Why do we need homeowners insurance?

Purchasing homeowners insurance is exactly like purchasing car insurance: you want and need additional protection for your property, in case it is damaged or someone is injured on the property. Like car insurance, the type of homeowners insurance you purchase will largely determine how much you pay. It’s a worthwhile investment—and in many cases, mandatory—if you live in areas prone to natural disasters like floods, hurricanes, natural fires and earthquakes.

Typically, homeowners will purchase two types of homeowners insurance: hazard insurance and liability insurance. Hazard insurance protects your home against all unintentional damage or destruction. This includes covering costs of repairs as well as content lost in vandalism, storms and fires. However, keep in mind with hazard insurance, the insurance company will not reimburse you for the initial price you paid for a lost object. For example, if you paid $500 for a dining room table that was bought over 10 years ago, your insurance company will not pay you the full $500. Instead, they’ll pay the depreciated cost of the dining table.

Homeowners insurance also includes liability. This covers costs for any injuries that have occurred on your property. For example, if a friend or relative accidentally trips over a garden hose and twists her ankle, you can use your liability insurance to pay for any and all incurred medical injuries, up to the limited articulated in the policy.

One of the main reasons why homeowners also purchase home insurance is that their mortgage company requires it. In other words, until you pay off your mortgage, the lender partially owns the house. Your lender wants protection while the home remains their collateral and will require you to purchase at least a minimal level of hazard insurance.

Keep in mind that basic homeowners insurance doesn’t cover everything. If you own expensive business equipment or keep cash at home, these items are not covered in any type of homeowners insurance policy. Business equipment may be insured, but you’ll need to pay more by adding a supplemental policy. Also, basic homeowners insurance only covers specific types of natural disasters.

In flood and earthquake-prone regions like Louisiana or California, homeowners insurance does not automatically cover these natural disasters. Instead, you must purchase supplementary policies covering flood and earthquake damage. Also, if you live in an older home or own an older building that is severely damaged, the new reconstruction needs to follow current building code standards. Your insurance company, however, is not obligated to pay for the any new upgrades. It's important to rely on an insurance broker that has the experience and wide range of companies to provide you enough quotes to make the best selection.

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