In the case of a flood, a theft, a fallen tree or an injury to a visitor on your property, you don't want to be left footing the (potentially huge) bill. That's why you need homeowner's insurance, which will cover you in all of these instances and more. But all the details of a home insurance plan can be confusing, especially for new home owners. What is home insurance, and how does it work?

Many home owners may cringe at paying monthly for home insurance coverage when they may never use it, but not only do most mortgage lenders require it, it's not a good expense to skip. Sure, it's costly, but if the time came when you were hit with an injury lawsuit or your home had to be replaced altogether, you'd be happy to have it.

Types of home insurance

Just as with many other types of insurance, you can either buy components of homeowner's insurance individually or get them as a package deal. Most home owners go with what's known as an HO-3 policy, meaning that not only are your home's structure and your personal property covered, but you'd have liability insurance in the event that someone accuses you or your property in a lawsuit of causing physical harm.

Some insurance providers also offer the option to pay for guest medical insurance, which covers medical costs when a visitor is injured in a covered event at your home. In some areas, flood insurance may also be required, and it's typically sold separately. If you have business property worth more than $2,500, you'll need additional coverage for that, and high-value items like antiques, musical instruments and professional cameras may require more than the standard minimum coverage. You can have your personal property covered at actual cash value (including depreciation) or get it covered at replacement value, which costs about 10 percent more.

Homeowner's insurance covers a wide range of damage. Many policies will cover major events like a hurricane-induced roof collapse as well as malfunctioning water heaters, vandalism, frozen pipes and even damage caused by a pet. The policy will tell you what kinds of events are excluded from coverage, like mold, dry-rot and bacteria.

If you're a renter and not a homeowner, you can purchase coverage that protects your personal property. If there were a disaster or a break-in, your landlord's home insurance policy would cover any damage to the physical structure, but not your possessions - that's your responsibility. Renter's insurance is available from the same companies that provide homeowner's insurance.

How home insurance works

When choosing a home insurance plan, you will have to determine your liability limit. Most liability limits, which dictate how much coverage you would have in the event of a loss, start at $100,000, and go up according to how much it would cost to rebuild your home and replace your possessions. If you require a higher liability limit than the one offered as a standard by your insurance provider, consider an umbrella policy. Not only would this type of policy pay you more than the standard coverage amount, it also offers additional coverage for other types of lawsuits like slander and libel.

The price of your policy will not only be determined by your liability limit and the types of coverage that you choose, but also factors like an increase in the number of claims filed with the company. This may occur if you live in an area that has seen several major catastrophes within a single year.

If you suffer a loss, you have to file a claim with your homeowner's insurance company in order to receive the money you need to recover. The company will send out an insurance adjuster to confirm the value stated on your claim. This is why keeping pictures, receipts and other records of your home and your possessions is a good idea; consider keeping them in a safety deposit box.

Finally, though it may seem as if paying a monthly fee for all this peace of mind is a license to file as many claims as you like, consider each claim carefully. Insurance companies may raise your premium or drop you altogether if your claims are too frequent.

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