Homeowner’s Insurance: The Basics1

Before you pass papers on that new home, you’ll want to think about protecting your big investment in the unlikely event disaster someday comes calling, be it wind, fire or even volcanic eruption (depending where you live of course).

The financial safeguard against disaster, including property loss and injuries to third parties, is homeowners insurance. While anyone can legally own a home without it, your friendly neighborhood mortgage lender will no doubt require this coverage for self protection.

Here’s what a standard Homeowner’s Policy covers:

Structural Damage To The Home
Pays to repair or rebuild the home if damaged by any of the disasters listed in the policy (which won’t include earthquake and flood unless purchased separately). Don’t base rebuilding costs on the price you you paid for the home, nor include the price of the land when estimating coverage. You’ll need an insurance amount sufficient to rebuild at the going rate of construction in your area. This amount can be estimated by multiplying the homes total square foot cost of local construction – numbers that can be gathered from building associations, realtors & insurance brokers & agents.

Loss of Personal Items
This includes up to 70% compensation for furniture, clothes and keepsakes that have been stolen or lost due to disaster. Keep an inventory of possessions (on video if you’d like) and store it safely off-premises.

Financial protection against third party bodily injury or property damage you might cause. Court costs and damage awards are usually covered up to the policy limit. This coverage typically begins at about $100,000, but most experts recommend carrying at least three times that amount. Check into Umbrella Policies. These provide broader liability coverage & higher compensation limits.

Additional Living Expenses
This coverage picks up your hotel bills, restaurant tabs and other miscellaneous expenses should you be forced to live elsewhere while your home is rebuilt or repaired. But prior to purchasing a policy, take time to ask about time frames and the specific limits of what is and isn’t covered.


Homeowner policy costs are determined by many factors, such as square footage of the house, neighborhood crime rate and how prone your neighborhood is to natural disasters. The level of coverage also makes an impact. Consider these options:

Actual Cash Value
Replaces home and/or possessions minus a deduction for depreciation.

Replacement Costs
Replaces home and/or possessions without a deduction of depreciation.

Guaranteed Replacement Cost
Pays whatever it costs to rebuild your home the way it was before the disaster.

Strategies for keeping your insurance premiums out of the stratosphere include purchasing homeowners and auto insurance from the same carrier (they’ll sometimes offer discounts) and raising the amount of money you’ll chip in towards loss. For instance, a homeowner might save upwards of 25% simply by raising the policy deductible from $500 to $1,000. Be sure to ask about other discounts as well.