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Home and Auto Insurance: The Basics

Whether this is your first- or fifth-time shopping for home and auto insurance the task can seem daunting. To help keep that anxiety at bay we’ve provided some basic information about important “property and casualty (P&C) insurance” you should understand.  

What is Homeowners Insurance?

Homeowners insurance (also called home insurance) is a necessity for homeowners because it protects you and your family from the possibility of losing your home and possessions in a disaster, like a fire.  It is also true that mortgage companies require borrowers to have insurance coverage for the full value of the property (which, originally, is usually the same amount as the purchase price).  This means that if you borrow to purchase your home, there is no way of avoiding purchasing homeowners insurance. This insurance also protects you from lawsuits in the event someone is injured on your property, including being bitten by your dog.  It is an essential expense that must be incurred as a homeowner.  

What Does Homeowners Insurance Cover?

A standard homeowners insurance policy provides coverage to repair or replace your home and its contents in the event of damage.  That usually includes damage resulting from fire, smoke, theft or vandalism, or damage caused by a weather event such as lightning, wind, or hail.  Other covered damage could come from external forces like a falling tree.

That coverage includes your heating and cooling systems, along with kitchen appliances, furniture, clothing, and other possessions.  Coverage for outbuildings on your property, such as a garage, barn, or shed is included.  Things like outdoor furniture, grills or fireplaces, swing sets, walls, or fences are also included.  

In addition, you’re typically covered for living expenses if you need to find alternate lodging while your home is rebuilt.  This is called “loss of use,” when you can’t live in your home while it’s being repaired.  Liability coverage is typically included as well.  That means you’ll be reimbursed for medical expenses and legal fees if people that are not living in your home are injured on your property.

What Does Homeowners Insurance Not Cover?

Homeowner insurance rarely cover flooding and earthquakes.  Protection can be purchased for these hazards, but it’s costly.  Mold and damage due to termites are often not covered, since both are generally preventable with routine maintenance.  Leaky roofs that are the result of a storm or hail, are usually covered; leaky roofs that are the result of insufficient maintenance may not be covered.  While flooding due to natural disaster is not covered, water damage from something like a burst pipe or failed washing machine hose is generally covered by a standard homeowners insurance policy.  Damage to the foundation of your home is covered if it is caused by a storm, fire, or other event that is included in a homeowners insurance policy. Flood and earthquake damage require separate policies. Damage caused by neglect, lack of maintenance, or faulty construction is not covered.  Standard homeowners insurance policies typically do not include coverage for valuable jewelry, artwork or other collectibles.  Most of these coverages are generally available at an extra cost, or simply by purchasing sufficient additional coverage beyond the limits of a standard policy to cover expensive jewelry and valuables.

Different Types of Homeowner Insurance Coverage

Not all insurance coverage is created equal; the options make it confusing.  In the United States there are several forms of homeowners insurance that have become the standard and are designated HO-1 through HO-8.  Each offers a level of protection depending on the wants and needs of the homeowner and they type of residence being covered.  For example, HO-1 insurance is the most basic home insurance policy that providers offer.  It includes only dwelling coverage, which protects the physical structure of your home.  HO-1 insurance does not include liability, personal property, medical payments or additional living expenses coverage.  You’d work with your insurance agent to determine the insurance for your situation and budget.

Most insurance companies will offer you a choice of two types of homeowners insurance policies – a cash value policy or a replacement cost policy.  For most people, a replacement cost policy is the better option.

The reason is that replacement cost coverage policies pay for the actual cost to repair or replace your home and possessions at current prices – or at least come close depending on the limits of your policy.  A cash value policy caps the amount you’ll be reimbursed for your home and its contents, less depreciation.  So, if your budget will allow it, a replacement cost policy offers better protection.

What is Auto Insurance?

To protect your home, you purchase homeowners insurance.  To protect your automobile, you purchase auto insurance.  Essentially, car insurance is designed to protect you against financial losses if you’re involved in an accident or the vehicle is damaged in some way.  Most states require you to have minimum amounts of liability insurance coverage; some also require you to have other coverage types, such as uninsured motorist coverage.

Premiums are what you pay (monthly, semi-annually or annually) to maintain a car insurance policy while deductibles are amounts you pay when you file a claim.  The higher the deductible, the lower the premium, and vice-versa.  the Auto insurance is an agreement between the policyholder (you) and an insurance company that. This agreement states that the insurance provider will pay compensation for losses specified in the policy while you agree to pay a premium each year (paid monthly, semiannually, or annually).  

What Does Auto Insurance Cover?

Auto insurance can offer coverage for:  

  • Vehicle damage, including your car or another driver’s car
  • Property damage or bodily injury caused by an accident
  • Medical bills, including treatment, rehabilitation, lost wages, and funeral expenses  

Different Types of Auto Insurance Coverage?

Like homeowners insurance, auto insurance is customizable.  The most common car insurance coverage options include:

  • Bodily Injury Liability.  Covers the cost of treating injuries of other drivers involved in an accident resulting from your negligence.
  • Personal Injury Protection (PIP) or Medical Payments (MedPay).  Covers medical bills incurred while treating you and passengers after an accident.  In addition, PIP pays for any lost wages associated with not being able to immediately return to work, and funeral expenses if applicable.
  • Property Damage Liability.  Covers repair costs after causing damage to someone else’s property in an accident.  This includes damage to vehicles, buildings, fences, lamp posts, telephone poles, etc.  
  • Collision.  Covers damage to your car as a result of a collision with another vehicle or object, a roll-over, or potholes.  
  • Comprehensive.  Provides financial protections against loss due to theft or vehicle damage resulting from non-accident events (such as vandalism, falling objects, animals, fires, explosions, etc.)  
  • Full Coverage.  Full coverage auto insurance policies include liability, collisions, and comprehensive coverage.  

What Is No-Fault Insurance?

In most states, the driver who caused the accident will bear financial responsibility (usually through an insurance company) for injuries and other losses.  But in a dozen or so states, the car insurance process starts (and often ends) with a no-fault car insurance claim made through your own coverage.

A handful of other states follow some version of a “choice” no-fault system, and some form of no-fault or PIP insurance is available as an add-on in every other state.  It exists to streamline the claims process regardless of who caused the accident.  

Car Insurance Premiums and Deductibles

There are two primary costs associated with purchasing car insurance: premiums and deductibles.  Auto insurance premiums vary depending on age, gender, years of driving experience, accident and moving violation history, and other factors.  Most states mandate a minimum amount of auto insurance you must have. That minimum varies by state, but many people purchase additional insurance to protect themselves further.

However, you can reduce your premiums by agreeing to take on more risk, which means increasing your deductible.  Your deductible is the amount you pay when filing a claim before the insurance company will pay out anything to you for damages.  For example, your policy may have a $500 deductible.  If the cost to repair the damage to your car was $1,000, you would receive a check for $500 ($1,000 – $500 deductible) and you would have to pay the remaining $500 out of pocket.  Agreeing to a higher deductible can result in a lower premium but you’d have to be reasonably sure you could cover the higher amount if you need to file a claim.

While other types of insurance such as health and homeowners insurance may seem more important, if you own an automobile, regardless of whether your state requires auto insurance, having an insurance policy can save you a lot of money and aggravation in the long run if you become involved in an accident.  Because there are so many choices of providers and coverage options, it’s important to shop around for the best policy at the best rates that suit your needs and budget.