UK Accounting Glossary
Home insurance, or homeowners insurance, is an insurance policy that combines insurance on the home, its contents, and, often, the other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home.
The cost of homeowners insurance scales upward depending on what it would cost to replace the house, and which additional “riders”, meaning additional items to be insured, are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims are not paid due to earthquakes, floods, “Acts of God”, or war (whose definition typically includes a nuclear explosion from any source). Special insurance can be purchased for these possibilities.
Most insurers charge less if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station, or if the house is equipped with fire sprinklers and fire alarms.
In the United States, most home buyers borrow money in the form of a mortgage, and the mortgage lender always requires that the buyer purchase homeowners insurance as a condition of the loan, in order to protect the bank if the home were to be destroyed. In most mortgage agreements, the lender “impounds” the homeowner’s insurance payments, meaning that although the insurance payments are due every six months, the homeowner must send the lender one-sixth of the money every month along with his mortgage payment. Then every six months, the lender pays the premium to the insurance company. This “impounding” is a scheme to ensure that the homeowner never misses a premium payment, and therefore will be sure to have insurance for the length of the mortgage.
Homeowner’s insurance is a type of insurance policy that indemnifies a homeowner against various losses. A homeowner’s insurance policy can cover only named perils, such as a hurricane, or fire, or earthquake, or all perils. In a flood-prone area, for example, it may be difficult for the homeowner to get homeowner’s insurance coverage against flooding. Typical homeowner’s insurance coverage levels include cash value and replacement cost value for both the home and contents. Cash value is less effective homeowner’s insurance. With a cash value homeowner’s insurance policy, the payment on a complete loss may be insufficient to replace the home. Homeowner’s insurance may include liability coverage against injury to a guest while on the premises. Factors that influence homeowner’s insurance policy premiums include coverage types; losses covered; loss deductibles; and the structure’s age, type, and location. Renter’s insurance is similar to homeowner’s insurance but provides coverage to the tenant for possessions only.
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This glossary post was last updated: 9th February 2020.