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Homeowners Insurance Cost: Things To Know

TLDR

What You Need To Know

  • Homeowners insurance protects your home, your belongings and provides liability coverage
  • A variety of factors go into calculating the cost of a homeowners insurance policy
  • Look at several lenders before deciding on an insurance company for your homeowners policy

Contents

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Homeowners insurance is an invaluable safety net for homeowners. 

It’s not mandated by federal or state law, but homeowners insurance (aka hazard insurance or home insurance) is required by most mortgage lenders to get a home loan. Even if you buy a home without a mortgage, homeowners insurance is a must.

So, why is homeowners insurance so important? 

We’ll explain all that, show you some common factors that affect your premium and clue you in on how you might be able to save money on your policy. 

What Is Homeowners Insurance?

Like all insurance, homeowners insurance is a contract. The insurer agrees to protect the insured against unexpected financial loss. Homeowners insurance has two purposes: 

It protects the home and other assets

Homeowners insurance provides financial protection for a homeowner in case of certain perils or catastrophic events (think: fire or burglary). It also shields you from liability if someone gets hurt on your property. 

It protects the lender’s stake in the home

Homeowners insurance protects the lender’s financial investment in the home, ensuring that the lender will be repaid even if the home is damaged or destroyed.

What Does A Homeowners Insurance Policy Provide?

Typically, the insurance company (aka the insurance carrier or insurer) will reimburse the homeowner for most of the cost to fix any covered destruction or damage. 

Homeowner policies can differ widely because they can be customized to the needs of the homeowner and lender. But most homeowners insurance policies include these standard types of coverage:

Repair damage to the home

Your policy will pay to repair damage to the exterior and interior of your home if a covered event, like a tornado or vandalism, occurs. If your home needs to be rebuilt, your policy will compensate you for the construction. 

Most policies cover the cost to repair detached structures, like a shed or garage, but only for around 10% of the amount the home is insured for.[1] 

Not all catastrophic events are covered under a general homeowners insurance policy. Earthquakes and floods usually require an insurance rider (it’s an add-on to the main policy) or a separate policy. 

We’ll take a deeper dive into insurance riders later.

Repair or replace belongings

Most of the items inside your home, like your furniture and clothes, are covered by a standard homeowners policy. Your belongings are generally covered up to 50% – 70% of the amount of insurance you have for the home.[1] 

Belongings that aren’t physically in the house, such as furniture you’re keeping in a storage facility, are usually covered, but there is generally a limit on the amount of coverage. Some insurers limit your coverage for off-site possessions to 10% of the amount of coverage you have for all your belongings.[1]  

Liability coverage

As long as it’s unintentional, your homeowners insurance policy generally protects you from lawsuits if you or your pets injure someone either at or away from the home, or if you damage someone else’s property. It also protects you from getting sued by someone who got hurt on your property. 

Most homeowners insurance policies provide no-fault medical coverage for people who get hurt on your property. So, if someone gets hurt on your property, your homeowners insurance covers their medical bills.

Additional living expenses

Homeowners insurance will cover the cost of additional living expenses (ALE) for everyone living in the home if they’re displaced because of a covered event. 

For example, if the home is being repaired or rebuilt after a fire, ALE will cover restaurant and hotel costs to the dollar or time limit specified in the policy. 

How Much Is Homeowners Insurance?

The average cost of homeowners insurance nationwide is approximately $1,250 a year or around $104 a month for a standard policy. That average cost can vary from state to state.[2] 

The 5 most expensive states for home insurance are[2] [3]:

  • Louisiana: $1,987
  • Florida: $1,960
  • Texas: $1,955
  • Oklahoma: $1,944
  • Rhode Island: $1,630

The 5 cheapest states for home insurance are (with average annual premium)[2] [3]

  • Oregon: $706
  • Utah:  $730
  • Idaho: $772
  • Nevada: $776
  • Wisconsin: $814

If you were insuring a home in Hawaii, your annual premium (read: the amount you pay every year) for an HO-3 (standard) policy might be $1,140. But it might cost you $1,944 to insure the same home in Oklahoma.

No matter what state your home is in, what you pay for your policy will depend on a host of other factors. 

What Factors Affect the Cost of Homeowners Insurance?

The cost of homeowners insurance primarily depends on the risk to the insurance company. The insurer will weigh how likely it is that the homeowner will file a claim (a request to pay you for a covered loss or damage).

Insurers consider several factors when creating a homeowner’s “risk profile.” A high-risk profile signals a greater chance of a claim being filed and higher estimated costs to reimburse the homeowner for any damage or liability – and this will result in a high-priced insurance policy. 

Here are some of the most common factors used to determine the cost of a homeowners insurance policy:

Past claims

If you filed a claim with your current insurer, filed claims when you lived in another home or the previous owner(s) of your current home filed claims, your rate will probably be higher. 

Why? Well, it’s been shown that people who file claims are more likely to file again. And, if there were past problems in the home that caused a claim to be filed, the chances are greater that there are other problems in the home.

More than one claim filed for the same peril (wind damage, water damage, etc.) is another red flag to insurers that they can expect similar claims to be filed in the future. Another rate raiser? Severe claims, like a total rebuild of your home, are very likely to raise your rate.

Location of the home

Your insurance carrier will look closely at the location of your home. Is it in a high-crime area? Is the area prone to tornadoes? Is the home near a fire station and hydrant? 

All of these situations point right back to risk. 

To an insurer, a home in a high-crime area is more likely to experience crimes, like vandalism or theft. A home in an area plagued by tornados is more likely to be damaged by one. A home near a fire station is considered less likely to sustain extensive fire damage than a house fifty miles away. (FYI: Your insurance company may even check if your local station is staffed by professional firefighters or volunteers.)

The cost of rebuilding or repairing a home will also vary by location. Labor and the cost of materials will depend, in large part, on where the home is.

The home’s age and condition

As a rule, older homes generally carry more risk of a damaging event than newer homes. Faulty wiring, flammable materials and old heating systems will likely lead to a higher premium.

On the flip side, homes with upgraded electrical systems and a new roof or a security system that rivals Fort Knox would likely lower a home’s insurance premium.

The amount of coverage and the deductible

When you get an insurance policy, the cost is determined based on the specifics of the policy. Here are a few things to look out for:

  • Premiums: This is what you pay to the insurance company every year. The more you pay, the better your coverage.
  • Deductibles: This is the out-of-pocket amount the homeowner pays before the insurance company starts paying. A deductible of $1,500 will have a lower premium than the same policy with a $500 deductible. With a higher deductible, you’ll pay more out of pocket before the insurance kicks in.
  • Liability limits: Each homeowners policy has a liability limit. It’s the maximum amount an insurance company will pay toward damages after any deductibles. 
  • Dwelling limit: Most homeowners insurance policies will cover your home’s full replacement value or the cost to physically replace your home – not the current market value of the home. If your home has appreciated in value it may make sense to get it insured again.

Homes that cost more to replace have higher dwelling limits (the amount insurance will pay to rebuild your home), higher premiums or policies with higher deductibles. Other areas of coverage are usually expressed as percentages of the home’s replacement value. For example, personal property limits are usually set at 50% of the home’s replacement value.[4]   

Your credit record

In most states, insurance companies use a credit-based insurance score to help them create your risk profile and determine what you’ll pay in insurance costs. 

Note that it’s not the same credit score you’re assigned by the traditional credit reporting agencies. The factors that go into calculating your score and their percentage of importance on your score are different. 

Credit-based insurance scores are compiled by analytics companies, like the Fair Isaac Corporation (FICO®).

Dogs and outdoor features that could cause injury

No one needs to tell you how sweet, lovable and adorable your dog is. But some dog breeds are more likely to cause injury than others. If your pooch happens to be one of those breeds, you’ll probably pay more for homeowners insurance.

Got a swimming pool or trampoline? Be prepared to pay more for your home insurance. Insurance companies are typically not fans of these features. They may be fun, but they make your property more dangerous and increase the likelihood of a claim. 

Additional insurance

A standard insurance policy may not cover everything a homeowner wants covered.

For example, a homeowner may want additional coverage if the home is in an area where flooding, which is typically not covered by homeowners insurance, is likely. Homeowners usually have to get a separate policy for that particular peril. 

Owners may also want more coverage for belongings like expensive jewelry or artwork with a value that exceeds what’s covered in a standard policy. This type of additional insurance is usually an endorsement or rider. It’s an add-on to the primary policy that provides more coverage where the primary policy falls short. 

Separate policies and endorsements will add to the cost of insuring your home.

How Can You Save Money on Homeowners Insurance?

You know what can raise the cost of your homeowners insurance policy. Now, let’s see what you can do to reduce it.

Compare policies and insurers

Shopping around for your insurance company is time well spent – but don’t focus exclusively on the dollars and cents. Look for an insurance carrier that will be responsive to your questions and concerns and will assist you if you need help filing a claim.

You’ll also want to confirm that your carrier is in good financial standing. The National Association of Insurance Commissioners (NAIC) is a good resource for investigating insurance carriers. It’s also worth checking out Standard & Poor’s or Moody’s. These companies rate insurance carriers on their financial health.

Provider discounts for bundling insurance products

Insurers will often give discounts for bundling products. If you get your homeowners policy and auto insurance from the same place, they may knock 5% – 15% off the premium of each policy.[4]

Replacement cost vs. Actual cash value

Most homeowners insurance policies use actual cash value (ACV) as the standard for personal property coverage and replacement cost value (RCV) for dwelling coverage. 

ACV replaces your property’s value but subtracts depreciation. RCV replaces items with something similar at current prices. ACV provides less coverage, but it tends to be cheaper than RCV. 

Negotiating the type of property replacement you get could save you money if trading less coverage for a lower premium works for you.

Add safety and security features

Installing a security system, upgrading smoke detectors and putting stronger locks around your home can reduce your premium. Depending on how sophisticated your security system is, you could get a discount of 15% – 20% on your premium.[5]

Improve your credit record

Although it may take a while to show up in your credit history, improving your credit can help lower your premium.

Use the same insurance carrier you’ve been using

Some insurance companies reward loyalty. If you’ve been using the same insurer for years, ask if they will give you a discount because you’re a long-term policyholder. Some insurers will give clients who have been customers for 6 years or more up to a 10% discount.[5]

Take an inventory

If you have a rider for your personal belongings, it’s a good idea to take an annual inventory and jot down the value of each item. When you know what you have, you won’t end up paying insurance for items that are no longer in your possession or have lost their value. 

Get Your Home Insurance Estimate

Now that you know all about homeowners insurance costs, you’ll be better prepared to ask prospective lenders the right questions. Pro tip: It’s always a good idea to get a few estimates. And it wouldn’t hurt to revisit your policy every year. 

Make sure your policy is providing the coverage you need (but not too much!). Then you can rest easy knowing your home and belongings are covered.

  1. Insurance Information Institute. “What is covered by standard homeowners insurance?” Retrieved December 2021 from https://www.iii.org/article/what-covered-standard-homeowners-policy

  2. National Association of Insurance Commissioners. “Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report: Data for 2018 (2020).” Retrieved December 2021 from https://content.naic.org/sites/default/files/publication-hmr-zu-homeowners-report.pdf

  3. Insurance Information Institute. “Facts + Statistics: Homeowners and renters insurance.” Retrieved January 2022 from https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance#Homeowners%20insurance%20expenditures

  4. National Association of Insurance Commissioners. “A Consumer’s Guide to Home Insurance.” Retrieved December 2021 from https://content.naic.org/sites/default/files/publication-hoi-pp-consumer-homeowners.pdf

  5. Insurance Information Institute. “12 Ways to Lower Your Homeowners Insurance Costs.” Retrieved December 2021 from https://www.iii.org/article/12-ways-to-lower-your-homeowners-insurance-costs

ICYMI

In Case You Missed It

  1. Good credit can potentially get you a lower insurance premium

  2. Your home’s location, age and even your dog’s breed (if you have one) can affect what you pay for homeowners insurance

  3. An insurance rider is a good way to add coverage where a standard homeowners policy might fall short

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