you much more if things go wrong. Fortunately, with a better understanding of home insurance and how it works, you can keep your home and your family covered for almost anything, potentially saving hundreds of thousands of dollars.
What Is Homeowners Insurance?
Home insurance acts as a safeguard against the unexpected, helping you cover the costs in case disaster strikes. In a nutshell, it offers protection should anything happen to your home, the people in it (including visitors) and the contents. You’ll typically be required to pay monthly or annual payments, sometimes rolled into your mortgage repayments.
What Does Home Insurance Cover?
So, what does homeowners insurance cover exactly? This can be a tricky question because every policy is different. However, for the most part, standard homeowners insurance coverage can be split into six main categories:
1. The Property/Dwelling
A typical home insurance policy covers your physical property, including any external or internal damage that can impact its structural integrity. This includes damage to the foundations, roof and gutters, windows and doors, flooring, light fixtures, and even cabinets.
In general, you can expect the following types of damage to be covered:
- Fire damage
- Certain natural disasters, such as hail, hurricanes, lightning and thunderstorms
- Ice and snow damage
- Falling tree damage
- Accidental and sudden water damage (typically caused by burst pipes)
- Malicious acts such as break-ins and vandalism
Dwelling coverage will generally make up the bulk of your homeowners insurance, covering repairs or even rebuilding costs.
2. Detached and Stand-Alone Structures
Structures such as sheds, garages, fences, gazebos, and even decks that aren’t attached to your main dwelling are also usually covered by homeowners insurance. Typically, the combined insurance limit for these structures will be capped at about 10% of the dwelling coverage.
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3. Personal Belongings
Besides the physical structure of your home and outbuildings, home insurance will also usually cover the belongings you keep inside. Coverage tends to extend to clothes, electronics, furniture and appliances. They may be replaced or repaired if they’re stolen or destroyed due to damage to the home.
4. Additional Living Expenses
If your home becomes inhabitable because of damage, your home insurance policy will typically reimburse the costs of finding alternative accommodation. This can extend to hotel costs, restaurant meals, pet boarding, travel costs, and even longer-term rent, as well as any other expenses incurred due to being unable to live at home.
5. Liability
The liability coverage included in home insurance protects you against any lawsuits that may be filed against you involving injury or property damage. For example, if your dog bites a guest at your home and they decide to sue you, the insurance will pay the resulting legal costs and payouts.
6. Medical Costs
If anyone is injured on your property, this final aspect of your homeowners insurance will cover the medical expenses. So, for example, if someone slips on your driveway and requires medical attention, your coverage can be used to treat their injuries.
What Doesn’t Home Insurance Cover?
At first glance, your homeowners insurance policy will cover you for anything. However, reading the small print and understanding its limits is essential. Generally speaking, standard home insurance won’t cover you for damage caused by the following:
- General wear and tear, neglect or poor property maintenance
- Particular natural disasters, including earthquakes, landslides and floods
- Acts of war, such as invasion, terrorism or insurrections
- Nuclear accidents
- Governmental acts
- Sewage problems
Understanding where an insurer draws the line between what’s covered and what isn’t is essential. Natural disasters are a good example. While many policies will provide cover against hurricanes, for example, they won’t cover you for water damage caused by floodwater, even though the two tend to go hand in hand. Flood insurance will typically need to be purchased separately. It can be a pricy addition, too, especially if you’re in a flood-prone area.
Indeed, in regions prone to other types of natural disasters, be it hurricanes, tornadoes or blizzards, you may also find you aren’t covered for damage caused by these as standard, and must take out additional policies.
Moreover, to protect your home against sewage problems, you’ll typically need to take out ‘Sewage Backup Coverage’ as an extra.
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Read Between the Lines
When it comes to home insurance, it’s important to know the difference between accidental damage and damage resulting from poor maintenance. For example, water damage from a burst pipe may be covered, but not if it’s been leaking for weeks. Similarly, electrical issues caused by outdated wiring typically won’t be covered either.
Pest and vermin infestations are also considered the result of neglect and won’t be covered. This includes damage caused by mold, termites, birds and rodents.
How Much Home Insurance Do I Need?
At this point, you might be asking, “How much homeowners insurance do I need?”. Of course, home insurance policies can be customized to suit your needs best, but typically, you’ll have three standard levels of coverage to choose from:
- Actual Cash Value: This is the cheapest option and offers the least coverage: the cost of your home plus your possessions. However, depreciation is deducted for your possessions, so you’ll be covered for the current value, not what you originally paid.
- Replacement Cost: This mid-tier covers the value of your home plus the cost of replacing your possessions. Depreciation isn’t deducted, but generally, a limit is set in advance.
- Extended/Guaranteed Replacement Cost: Offering the most comprehensive coverage, you’ll be covered for whatever it costs to repair or rebuild your home and replace your possessions, regardless of your policy limit.
How Much Does Home Insurance Cost?
So, how much does homeowners insurance cost? Unfortunately, setting an accurate price is difficult since almost all policies depend on several variables. However, in the U.S., the average cost of home insurance is a little under $1,000 per year. But bear in mind that first-time homeowners typically pay more, with some policies exceeding $2,000 a year.
How much is home insurance in Canada? The good news is that it tends to be marginally cheaper. The average homeowners insurance cost across the country is around $960 annually, but prices in Ontario tend to be higher, averaging around $1,100.
Is Home Insurance Tax Deductible?
Since you’re paying out a fair chunk each year, you might wonder, “Is homeowners insurance tax deductible at least?”. Sadly, however, home insurance isn’t tax deductible in either the U.S. or Canada. There are exceptions, however, such as if the property generates income.
Is Homeowners Insurance Required?
Homeowners insurance isn’t a legal requirement, but most people won’t have a choice in the matter. When you take out a mortgage to buy your home, the lender will almost always request you to take out a policy. This simply protects their investment, i.e., your new home, in case of disaster.
If you don’t take out a mortgage to buy your home, it would still be unwise not to take out homeowners insurance. Accidents and disasters can strike anyone, anywhere, at any time, so it’s worth being prepared.
