Homeowners insurance terms that first-time home buyers should know

1. Dwelling coverage

Dwelling coverage helps to pay for the cost of fixing or rebuilding your home if it's damaged or destroyed. As the cornerstone of your home insurance policy, Inga says it's one of the most important factors to consider: “I always explain to people you want to make sure you have enough coverage to rebuild a home. Because it's very, very important."

2. Market value vs. rebuilding cost

Inga says most homeowners mistakenly think it's enough to cover their house for what they paid for it—the market value. That's how much the house is worth to a buyer in its current condition. A house's market value is affected by many factors that aren't related to the cost of rebuilding the home itself, such as the quality of nearby schools and whether there are many or few other homes on the market.

Instead, Inga says, homeowners should cover their home's rebuilding cost—what it would cost to rebuild their house today. An estimated rebuilding cost will take into account things like:

• The square footage of your house
• When the house was built
• The kinds of floors you have
• Any custom or designer kitchen and bathroom upgrades
• The cost of labor in your neighborhood
   

Rebuilding cost can be similar to market value, but it can also be substantially more or less. Homeowners should determine their rebuilding cost before purchasing insurance, and can ask their insurance agent for a suggestion on how to make that determination.

3. Perils

Homeowners policies only cover damage or destruction that result from particular events, known as perils. Perils are things like fire, lightning, hail, damage from water leaks, and so on. Generally, the more perils are covered by a policy, the more expensive it will be. Common perils include:

• Fire: This covers fires that start in the home, as well as fires that result from natural disasters.
• Theft: This covers items stolen from inside your home and vehicle. "Whether it's a condo, renters, or homeowners policy, if somebody breaks into your car, the insurance policy actually covers those items," Inga says.
• Liability: “Let's say somebody you know trips and falls in front of your house or they are visiting you and they get injured," Inga says. "As part of the home policy, it would cover medical care for your guests." This peril also comes into play if someone gets hurt at your house and decides to sue.
• Water: This is a separate from natural disaster flooding, which is usually not covered as part of a homeowners policy. It is defined as sudden and accidental water damage, such as if broken plumbing or appliances damage a hardwood floor.
• Wind: Also called "windstorm damage," the potential for wind damage varies by region, as not all areas are prone to tornadoes and hurricanes that cause the most wind damage.

Depending on where your home is, you may also need to consider natural disaster perils such as flooding and earthquakes. These aren't included on standard homeowners policies and need to be purchased separately.

4. Home policy vs. coverages

A home policy is the full package of your homeowners insurance, laying out all the situations that are covered and how much they're covered for. Coverages are the individual components that make up the policy. Typically, they are composed of coverages A through E.

• Coverage A is another name for dwelling coverage. It covers the cost of repairing or rebuilding your house if it's damaged by a covered peril.
• Coverage B covers damage to other structures on your property, such as garages, pools, gazebos, and guest houses.
• Coverage C covers personal property inside your home. Inga says to imagine flipping your house upside down—everything that falls out is considered personal property.
• Coverage D, also known as loss of use, covers apartment or hotel costs if you can't live in your home because of a fire or other peril. "That would mean you and your family would be covered for a hotel stay and food expenses," Inga says. "It's up to a certain amount depending on how your policy is set up."
• Coverage E is liability coverage, which protects you if someone gets hurt on your property and has medical bills or sues you.