What is homeowners insurance?

In a nutshell

Homeowners insurance is a type of property insurance that provides a way for you to protect your house, which is likely your most valuable asset.

  • Homeowners insurance is like other kinds of insurance in that you pay premiums for coverage, and in case you need to file a claim, you may pay a deductible.
  • A peril is the kind of damage against which insurance protects you. Some different kinds of policies cover different kinds of perils including natural disasters, legal liability and theft.
  • The cost of homeowners insurance depends on several variables including your home’s location, how much coverage you want and additional riders you may choose.

How does homeowners insurance work?

As with other insurance coverage, you pay a monthly premium. The insurance provider then agrees to cover certain costs that might be associated with damage to your home, the furniture, and other house contents. Homeowners insurance can also help you cover costs if someone is injured on your property and needs medical attention.

In general, home insurance providers complete risk assessments to determine how likely your home will suffer damage or need replacement. Your monthly premium is based on that assessment and the likelihood that the insurer will be required to pay a claim.

It’s essential to understand your deductible and limits. Most policies come with a deductible and limits to coverage.

What is a deductible?

The deductible is the amount you pay out of pocket before the insurer pays a claim. For example, if you have a deductible of $1,000 and your home sustains $10,000 in damage by a thunderstorm, you will pay $1,000 first, and the insurer will cover the remaining $9,000.

What is a limit?

Many homeowners insurance policies come with limits. For example, you might have liability coverage covering medical bills for those injured on your property up to $100,000. You might have to pay the additional amount if the medical bills exceed that amount.

Most mortgage lenders require you to pay for a policy as a condition. They want to know that if the home is destroyed, it will likely be replaced, and you’ll still be able to afford mortgage payments.

What does homeowners insurance cover?

In general, homeowners insurance covers:

  • Damage to the interior and exterior of the home by certain events.
  • The cost to replace personal items inside the home.
  • Injuries to those visiting the property.

Depending on the policy, you’ll likely be covered in natural disasters like fire and lightning, windstorms, hail, weight of ice, and volcanic eruption. Additionally, theft, vandalism, falling objects (including aircraft), and damage from heating and water systems inside the home are usually covered. Even damage caused by riots and other issues can be covered with insurance.

What is excluded from homeowners insurance?

It’s important to note that not everything is covered, especially in certain areas. For example, your policy might not cover:

  • Earthquakes.
  • Tornados.
  • Hurricanes.
  • Flooding and rising groundwater.
  • Terrorism.

You might need extra insurance to cover these events, depending on the situation. Additionally, not all items on your property are covered. If you have certain dog breeds, you might need extra coverage to cover liability from bites. Some items, like trampolines and pools, also come with added costs for insurance coverage.

Levels of homeowners insurance coverage

The Insurance Information Institute cites three different levels of coverage for homeowners insurance:

  1. Actual cash value: Covers the cash value of items in the home or the home’s value at the time of the disaster, minus depreciation.
  2. Replacement cost: Covers the cost of replacing the home and your possessions and doesn’t account for depreciation.
  3. Guaranteed replacement cost: This is the highest level of protection. You don’t have to worry about the total cost of replacing your home even if the costs are beyond your policy limits.

Each type of coverage comes with a different premium. However, if you’re concerned about increasing construction costs, guaranteed replacement cost might be worth the higher premium.

How much does homeowners insurance cost?

The national average cost of homeowners insurance is about $146 a month, according to a December 2023 analysis from Policy Genius. However, the actual cost of your policy will depend on these factors:

  • Coverage amount: The amount of your policy limit (including the cost to repair or replace your home) and your liability limits, affects the cost of your homeowners insurance. Additionally, whether you get guaranteed replacement cost coverage instead of a less comprehensive policy can make a difference.
  • Location: Where you live matters in all insurance calculations. Certain areas come with higher costs. For example, someone living in Idaho might pay $105 per month for coverage, while someone in Florida pays on average $191 per month. Cities are generally more expensive than suburbs, and places prone to natural disasters (like hurricanes) are more expensive than places where natural disasters are rare.
  • Additional coverage and riders: You might need to buy riders for different situations, such as having a home office or owning a specific dog breed. If you live in an area prone to floods, buying flood insurance can make sense — and increase the cost of your homeowners insurance.
  • Bundles: One way to reduce the cost of your homeowners insurance is to bundle it with other coverage. Some insurers, like State Farm and Allstate, will give you an overall discount if you get homeowners insurance along with car and life insurance coverage. Ask for bundling discounts when you shop around for homeowners insurance.

When shopping for a home, you should consider including the cost of homeowners insurance in your calculations.

When should you get homeowners insurance?

If you have a mortgage on your home, there’s a good chance you’ll be required to carry homeowners insurance the entire time you have a mortgage.

However, even without a mortgage, it can make sense to get insurance coverage. If you’re concerned about the high cost of replacing your home if it’s destroyed in a disaster, insurance can help. By paying a relatively small monthly premium, you can access help from the insurer to cover the costs of repairing or replacing your home.

Additionally, if you’re concerned that people might get hurt on your property, carrying homeowners insurance can help buffer you from the financial impacts of being sued. Carefully consider the level of coverage you need to ensure that your finances are better protected.

Frequently asked questions (FAQs)

Is homeowners insurance required?

Many mortgage lenders require you to get homeowners insurance. Depending on where you live, there might be other entities that require you to purchase homeowners insurance.

Why do mortgage lenders require homeowners insurance?

In general, mortgage lenders worry that if you can’t cover the cost to repair or rebuild your home, you’ll default on your loan and they won’t have the loan repaid.

Is home insurance worth it?

Home insurance can be worth it for your peace of mind. Additionally, it might be worth it if you experience a significant event that damages your home and need a way to repair or replace it.

When does homeowners insurance payout?

Generally, the insurer will payout if your claim meets the requirements and your deductible has been met. However, you usually need to have an inspector come to determine the cost of repair or replacement.

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