- Homeowners insurance primarily protects your home and personal belongings.
- If your home is damaged and unlivable, temporary housing costs can be covered.
- Damage to your home must be caused by an insurance peril to be covered.
Homeowners insurance protects your dwelling and personal property and offers liability coverage. Unlike car insurance, homeowners insurance is not required by law. However, if you have a mortgage, your lender will require homeowners insurance to protect its investment.
Understanding Homeowners Insurance
Homeowners insurance is an investment for peace of mind to safeguard your home. According to the Harvard Joint Center for Housing Studies, only 12% of homeowners did not have homeowners insurance in 2022. So if you don't already have homeowners insurance, here's why you should look into it.
What Is Homeowners Insurance and Why Is It Important?
Homeowners insurance protects your dwelling and your personal belongings and offers personal liability coverage for injuries that happen on your property.
For instance, if the mailman slips and falls on your sidewalk, the dog bites a guest, or the neighbor's kid injures himself in your swimming pool, homeowners insurance will pay for all or some of the legal and medical bills.
Additionally, if you are forced out of your home due to damage, homeowners insurance offers "loss of use," also known as additional living expenses, to help with temporary housing or relocation costs.
How Home Insurance Protects Your Home and Belongings
If a storm damages your roof, a fire breaks out, or someone breaks into your home, your homeowners insurance policy can help cover the cost of repairs or replacements. It also covers your personal belongings and provides liability protection if someone gets hurt on your property.
Without insurance, you'd have to cover these costs out of pocket, which could be financially devastating.
Types of Home Insurance
There are eight types of homeowners policies based on your home type. If you have a mortgage, your lender may prefer the type of coverage necessary to secure the home loan. Therefore, it is best to talk to your agent and lender to ensure proper coverage.
Additionally, some condominium associations will have by-laws rules about minimum homeowners insurance coverage coverage.
Here are the different types of policies and what each covers:
| Policy | Dwelling | Liability | Belongings | Peril Type |
| HO-1: Basic* | Yes | No | No | Named |
| HO-2: Broad* | Yes | No | Yes | Named |
| HO-3: Special | Yes | Yes | Yes | Open/Named |
| HO-4: Renters | No | Yes | Yes | Named |
| HO-5: Comprehensive** | Yes | Yes | Yes | Open |
| HO-6:Condo/Co-op | Yes*** | Yes | Yes | Named |
| HO-7: Mobile Homes | Yes | Yes | Yes | Open/Named |
| HO-8: Older homes | Yes | Yes | Yes | Named |
What Homeowners Insurance Does and Doesn't Cover
Homeowners insurance covers damage to your dwelling and personal belongings, plus liability and additional living costs caused by a covered peril.
Here are the types of perils that are typically covered by homeowners insurance:
- Fire and smoke
- Theft
- Lightning strikes
- Windstorms
- Hail
- Explosion
- Vandalism
- Damage from an aircraft or vehicle
- Theft
- Falling objects
- Weight of ice, snow, or sleet
- Water damage
And here are the common exclusions to be aware of:
- Flood damage
- Earthquakes
- Mold
- Wear and tear
- Maintenance issues
- Pest infestations
- Government action
- War-related damage
- Nuclear accidents
Key Homeowners Insurance Terms You Should Know
Deductible
The deductible is the amount you must pay before your insurance covers a claim. A smaller deductible, such as $500 or $1,000, will typically lead to a higher premium. If you have enough savings to cover a larger deductible without financial strain, choosing a higher deductible amount can lower your monthly premium. But if you can't shoulder a large amount upfront, you may want to go with a lower deductible.
Peril
A peril is any risk that results in a loss of your home or belongings, such as wind, fire, hail, and theft. There are two types of perils: named perils and open perils.
Named perils are damages listed in your policy. A homeowners insurance policy has 16 named perils. A few common perils are fire, theft, and windstorm.
Whereas with open perils, your insurance policy will cover every peril except the listed exclusions in your policy.
Dwelling Coverage
Dwelling coverage covers the cost of repairing or rebuilding the structure of your home. The cost of your dwelling coverage will depend on factors like the size and age of your home and its location. For example, homes in areas prone to natural disasters like wildfires often cost more to insure.
Replacement Cost vs. Actual Cash Value
Replacement cost coverage pays to rebuild or repair your home and replace your belongings at today's prices (without accounting for depreciation). On the other hand, actual cash value only reimburses you for what your property is worth now, which means it'll factor in wear and tear.
Though actual cash value policies typically have lower premiums, you may risk paying significant out-of-pocket costs after a loss. That's why replacement cost coverage is usually the better choice.
Loss of Use Coverage
Loss of use coverage covers the cost of relocating while your property is unsafe to live in or is being rebuilt. It could pay for hotel stays, food, etc. Loss of use coverage usually defaults to a percentage of your dwelling coverage limit, typically around 20% to 30%.
Hazard Insurance
Hazard insurance is a component of a standard homeowners insurance policy, meaning that when you purchase homeowners insurance, hazard coverage is included. It's essentially the same as the dwelling portion of your policy and only protects the structure of a home.
Contents Insurance (Personal Property Coverage)
Contents insurance is the part of your policy that helps pay to replace personal items damaged or stolen due to covered events. To calculate the right amount of coverage, you'll want to take an inventory of your belongings and estimate their total value. If you have high-value items like jewelry, art, or collectibles, you may need to buy additional coverage or schedule them separately.
Declaration Page
The declaration page is the page of your policy that includes information like the names of the insured, property address, coverage limits, deductible amounts, premium cost, and policy period. It also lists the types of coverage included in your policy, like dwelling, personal property, liability, and more. Contact your insurance provider for clarification if something looks off or if you don't understand a term.
How to Choose the Right Homeowners Insurance Policy
Here's what to keep in mind as you shop around for the best homeowners insurance for your needs.
Factors That Affect Your Homeowners Insurance Premium
The average HO-3 insurance policy, the most common type of homeowners insurance, costs $1,411. However, your
- Location: Expect higher premiums if you live in a natural disaster-prone area. For example, Florida has the highest average homeowners insurance premiums due to the risk that hurricanes pose each year.
- Home's age and condition: Older homes are typically more expensive to insure as they may need more repairs.
- Coverage amount: The higher the coverage limits, the more expensive the premiums.
- Deductible: Higher deductibles means that homeowners take on a greater responsibility for repair costs. As a result, home insurance providers can charge lower premiums.
- Credit History: Depending on where you live and your insurer, having a good credit score means you're more responsible and less of a risk. As a result, you can qualify for cheaper premiums.
How to Compare Home Insurance Quotes
When you're comparing home insurance quotes, remember that you shouldn't necessarily look for the most expensive or cheapest homeowners insurance.
Instead, focus on finding a service that provides the most cost-effective service, providing quality care and customer service at a price you can afford. Also, focus on claims and customer satisfaction rankings, like those from J.D. Power. This is especially important for those living in disaster-prone areas when good service can make all the difference.
Always compare home insurance quotes from various providers to see where you can get the best policy for the lowest premium.
When to Update Your Homeowners Insurance Policy
If you currently have homeowners insurance, review your policy coverage yearly. You'll want to update your policy if you've recently renovated your home, bought new furniture, or added safety features like a home security system. And if your homeowners insurance company hasn't provided the level of service you expected, maybe it's time for you to select a new provider.
Get Quotes
FAQs
What is homeowners insurance and why do I need it?
Homeowners insurance protects your home, belongings, and finances from damage, theft, and liability claims. Mortgage lenders often require it.
How does a deductible work in homeowners insurance?
A deductible is the amount you must pay before your insurance covers a claim. Choosing a higher deductible can lower your premium but increase out-of-pocket costs.
What is the difference between replacement cost and actual cash value?
The difference between replacement cost and actual cash value is that replacement cost covers the full cost to repair or replace damaged property, while actual cash value deducts for depreciation.
Does homeowners insurance cover all types of perils?
Homeowners insurance covers common perils like fire and theft but not floods or earthquakes. Additional coverage may be required for excluded events.
What is a homeowners insurance declaration page?
Homeowners insurance declaration page is a summary of your policy, including coverage limits, premium costs, and key details about what's protected.
