An essential part of the home buying journey and homeownership is often opening a homeowners insurance policy. While having homeowners insurance isn’t required by law, most mortgage lenders will require it within the terms of your mortgage. So unless you’re able to buy your house outright in cash, a homeowners policy is going to be a necessary purchase for you, and probably should be either way.
What is Homeowners Insurance and How Does it Work?
Homeowners insurance, or home insurance, is a type of insurance policy that protects you from incidents involving your home such as damage, theft, or accidents within the home.
Most coverage requirements will be for the fair market value of your property or the purchase price of the home. Renter’s insurance is different from homeowners but is also often required by landlords if you are renting your house rather than buying it.
Depending on the claim, coverage could include the value of personal belongings, lodging in the event that your home becomes unlivable, and occasionally legal expenses among other things.
Homeowners Insurance Coverage
Having a great home insurance policy can protect a lot of the value of your property, assets, and belongings inside your home. However, it does not cover everything. Exact coverage will depend on your coverage level, claim, circumstances of the incident, and home value, among other factors.
Here are some examples of what you could typically expect to be covered in a standard homeowners insurance policy. Be sure to check your specific policy for details when looking into purchasing homeowners insurance.
| Covered | NOT Covered |
|---|---|
| Interior & Exterior Damage | Floods |
| Damage to Structures on Your Property | |
| Hurricanes and Storms | Earthquakes |
| Vandalism | |
| Fire | Other Natural Disasters |
| Lost & Damaged Personal Belongings | |
| Appliances | Damage Due to Lack of Upkeep |
| Liability (damage or injury to others)* | Destruction from War |
| Temporary Living Expenses | |
| Medical Expenses |
*Liability coverage can provide added protection from lawsuits that cover medical expenses, legal repercussions, and more in the event of an incident within your home that affects someone else or (in some cases) accidents outside of your home that you or someone on your policy is at fault for.
There is usually a limit to how much your insurance carrier will cover for your personal property. So, if you own a lot of very valuable items you may want to consider formally documenting them and looking into separate or extended policies.
Common Coverage Types
There are three main levels of homeowners insurance coverage – actual cash value, replacement cost, and extended replacement cost/value (also known as guaranteed replacement cost).
These different levels can be chosen based on the level of coverage needed by the homeowner.
Actual Cash Value
Coverage for the cost of your home and value of your personal belongings based on the current worth (accounting for depreciation of value)
Replacement Cost
Coverage for the cost of your home and value of your personal belongings based on the original purchase price of items (does not deduct to account for depreciation of value)
Extended Replacement Cost
Coverage for the cost to repair or replace your home and personal belongings, even if it exceeds the value that would be covered in actual cash value or replacement cost coverage. There is still a limit to the replacement cost that will be set by your insurance carrier, but this level of coverage can help account for inflating prices that will drive up the amount needed to repair or replace your home and possessions.
How Much Does Homeowners Insurance Cost?
Homeowners insurance rates are based on risk, which can be defined as the likelihood that a claim is filed by the policyholder. There are many factors that can influence the cost of homeowners coverage, including:
- The value of your home
- Your Location
- Coverage level
- Your credit
- Claims history
The average cost of homeowners insurance in the United States is $1,445 annually or around $120 per month [1].
How to Save Money on Home Insurance
- Policy Bundles
Bundling insurance policies through the same provider can often result in discounts compared to if they were purchased separately. Home and Auto coverage are commonly bundled together. - High-Deductible Policies
Lower rates are typically offered on policies with a high deductible, which can prove to be less effective for smaller claims, but could pay off in the event of a significant incident. - Protective Devices & Security
Some providers will offer discounts for investing in home protection such as locks, security systems, alarms, and more. - Establish and Maintain Good Credit
Insurance providers can use credit information to influence pricing of homeowners policies. - Lack of Claims Filed
If you maintain coverage without filing a claim for a certain period of time, your carrier may offer a discounted rate. - Carrier Loyalty
Maintaining coverage through the same provider for several years can yield significant cost savings. - First-time Homebuyer
Sometimes there are first-time buyer programs for home insurance too!
Home Insurance vs. Home Warranty vs. Mortgage Insurance
While homeowners insurance, home warranty, and mortgage insurance policies all aim to provide some sort of financial protection regarding your home and the purchase of it, they are very different things and should not be conflated.
Homeowners Insurance – Aimed to protect homeowners from unanticipated incidents such as damage or theft.
Home Warranty – Aimed to financially protect homeowners from anticipated events like aging leading to wear and tear on the home systems and appliances.
Mortgage Insurance – Aimed to protect your mortgage lender in the event that a homebuyer defaults on their mortgage payments. Mortgage insurance does not protect the homeowner.
Finding the Best Homeowners Insurance Company
The best homeowners insurance providers will be determined by the individual home owner’s coverage needs, likelihood to file a claim, and available coverage in the area.
Some things to keep in mind when shopping around for insurance companies:
- Affordability – how do rates compare between providers for similar coverage?
- Claims Process – how streamlined is the process of filing a claim?
- Availability – does the carrier provide coverage in your area?
- Customer Service – is the company readily available for questions and support?
- Discounts – in line with affordability, are there discounts that can be taken advantage of?
- Coverage Level – does the amount of coverage provided by different carriers fit your needs or is it customizable?
- Technology – is there an app or website that makes payments, managing your policy, and locating information easy?
Getting a Home Insurance Quote: Step-by-Step
- Gather Necessary Information and Documents
Collecting personal information, mortgage and home documents, and details about your living situation can help expedite the process. - Determine Your Needed Coverage Level
Explore coverage options that fit your needs as a homeowner and account for your location and living situation. - Get Multiple Quotes
Look at your existing insurance providers to see if they can offer you discounted rates, but be sure to also shop around and get 3-5 quotes so you can compare potential providers and negotiate. - Choose a Policy
Once you’ve compared policies and carriers and have weighed your options, it’s time to choose the best option. - Complete a Home Inspection
An inspection of your home will likely be required before the insurance policy is official. - Finalize your Policy
Take one last look over all of the terms and details of your policy, sign the final paperwork, and take a deep breath.