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How Homeowners Insurance Works

written by: theMallorys•edited by: Jean Scheid•updated: 7/11/2011

“How does homeowners insurance work?” is a question most first-time home buyers ask. While individual policies will vary, most homeowners insurance policies cover the same basics. These include property damage and replacement of stolen items, among many others.

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    Protect Your Home and Property You know you have to buy homeowners insurance, but you may be wondering “How does homeowners insurance work?” Understanding the basics will help you make the best purchase for your home. The lowest rate is not necessarily the best option. Here’s what you need to know about homeowner’s insurance:

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    What It Covers

    The best way to understand “How does homeowners insurance work?” is to know what it covers. Buying homeowners insurance would be unnecessary if you had a large sum of money in your bank account set aside to rebuild your home if there was a fire, to replace your personal belongings that were stolen, or to pay the medical fees and loss of wages for a visitor who slips and falls on your driveway. The amount of money required to save for those instances would be difficult or nearly impossible for many homeowners, and that’s why homeowners insurance exists. By paying small premiums, you can get the money you need to pay for damages, replace or buy new items, and get legal representation if you end up in court. Here are the things that many homeowners insurance policies cover:

    • Damage to structure of the home, garages, sheds, and other structures on the property due to a catastrophe or vandalism
    • Replacement of or cash value for personal belongings in cases of vandalism, perils and theft
    • Medical bills for accidents that occur at your home, and payments for property damage
    • Earthquake and flood damage, although you may have to purchase riders or additional policies

    Review any homeowners insurance policy carefully before signing it. Some policies offer more coverage than others for the same rate.

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    Liability Coverage

    Some homeowners don’t consider one of the biggest aspects of homeowners insurance: Liability insurance. Even if you’re a hermit, you’re exposed to the risk of visitors injuring themselves on your property, such as utility workers or others. The injured party may sue you for property damages for the injuries they suffered or both. Medical bills can amount to hundreds of thousands of dollars, and if you can’t pay for them out of pocket, you risk losing your house to pay for it. Liability insurance pays up to the coverage amount. You’ll also have the legal representation you need from the insurance company to settle cases or fight claims that visitors may bring against you.

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    Deductible and Premiums

    Any discussion on how does homeowners insurance work must include an explanation of deductible and premiums. A deductible is the amount that you must pay first before the homeowners insurance company will pay the balance up to the coverage amount. The premium is the amount of money that you pay on a yearly or monthly basis for the coverage. In most cases, you can pay lower premiums if you select a higher deductible. For example, you could pay a $250 deductible and pay a yearly premium of $1,500, or select a $1,000 deductible and pay a yearly premium of $500. You don’t pay the deductible until you file a claim.

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    Owning a home and not paying for insurance is a risky proposition. Now that you have the answer to how does homeowners insurance work, you can make a more informed decision as you compare policies.

    Image Credit (FreeDigtialPhotos)