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Homeowner's Insurance Basics

By Motley Fool Staff – Updated Mar 7, 2017 at 2:59PM

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With the value of homes skyrocketing in recent years, the cost of homeowner's insurance has also been rising. Here are a few things you should understand about homeowner's insurance. (There's much more to know, of course, but we don't want to keep you here all day.)

First, it covers two things: your personal property and your personal liability. Every homeowner should carry this insurance. If you have a mortgage on your home, the lender will be listed on your homeowner's policy and will require you to carry the policy because it protects the lender against non-payment of the mortgage balance. If your house burns to the ground, you have little incentive to keep paying that mortgage. After all, there's no "house" anymore. That's why your mortgage company is the first to be paid on the loss because, technically, it "owns" the house (the structure and land) until the mortgage is paid off.

As with any insurance, when buying a homeowner's policy, first determine exactly how much coverage you need to cover your property and your personal liability. Once you know exactly what you're looking for, take some time to do a little comparison-shopping.

If you have an older home, you might want to consider homeowner's coverage that includes any building-code upgrades needed if you suffer a loss and have to rebuild your home. Most policies will just cover what it costs to put things back exactly the way they are now.

If building codes in your area have changed significantly since your house was built, they may require something that your house doesn't have (e.g., better wiring, stronger foundation, different easement restrictions). You will have to pay for improvements to bring your house up to code if your policy doesn't cover these expenses, and the total cost can be substantial for older homes. Check on the building requirements for your community to see if this is something you should be concerned about.

If you live in an area with a high risk of earthquakes and you want earthquake coverage, ask about it and have it added on. Don't assume it's already there, because it probably isn't.

Another very common tragedy that often catches people by surprise is that most homeowner's policies do not cover losses due to flooding. If you live in an area prone to flooding or where there is any potential for flooding from rivers, lakes, mountain snow packs, or storms, it's a good idea to purchase flood insurance. The Federal Emergency Management Agency (FEMA) offers flood insurance at reasonable rates. See the FEMA website at www.fema.gov or call FEMA and ask for information on the National Flood Insurance Program at 1-888-CALL-FLOOD. The insurance does not kick in immediately, so call and get coverage well before you expect to need it.

Learn more about insurance in our Insurance Center and on our Insurance discussion board. You may not have thought about some kinds of insurance, such as disability or long-term care insurance, but they're vital for many people. And you'll find home-buying guidance and tips in our Buying a Home Center.

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