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Guide to Homeowners Insurance

TLDR

What You Need To Know

  • A typical homeowners insurance policy covers the cost to repair your home and replace your belongings and provides personal liability coverage
  • No matter what policy you get, homeowners insurance should include main dwelling coverage, personal property coverage, liability protection and additional living expenses
  • Homeowners insurance rates can vary based on where you live, but in most states, expect to pay $1,000 – $1,400 a year

Contents

When you become a homeowner, you hope that your home and its belongings are safe and protected for as long as you own the home. Unfortunately, no hope is guaranteed. Fire, theft, weather events, plumbing problems and the fickle finger of fate can strike your home at any time.

That’s why you need homeowners insurance.

What Is Homeowners Insurance?

As the name suggests, homeowners insurance is insurance on your home. The insurance offers financial protection if something happens to your home, if your belongings inside the home are stolen or destroyed or if someone is injured on your property.

While having homeowners insurance isn’t legally required, most lenders require that you purchase a policy before they approve your mortgage. It’s also a good idea because you never know what can happen to your home. 

Getting a policy

The good news is that there is no shortage of companies that sell insurance to homeowners. 

Whether it’s big companies targeting us with ads featuring quirky mascots, earnest messaging coupled with dramatic imagery or high tech ways to save, insurance companies are always looking to attract new customers.

If you’re not sure where to start, you can work with an insurance broker. Insurance brokers are independent agents who don’t work for insurance companies. Because they aren’t associated with any insurance companies, they are free to search for a policy that best fits your needs. They can also connect you to smaller insurance carriers who may offer more competitive rates.

Some insurance brokers may charge a fee for their services, but if they can find you a good offer, it may make sense to pay a little extra now in exchange for a more affordable policy.

Getting a quote

When you apply for a policy, home insurance carriers will ask for basic information on the home. Every company has its way of determining a price quote, but they may ask questions like:

  • What is the size of your home?
  • How old is it?
  • How close is the nearest fire station?
  • Does the home have a security system?
  • Have you had homeowners or other insurance policies in the past?

Once they have that information, they can provide you with a home insurance quote. 

Once you’ve selected an insurance provider to work with, they will ask more questions and may even require a home inspection before they sell you a policy. Your policy should lay out the different types of coverage and coverage limits in clear, easy-to-read language.

You’ll also want to know about your premiums and deductibles.

  • Premium: When you buy a policy, you pay a monthly or annual insurance premium. You can fold your premium into your monthly mortgage payment or pay your provider directly.
  • Deductible: Policies often include a deductible. A deductible is the amount you pay out of pocket before insurance kicks in. If your home has a $1,000 deductible, you’re responsible for covering the first $1,000 before the insurance company starts to pay.

Filing a claim

Once you have a policy, you’ll hopefully never have to use it. But if something goes wrong, you’ll need to file a claim with the insurance company and give them an overview of everything that happened. 

After you file the claim, you work with a claims adjuster (this isn’t the agent who sold you your policy). The claims adjuster looks at your situation and determines how much you’ll be compensated based on your level of coverage and your deductible. 

Depending on the claim, you’ll either get a check to cover your expenses or the insurer will pay your contractors directly.

What Does a Homeowners Insurance Policy Cover?

Now that you know how to get a homeowners insurance policy, it’s a good idea to know what kind of coverage you should get.

A typical homeowners insurance policy covers the cost to repair your home and replace your belongings and provides personal liability coverage if you’re held legally responsible for injuring someone on your property or damaging their property.

If your house caught fire with a guest in the home, insurance could potentially cover the damage to the home, the cost to replace your belongings and any medical or legal bills if your guest (or their insurance company) sued you for damages. 

How much coverage do you need? 

  • Damage to your home: You’ll need enough coverage to rebuild your home if it’s destroyed. Use the value of your home as a baseline. 
  • Personal property protection: Make a personal inventory of your valuables and see how much it would cost to replace your most valued possessions.
  • Liability coverage: Most policies provide a minimum of $100,000 in liability insurance, though $300,000 – $500,000 is recommended.[1]

Each aspect of your coverage covers a specific scenario. Let’s take a look at what’s covered.

Damage to your home

The first component of homeowners insurance is damage to (or loss of) your home and personal property. This is often referred to as dwelling coverage.

Most insurers use a list of 16 disasters (aka perils). It includes everything from vandalism to volcanic eruptions. Just under 90% of claims fall into four categories[2]:

  • Wind or hail
  • Water damage or freezing
  • Fire or lightning
  • Theft

Keep in mind: not every type of disaster is covered by homeowners insurance. 

If your home is flooded because of a busted pipe in your basement, that’s covered. If the whole neighborhood floods because you live in a flood zone and a hurricane hits, not so much.

Also, if you intentionally damage your home or neglect a growing problem (like a termite infestation or cracks in the foundation), your policy may not cover you.

Personal liability for damage or injuries

Personal liability coverage protects you in case you get sued. If someone slips on your front porch and breaks their arm, liability coverage will pay their hospital bills. 

Liability insurance also covers things that happen outside the home. If your dog bites someone or your toddler has an accident on grandma’s best carpet, you’re covered.

Most policies start at around $100,000,[3] but experts recommend getting coverage that’s around $300,000.

Living arrangements while your house is being repaired

If you can’t live in your home while you have a claim open, your insurance coverage may include additional living expenses (ALE) insurance. ALE can cover the cost of a hotel or a temporary rental. It may also cover:

  • Laundry: If your temporary residence doesn’t have a laundry machine, you’ll be reimbursed for the money you spent at the laundromat.
  • Furniture rental: Do you need a temporary crib for a little one or need some other must-have piece of furniture? You can get reimbursed for furniture rentals while your old furniture is being replaced.
  • Storage costs: Need to keep your stuff somewhere safe? Your coverage may also cover the cost of a temporary storage unit.
  • Moving or displacement costs: Insurance may cover it if you need to move or hire movers to transport your stuff while you’re between homes.
  • Pet boarding: If your hotel or rental isn’t pet friendly, you may be able to get your pet boarded.

FYI: ALE coverage isn’t unlimited. Most policies only cover up to 20% of your coverage limit.

What Isn’t Covered by Homeowners Insurance?

If you live in an area that is prone to natural disasters, like hurricanes, wildfires or tornadoes, you may only be partially covered. When you’re getting your policy, ask your insurance agent about any special or additional coverage (sometimes called endorsements) that may be important in your area. 

Endorsements can cover lots of potential problems, ranging from sewer backups to earthquakes to the cost of replacing your home office.

Depending on where you live, you may need special coverage for flooding. Flood policies aren’t typically available through standard insurance companies. You can get them through the National Flood Insurance Program.

Anything that doesn’t fall into one of these categories – a declaration of war, a nuclear hazard, a disease epidemic or other natural disaster event that falls under force majeure (aka a greater force or act of God) – probably won’t be covered.

What Are the Different Types of Homeowners Coverage?

While insurance companies offer different policies, there are eight main types of homeowners insurance. They are usually classified using one of the HO codes: 

  • HO-1 and HO-2: Homeowners insurance with limited coverage
  • HO-3: Standard homeowners insurance (This is the most common type of insurance in the U.S.)[4]
  • HO-4: Renters insurance
  • HO-5: Premier or comprehensive coverage (This policy offers the greatest protection but isn’t available to all homeowners.)
  • HO-6: Condo insurance 
  • HO-7: Mobile home insurance 
  • HO-8: Older or historic home insurance

No matter which policy you get, homeowners insurance should include main dwelling coverage, personal property coverage, liability protection and additional living expenses.

How Homeowners Insurance Works: Actual Cash Value vs. Replacement Cost

When something does go wrong and you need to take advantage of your insurance policy, your insurer won’t simply write a check for the amount listed on your policy. Your payout will be based on the cost to rebuild and your level of coverage. 

In fact, most insurance companies only provide coverage for 50% – 70% of the amount of insurance you have on the home.[3]

The amount you receive is usually determined using one of two approaches: the actual cash value of the damaged property or the cost to replace it.

Actual cash value

Your insurer pays the cost to repair the damage or replace your property minus depreciation. You’ll usually see this applied to your belongings, not your home. Why? Because homes tend to appreciate (gain value) over time, while your belongings tend to lose value over time. 

Replacement cost

This method of determining how much you get back is based on the cost to replace or repair any damage. These costs are determined in different ways.

  • Functional replacement cost value: With this method, items are replaced or damage is repaired with less expensive materials.
  • Replacement cost value: Items are replaced or damage is repaired with materials that are of equal quality as long as you don’t exceed your coverage limits. You may be able to get this type of policy for personal belongings, but you’ll pay extra for it.
  • Extended replacement cost value: If you anticipate that rebuilding will be more expensive than the face value of your dwelling coverage, you can get additional coverage, which would set a higher limit on your coverage. The limit increase is usually expressed as a dollar amount or percentage.
  • Guaranteed replacement cost value: Guaranteed replacement covers all costs to repair your home and your belongings. This is the most expensive level of coverage and not all insurers offer it.

How Much Does Homeowners Insurance Cost?

Homeowners insurance rates will vary depending on where you live. In Oregon, it costs around $730 a year. In Louisiana, homeowners insurance can cost $1,987 a year. In most states, you can expect to pay $1,000 – $1,400 a year.[2]

While geography is a big factor in how insurance rates are determined, insurance companies also look at your credit score and income to verify that you can afford your insurance premium.

Are There Ways To Lower Your Homeowners Insurance Rates?

If you want to lower your insurance rates, try making these home improvements:

  • Security system: Professional alarm and surveillance systems can help reduce the risk of theft. 
  • Safety discounts: Insurers may offer discounts if you install safety features, like fire extinguishers and smoke detectors and water system alarms that detect leaks before they get out of control.
  • Upgrades or repairs: Fixing small problems before they become bigger problems is another way to show your insurance company that you’re a good risk.

Before you commit to making any changes, talk to your insurance provider to see what discounts they may offer if you make these improvements. 

If you want to lower your premiums without making any changes in the home, you can:

  • Raise your deductible: Your deductible is what you pay out of pocket before your insurance kicks in. A higher deductible usually means lower premiums. Just be prepared to shell out more cash upfront.
  • Pay off your mortgage: Owning your own home is a good look to an insurer. They know they won’t need to deal with a mortgagee, like a bank or other lender.

Expect the Unexpected and Make Sure Your House Is Protected

As much as we hope it won’t happen, bad things can happen when you’re a homeowner. While you hope you’ll never have to use it, homeowners insurance can give you a little extra peace of mind, knowing that you’ll be able to access the funds you’ll need to get back on your feet.

  1. Insurance Information Institute. “How much homeowners insurance do I need?” Retrieved February 2022 from https://www.iii.org/article/how-much-homeowners-insurance-do-you-need

  2. Insurance Information Institute. “Facts + Statistics: Homeowners and renters insurance.” Retrieved February 2022 from https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance

  3. Insurance Information Institute. “Homeowners Insurance Basics.” Retrieved February 2022 from https://www.iii.org/article/homeowners-insurance-basics

  4. Insurance Information Institute. “Am I Covered?” Retrieved February 2022 from https://www.iii.org/article/am-i-covered

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In Case You Missed It

  1. While insurance companies offer different policies, there are eight main types of homeowners insurance, and each comes with an HO code

  2. Having personal liability coverage means you’re protected if you get sued

  3. Most insurance companies only provide coverage for 50% – 70% of the amount of insurance you have on the home

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