Homeowners Insurance: What It Is, Cost And Coverage
Victoria Araj13-minute read
February 23, 2022
When disaster strikes, it's crucial that you're protected, especially when it comes to a large investment like your home. Before you close on a new home, you'll likely have to buy homeowners insurance to cover your property in the event of potential damages.
Even if you instinctively understand that homeowners insurance is important, you may still have a lot of questions about what it is and how to get it. This article takes a deeper look at what homeowners insurance covers and how much it costs, so you can have a better understanding of the kind of protection that's at your disposal.
What Is Homeowners Insurance?
Homeowners insurance, or simply home insurance, covers loss and damage to your house, as well as the assets inside your home. The insurance typically covers the costs that would be needed to restore your home to its original value in the event of damage.
This insurance doesn't protect only you – it also protects your mortgage lender. That's why, if you want to get a mortgage, your lender will typically require proof that you've purchased homeowners insurance before they agree to release your funds, and to ensure that you'll be able to cover any repair bills after a potential incident.
Lenders typically have home buyers pay for the insurance through an escrow account. In this way, your insurance premium is added to your monthly mortgage payment, allowing you to pay it monthly instead of in a lump sum every year.
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What Does Homeowners Insurance Cover?
When you sign up for insurance, your provider will give you a list of situations you're covered under, known as perils. Although standard policies cover the same basic perils, some companies offer more supplemental coverage than others. There can also be variations in coverage from one policy to another. While named peril policies only include coverage for the types of damages explicitly mentioned, open peril policies include all types of damages, unless stated otherwise.
Here are four different types of coverage and the perils commonly included within them.
Dwelling coverage is a portion of homeowners insurance that protects you against physical harm to your home. Since dwelling coverage provides you with the funds to repair or rebuild your property in the event that it's damaged or destroyed, you should buy enough to cover the cost of building your home from the ground up.
This portion of your homeowners insurance will usually include the following:
- Natural disasters: Your homeowners insurance policy protects you against damage from most types of natural disasters, like wind, hail, sleet and electrical storms. However, there are a few types of natural acts, such as floods or earthquakes, that require specific, separate policies from your homeowners coverage.
- Fires: House fires are common, which is why standard policies cover any damage caused by them. If a fire renders your home uninhabitable, your homeowners insurance will usually cover the cost to rebuild your home as well as the cost of additional living expenses – like hotel bills.
- Theft and vandalism: If someone breaks into your home, your insurance may pay to repair enough of the damage to the windows and doors to make your home secure again. Additional damage to other elements of your home may also be covered, depending on the circumstances.
Other Structures Coverage
Although your garage, pool, shed, gazebo or fence may not be physically attached to your house, that doesn't mean you don't want to protect them against damage or theft. Other structures coverage allows you to protect those unattached features of your home from the same perils for a percentage of your dwelling coverage.
Personal Property Coverage
Homeowners insurance covers your clothing, furniture, appliances, electronics and other personal property. Your insurance will offer you a payout if any of these items are stolen or destroyed during a natural disaster.
Homeowners insurance policies often limit personal property protections on high-value items. For example, you might have a policy that has $100,000 worth of personal property coverage, but it may also include a caveat that says you can only get up to $1,000 for broken or stolen jewelry. If you have something valuable you want to protect, you can add a rider to your policy. A rider is a policy extension that gives you more coverage for high-value items.
Your personal property protection also extends outside of your home. For example, your homeowners insurance will still cover you if someone steals your laptop at work. If you have any children under the age of 26 who live away from home, they are covered under your policy as well. However, you should keep in mind that insurance companies may put limits on personal property protection for individuals who don't live in your home.
Homeowners insurance also comes with personal liability coverage, which protects you in the case that someone is injured while on your property. Most policies will require that you have at least $100,000 in liability protection. However, medical bills and legal fees can be very pricey, which is why it's often recommended that you buy $300,000 – $500,000 worth of liability coverage.
Liability insurance protects you from financial loss after a lawsuit. Your homeowners insurance will cover you if someone injures themselves and sues you for the cost of their medical bills. If your lawsuit goes in front of a judge, homeowners insurance will also cover the cost of your lawyer or other legal representation.
Your homeowners liability insurance also protects you against damage to your neighbor's property. For example, if a tree in your yard falls and damages your neighbor's roof, your homeowners insurance will cover their repair bills.
Losses Due To Pet Bites
Liability insurance doesn't only protect against accidental trips and falls. Dog bites are some of the most common insurance claims. Most homeowners insurance policies classify pets as your property. This means that dog bite protection is free with most policies. This caveat can save you thousands of dollars if a guest or contractor is bitten by your dog. Dog bite claims in 2020 averaged around $50,425, according to the Insurance Information Institute.
Keep in mind that homeowners insurance policies can limit dog bite protections. Breed restrictions are the most common limitation. Your homeowners insurance may not insure certain dog breeds or may restrict your coverage if you have a breed that's deemed more aggressive.
What Won’t Homeowners Insurance Cover?
Not every item, nor every event, will be covered by homeowners insurance. There are typically a few common types of damage not covered by standard policies. Depending on your location, you may need to sign up for extra hazard insurance policies.
Natural movements, like sinkholes, landslides and earthquakes, are not usually covered by standard homeowners insurance. Instead, they may require their own coverage, like earthquake insurance.
Sump pump or sewer backups are not covered – but could be with additional coverage, or add-ons. Generally, property damage from burst water pipes or malfunctioning sprinkler systems is covered. However, flood damage from storms, melting snow or other natural causes isn’t typically covered, so if you live in a flood zone, you may want to get separate flood insurance.
If your home or personal property is damaged due to your own neglect or failure to maintain your property, it will not be covered.
When reviewing your policy, make sure you read the fine print and always ask questions. If there are items that are not covered by your homeowners insurance – like systems and appliances – you may want to consider a home warranty for extra protection.
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Different Types Of Homeowners Insurance
Insurance companies have a wide array of property insurance products. These coverage options range from policies covering condos to renters insurance to standard single-family homeowners insurance. Some of the common form types associated with homeowners insurance include HO-1, HO-2, HO-3 and HO-5 insurance. These range from the least amount of insurance coverage to the most.
The HO-3 form is the most common insurance policy form, covering up to 16 named perils, according to the Insurance Information Institute. The perils covered by this type of insurance include:
- Fire and smoke
- Lightning strikes
- Windstorms and hail
In general, higher insurance coverage and policy limits come with higher pricing.
Homeowners insurance policies are typically either replacement cost policies or actual cash value policies. Let’s take a look at how these policies differ.
Replacement Cost Policies
Replacement cost policies provide funds to replace what was lost, once you pay the deductible. They don't take depreciation into account. There are two types of replacement cost policies:
- Standard: A standard replacement cost policy will pay out what you paid for the item with inflation factored in.
- Guaranteed: A guaranteed replacement cost pays out the actual cost to replace the property. Likewise, guaranteed replacement costs could cover items that have drastically grown in value, like collectibles.
For instance, if you paid $300,000 for a home that was destroyed by a storm, standard replacement costs would pay you $300,000 plus however much inflation has occurred since you bought it.
Guaranteed replacement cost coverage would pay for restoring the property after the storm and constructing a new home, which would likely total much more than $300,000.
Actual Cost Policies
Actual cost policies take the depreciation of the items you've claimed into account before funding their replacement. This may mean you'll get less money to help you replace items lost or damaged in an event.
The idea is that if you spent $1,000 on a TV 10 years ago, that TV is no longer worth $1,000. Insurance companies have indices to determine how much they will payout actual cost for property that has depreciated.
What Are The Benefits Of Homeowners Insurance?
Being a homeowner comes with a lot of benefits, including some great tax deductions. Homeowners insurance comes with a number of benefits, too. These can include the following:
- Personal belonging and liability coverage: Not only does homeowners insurance protect your physical home, but also your personal belongings and your liabilities.
- Temporary housing assistance: If your home becomes uninhabitable due to a covered event, insurance may cover temporary housing expenses, like hotel rooms, rent and storage fees.
- A financial safety net: Homeowners insurance can help prevent financial destruction. One incident that causes damage, destruction or loss could force you into debt, wipe out your savings and hurt your credit. With homeowners insurance, you only have to pay your deductible and the rest is taken care of – up to the max.
- Peace of mind: Just knowing that you're covered can offer peace of mind. If something does happen, you can feel better knowing that you'll be able to replace items and find temporary housing solutions without cutting deep into your finances.
How Much Is Homeowners Insurance?
It's impossible to say exactly how much you'll pay because every insurance company uses a different formula to calculate premiums. The average American can pay around $1,585 every year for homeowners insurance, but rates can vary between states.
When you close on a house, you'll be able to check the cost of your homeowners insurance premium on your Closing Disclosure. This document lists your mortgage terms and costs in detail, so you know what you're responsible for paying. You'll receive your Closing Disclosure 3 business days before you close on your loan.
Factors That Determine The Cost Of Homeowners Insurance
How much you pay for insurance depends on a few different factors. Here are just a few of the most common considerations insurance providers use when they calculate your rate.
- Condition and age of your home: Insurance companies may charge higher premiums for older homes or "fixer-upper" homes that haven't been well-maintained.
- Location: Insurance premiums vary widely by state. Expect to pay more for homeowners insurance if you live in an area that's prone to wildfires, flooding or other natural disasters. On the other hand, you can expect to pay less if you live close to a police station or fire department.
- Credit score: Just like with a loan or credit card, insurance companies offer lower rates to people with high credit scores. By taking some time to raise your credit score, you can actually lower your premium.
- Deductible: Your deductible is the amount that you pay when you make a claim before your insurance kicks in and covers the rest of the bill. You'll pay more in premiums if you choose a lower deductible.
- Extra structures on your property: The more structures you have on your property, the more of a risk you pose to insurance companies. You may pay more for your insurance if you have a fence, tool shed or pool.
- Dog breed: As mentioned above, some insurance companies won't cover homes where certain dog breeds live. Even if your insurance company doesn't ban certain breeds, they may still charge you more if you own an aggressive breed of dog.
- Claims history: Your claims history follows you from home to home. If you've made a homeowners insurance claim before, your insurance company may charge you more. This is because insurance providers may view homeowners who have made claims in the past as more likely to make claims in the future.
Ways To Lower Your Homeowners Insurance Cost
Two of the basic ways to lower your home insurance cost include lowering the amount of coverage you have or raising your deductible. Other steps to take to lower your homeowners insurance cost may include:
- Taking preventative measures: Mitigate your risk of theft or injury by installing a security system and implementing new safety measures that can help prevent injury. This may include fixing walkways, installing handrails or putting a fence around your pool.
- Bundling your insurance: If you own a car or motorcycle (or both), you may be able to save money by bundling your home, auto or motorcycle insurance with one provider. Insurance companies typically offer a discount when you do this. If you have separate providers, call both and see what kind of deals they offer for bundling your insurance.
- Removing land coverage: Since your land will always be there, no matter what happens to the home, you typically won't need land coverage included in your insurance policy. Removing land coverage may help you save money.
How To Find The Best Homeowners Insurance Policy For You
Mortgage holders need to get homeowners insurance, but not every policy is alike. Before picking an insurer, do some research to find the plan that makes the most sense for you and your home.
Follow these steps to find the right policy for you:
Get A Homeowners Insurance Quote
To determine which home insurance policies or companies will best fit your needs, it's important to shop around for the best prices and coverage. Along with researching policies offered, make sure you research the company as well. Does it get good reviews? Do clients complain about lack of help, difficulty filing claims or other customer service issues? Speak with a few insurance agents and understand the difference between home insurance quotes.
Get All The Details
You probably don't usually read the terms and conditions when you sign up for online services, but perusing the fine details is a must when it comes to homeowners insurance. Make sure you understand what's covered and what isn't, especially if you live in a location where floods, earthquakes or hurricanes are common. Many policies don't cover these damages, so make sure you know what you're getting.
Finally, take inventory of your personal belongings, so you'll know how much it will cost to replace them. This will help you get an idea for how much coverage you actually need, and it may also come in handy should you need to file a claim.
Changing Homeowners Insurance Policies
A few things might cause you to change your homeowners insurance company.
First, you might switch homeowners insurance companies to save money. Shopping around for better policies is an important part of the process, and you should look for the best possible option.
The other common reason is that you want to increase or reduce your coverage in a way that cannot be done by your current homeowners insurance company. Once you’ve found a company that can better meet your custom insurance needs, here’s how you can begin making the switch.
Break Up With Your Carrier
If you decide to change insurance companies, you must let your old insurance carrier know that your policy needs to be canceled. If possible, wait to cancel your old policy until after you’ve purchased your new one to avoid a lapse in coverage.
Avoid A Potential Escrow Shortage
If you cancel in the middle of your old policy, you may receive an escrow refund check for unused premiums. It may be tempting to go on a spending spree with these funds, but in most cases you’ll want to send the check to your mortgage lender to pay for your new policy in escrow.
If you don’t send your lender the refund from your previous policy, you may need to pay for both the old policy and the new policy as part of your monthly mortgage payment.
This, in turn, could cause something called an escrow shortage, which basically means you don't have enough money in your escrow account to pay for all of your insurance. This causes your monthly mortgage payment to increase the next time your annual escrow analysis is performed.
Tell Your Mortgage Servicer
Once the change is official, notify your mortgage servicer about you switching homeowners insurance policies. Your servicer can then redirect your escrow payments to your new insurer. You may want to keep your lender in the loop for the entire process, as this can help you be sure you’re getting all the coverage you need with your new policy.
FAQs About Homeowners Insurance
Do I need homeowners insurance?
Homeowners insurance isn't legally required at the state or federal level. However, if you have a mortgage, your mortgage lender will require that you have home insurance coverage for financial protection for them and you in case something happens.
While homeowners or property insurance isn't required legally, you may want it even if you own your home. Policyholders have financial protection, personal liability coverage and covered loss offered through home insurance. Those things add up to safety and security on your property.
How much homeowners insurance should I have?
If you live in an area with higher crime, you may want a policy with a lower deductible that covers vandalism and theft. Likewise, if you live in an area with erratic storms, flooding or wildfires, you may want to pay for extra policies for better financial protection.
You need to weigh your financial goals against the covered loss you can afford.
Which areas aren’t protected by most homeowners insurance?
As discussed up above, most homeowners insurance policies won’t cover damage caused by neglect or maintenance issues. This can include damage caused by termites, rodents, birds and other pests.
Does homeowners insurance cover mold?
Mold is rarely covered under most homeowners insurance policies, unless the damage caused by it falls under a covered peril. Mold caused by neglect or general wear and tear typically won’t be covered, but a claim could possibly be made if it was caused by a burst water pipe, as that would fall under dwelling coverage.
The Bottom Line
Homeowners insurance is a type of safety net that covers you and your lender against financial loss. While it may add another payment to your monthly expenses, it's crucial to keep in mind that your home is a significant investment that must be protected if you’re to maintain your financial security. Research insurance rates and collect homeowners insurance quotes to find the best policy for you.
You can learn more about buying a home at the Rocket Mortgage® Learning Center.
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