Dad holding children in home with homeowners insurance

Homeowners Insurance: What It Is, Cost And Coverage

Katie Ziraldo11-minute read

November 19, 2021

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When disaster strikes, it’s crucial that you’re protected, especially when it comes to your largest investment. 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. 

Homeowners 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 the insurance before they agree to release your funds.

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 gain a better understanding of the kind of protection that’s at your disposal.

What Is Homeowners Insurance?

Homeowners 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.

Mortgage lenders require you to get homeowners insurance when you get a loan 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.

Types Of Damage Covered

Homeowners insurance covers two main types of damages: dwelling and liability.

  • Dwelling coverage protects you against damage to your home. For example, if your roof is destroyed in a fire, dwelling coverage foots the bill.
  • Liability coverage protects you against lawsuits brought against you. For example, if someone is injured on your property and sues you, liability insurance would pay for your lawyer and any court-ordered fees.

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
  • Theft

In general, higher insurance coverage and policy limits come with higher pricing.

Policy Types

Homeowners insurance policies are typically either replacement cost policies or actual cash value policies. 

Let's break these down.

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 and guaranteed. Standard will pay out what you paid for the item with inflation factored in. 

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 appreciated.

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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 include:

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. This can be especially comforting if you also have an emergency fund with at least enough money to cover your deductible.

How Much Does Homeowners Insurance Cost?

It’s impossible to say exactly how much you’ll pay because every insurance company uses a different formula to calculate premiums. According to data from the Insurance Information Institute, we pay about $1,200 every year for homeowners insurance.

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 Homeowners Insurance Cost

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

Some insurance companies won't cover homes where certain dog breeds live. These can include pit bulls, German shepherds and rottweilers. 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 homeowners who have made claims in the past are more likely to have more claims in the future.

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Ways To Lower Your Home 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.

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

Remember, 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 that aren’t covered, like floods and earthquakes.
  • 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 and 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.

Liability Coverage

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.

Lawsuits and claims against your property: 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 average around $37,000, 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. Like we mentioned above, your homeowners insurance may not insure certain dog breeds or may restrict your coverage if you have a breed that’s deemed more aggressive. Some of the most restricted breeds include rottweilers, pit bulls and German shepherds. Other insurance companies go on a case-by-case basis. If your dog bites someone, you can probably expect to see your premium increase.

You may be able to lower your premium by taking steps to show that your dog isn’t a danger to the insurer. Some insurance companies will loosen their breed restrictions if your dog completes obedience school. You can also get a certificate from your dog's veterinarian confirming your dog’s unlikeliness to bite.

What Isn’t Covered By Homeowners Insurance?

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.

Earth Movements

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.

Water Damage

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. But, flood damage is also not covered, so if you live in a flood zone, you may want to get separate flood insurance.

Neglect

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.

How Much Home Insurance Should I Have?

The answer to this, like many questions in life, is: it depends. 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 the financial protection. 

You need to weigh your financial goals against the covered loss you can stand.

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 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. As the old saying goes, it's better to have it and not need it than to need it and not have it.

How To Find The Right Homeowners Insurance Policy For You

Mortgage holders need to get homeowners insurance, but not every policy is built the same. Before picking an insurer, do some research to find the plan that makes the most sense for you and your home. Speak with a few insurance agents and understand the difference between home insurance quotes.

Shop Around

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?

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.

Take Inventory

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

For most of us, our house is our biggest and most valuable asset. It’s our shelter – our place to be safe and to call home. And for that reason, we want to keep it protected when disaster strikes. Homeowners insurance is a necessary way for us to keep our homes safe from the unpredictable.

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. So, you begin the search for a company that can better meet your custom insurance needs.

Making the Switch

Whatever your reason is for switching, you’ll want to make this transition in the right way. Let’s take a moment, from the perspective of a Rocket Mortgage client, to go through the steps of changing your insurance carrier.

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 cancelled. Don’t belabor this one – just rip it off like a bandage. Call your current insurer and break the bad news.

Refund the Refund

If your old policy hasn’t ended when you cancel, you may receive a refund check from your now-previous carrier. Before you run to the mall and splurge on your wish list, take a few deep breaths and send that fully endorsed check to Rocket Mortgage.

Whoa, whoa, whoa! But that’s your refund! At a first glance, this can seem confusing. Let’s take a second to break down what’s really happening with this refund and how Rocket Mortgage is involved in the process.

When you get a mortgage with Rocket Mortgage, most clients have something called an escrow account. This is an account that’s set up by your mortgage lender. Rocket Mortgage, as a service to you, will pay your yearly homeowners insurance policy upfront. You’ll pay it back on a monthly basis as part of your regular mortgage payment. This way, your payments are more manageable.

But what does this have to do with your refund? Let’s say your yearly policy costs $1200. Rocket Mortgage pays that upfront, and you’ll pay in monthly increments of $100 as part of your escrow account. After three months (during which you paid $300 for homeowners insurance), you decide to change insurance companies, meaning you receive a refund from your previous carrier. Since you’ve only had the policy for three months, you will receive a refund for nine months of insurance payments ($900).

Beware the Escrow Shortage

If you change homeowners insurance companies, Rocket Mortgage will again pay for your policy upfront. But if you didn’t send Rocket Mortgage the refunded check from your previous policy, you’ll 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.

This is why sending your fully endorsed refund check to Rocket Mortgage is usually easier. If you prefer, you can send a personal check for the amount of the refund you received instead.

The Bottom Line

Homeowners insurance isn’t required by law like car insurance. However, your mortgage lender will more than likely require you buy insurance before they agree to give you a loan. Homeowners insurance is a type of safety net that covers you and your lender against financial loss. 

While it may be a drag to 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 are to maintain your financial security. Research insurance rates and collect homeowners insurance quotes because pricing and coverage options can vary among  companies.

For more tips and information about buying a home, check out the Rocket Mortgage® Learning Center.

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Katie Ziraldo Headshot

Katie Ziraldo

Katie Ziraldo is a writer focused on financial learning for current and future homeowners. She found her love of writing through her experience working with various newspapers, such as the Detroit Free Press. Her financial literacy stems from her four years as a Recruiter, when she learned the details of every role in the mortgage process. As a writer, she uses that knowledge to create relevant content for homeowners to help them reach their goals.