Learn more about what homeowners insurance covers and how to find the right policy for you
Homeowners insurance is the policy you take out that’s specifically designed to protect your finances in case your home is damaged, robbed, or if there’s some kind of emergency on your property.
While generally mandatory to close on a new home, homeowner’s insurance is a good investment for any new buyer, no matter if it’s required or not.
Protecting your home and property may seem excessive until disaster strikes. But in the wake of a natural disaster or other covered damage, homeowners insurance gives you peace of mind. It can make a world of difference to your financial and emotional health, making it much more than a homebuying afterthought.
So, do you really need homeowners insurance? And if so, what degree of coverage can you expect? How much can you expect to pay? We’ll cover all of those questions and more in this guide to homeowners insurance.
In this article
Key takeaways
- Homeowners insurance is usually required for homebuyers when a loan is involved
Even if you’re paying out-of-pocket for your new home, it’s a good idea to purchase a policy that can protect your assets in the case of natural disaster, theft, medical and legal liability, or other covered damages.
- Homeowners insurance won’t cover every potential disaster
If you live in an area prone to tornadoes, earthquakes, or hurricanes, it could be a smart move to purchase add-on coverage for any potential issues that could arise in the future. While no insurance policy covers everything, it’s a good idea to cover any high-risk categories upfront.
- There are a few different levels of homeowner’s insurance
Most experts recommend selecting a guaranteed replacement option, but the final decision is up to you.
- The cost of your homeowners insurance plan may vary depending on your home’s condition, location, and other factors
Compare different company policies head-to-head before making a final decision.
What is homeowners insurance?
Homeowner’s insurance is designed to protect you and your property in the case of policy-covered damages. These damages may include fire, storms, theft, or water damage but may vary from policy to policy. Most policies also cover third-party injuries that occur on your property, replacement of home systems that are damaged in covered events, and stolen property expenses—if the theft occurred at your home.
If you’re ever the victim of a natural disaster or robbery, homeowners insurance can sweep in to save the day. Its main purpose is to make it easier for you to repair your house and replace any lost personal belongings, in addition to removing your liability for legal or medical expenses incurred on your property.
Do you need homeowners insurance?
Homeowners insurance is not legally required by any government or state entity. But if you take out a mortgage to purchase your home, your lender will most likely require you to insure your home. This homeowners insurance requirement is meant to help your mortgage lender avoid unnecessary risk and protect the investment. It also serves the same purpose for you as a homeowner.
No matter what type of home you buy—condominium, townhome, or even mobile home—you’ll probably be required to purchase homeowners insurance. But even if you inherit a home or buy a home outright, it’s always a good idea to cover your assets. That way, in the case of a natural disaster or other unforeseen event, you won’t have to pay entirely out of pocket. That reassurance alone makes homeowners insurance a must for nearly any homebuyer, whether having a policy is required or not.
Standard inclusions in homeowners insurance
As you explore different homeowners insurance policies, you may notice some similarities. So, what are the standard inclusions in homeowners insurance? What kind of coverage can you expect when purchasing a homeowners insurance policy? Part of the answer will depend on what kind of coverage you choose and the kind of property you’re buying, but some standard inclusions are:
Dwelling coverage
The main thing you want homeowners insurance to cover is your home itself. You will need a policy that covers the cost of rebuilding your home. That way, you’re prepared even in the worst of circumstances.
Personal liability coverage
Liability coverage takes care of any medical or legal expenses incurred on your property. Examples could include dog bites or slip-and-falls. Either way, it’s wise to take out a policy that at least covers the value of your net worth to protect yourself in case of a lawsuit. If you have a swimming pool or host events or parties that could increase the probability of injuries occurring on your property, you may want to invest in a more comprehensive liability coverage plan.
Personal property coverage
Your home likely isn’t the only valuable asset you keep on your property. Laptops, sports equipment, and vehicles are all belongings you keep on your property that could be damaged alongside your home itself. To determine how much personal property coverage you should have, it’s smart to perform a thorough inventory of your belongings. While documentation of inventory can be useful when making a claim, it’s also handy when setting your coverage limit.
Other structures coverage
For some homeowners, their house isn’t the only structure located on their property. Detached garages, barns, and storage sheds may not be covered under dwelling coverage, but they can be covered as “other structures”.
Living expenses coverage
In the event your home does need to be repaired or rebuilt for covered reasons, your homeowners insurance generally also includes loss-of-use coverage, or living expenses coverage. Loss-of-use coverage helps you pay for rent, food, and other costs associated with your temporary displacement.
Add-on coverage options
Homeowners insurance policies can be as personalized as you want them to be. If you live in an area prone to floods, earthquakes, or hurricanes, it could be a good idea (or even a requirement) to invest in a specific storm policy. You can search for providers and plans in your area that best help to protect against specific risks. These add-ons could include water backup coverage, identity fraud coverage, or service line protection. The add-on options you choose will depend on your home itself, its location, and its risk level.
What’s not included in homeowners insurance?
There are some issues that simply aren’t covered by homeowners insurance. It’s important to know which events are and aren’t covered when you purchase a plan. Some items typically not included in homeowners insurance policies are:
- Nuclear damage
- Earthquakes
- Damage related to war or governmental instability
- Homeowner neglect
- Mold or animal infestations
You can choose add-on plans with some items on this list but not all of them. Focus on controlling the most likely risks at hand and you shouldn’t have any issues.
A guide to homeowner’s insurance coverage levels
The extent of your homeowners insurance coverage will likely correlate very closely with the price of your insurance. In other words, the more expensive plans tend to be the most comprehensive ones.
There are several different tiers of homeowners insurance in the US. Depending on the kind of residence you’re seeking coverage for and the protection strength you need, you will choose from insurance types that are designated HO-1 through HO-8.
In simpler terms, there are three main levels of coverage you’ll be looking at as you explore homeowners insurance policies:
Actual cash value
This kind of policy covers the cost of the house, in addition to the cost of your belongings. However, it’s important to note your possessions will be valued at their current worth, not their original prices.
Replacement cost
Replacement cost covers the actual cash value of your home and possessions before depreciation, or at their original cash value.
Guaranteed replacement value
Guaranteed replacement covers repairs of any cost, meaning it can cover more than the value of your home and assets (up to a certain extent). There are plenty of advantages of guaranteed replacement. The cushion is worth it for some homeowners, but it is a more expensive option.
How much does homeowners insurance cost?
In 2022, according to Bankrate, the national average cost of dwelling coverage for a $250,000 home was $1,393 per year. That number will be subject to change depending on inflation levels, the location of your home, and other factors that only your insurance provider will be able to tell you.
Areas that are prone to natural disasters or high building costs can expect higher rates. For example, states like Oklahoma and Kansas, which are prone to tornadoes and other natural disasters, have higher average annual premiums than low-risk states. Each home insurance provider also uses its own rating system, which means your premium cost could vary significantly from provider to provider. The year your home was built and its construction quality are also factors that will be taken into consideration.
Ways to reduce cost of homeowners insurance
If you are worried about the potential high cost of homeowners insurance, there are some ways you can reduce your premium. Some of the best ways to lower your premium include upgrading your home to make it more resilient to natural disasters and burglary.
A home security system and deadbolt locks can help you save money on premiums. Ensuring your home is in good condition and doesn’t need any repairs can also reduce your risk of storm damage and other hazards. Finally, sticking with the same insurer for years or increasing your deductible are two ways you can pay less for your homeowners insurance.
When to buy homeowner’s insurance
You’ll need to start shopping for homeowners insurance in order to close on most homes. Your lender may provide you with a referral, but it’s in your best interest to do your due diligence and compare different policies from different providers. Once you find a policy and provider that fits your needs and meets your lender’s requirements, it’s time to sign on the dotted line and close on your home.
Your new insurance provider will typically pre-approve your policy request and send over confirmation of coverage before your final closing date. Then, you can move into your new home with peace of mind.
Tips for purchasing homeowner’s insurance
If rates are a concern for you, some insurance companies will offer discounts depending on your situation. Many insurers offer homeowners and automobile insurance bundles. Also, first time buyers and new customers are often eligible for discount offers. As discussed above, burglary-proofing and upgrading your home can also make a difference.
Many insurance companies provide online calculators that estimate rates, allowing you to compare coverage and fees quickly and efficiently. But that doesn’t mean you should always go with the cheapest option. You want an insurance company that will stick around in the long-term. If your provider goes out of business, that could spell trouble for you and your homeowners insurance policy. It’s also important to go with a responsive insurance company. The last thing you want in case of a disaster is an uncommunicative provider that drags its feet in processing claims.
Wrapping up
How much money do you really need to buy a house? That depends on a variety of factors, including how much your down payment and closing costs are. But there’s another set of factors first-time buyers rarely take into consideration, like moving expenses and the cost of homeowners insurance.
Homeowners insurance, even when not required, is one of the most valuable investments you can make in your new home. The last thing you want is to watch your property value plummet after a disaster or accident. Homeowners insurance is your first-line safeguard against unexpected disasters and theft. Now that you have a better understanding of what homeowners insurance covers and how it works, you’re prepared to bring your homebuying process to a reassuring close.
FAQs
What type of insurance should a homeowner have?
Most professionals recommend purchasing guaranteed replacement coverage. You’ll pay a bit more annually but will see big returns in the event you ever do need to make a claim. However, the exact insurance package you choose is up to you and your needs.
What are the three main things homeowners insurance covers?
When purchasing homeowners insurance, you should always ensure your policy includes dwelling coverage, personal property coverage, and personal liability coverage. Depending on where your new home is, you may also want or be required to purchase specific add-ons, like earthquake insurance.
What is most important for homeowners insurance?
In addition to ensuring the three main coverage items listed above and any desired add-ons, you should ensure your policy fits your needs. If you’re a public figure with a high net worth, for instance, you’ll need more coverage than the average Joe.
About the author
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By day, Celita Summa is a Florida-based freelance writer specializing in real estate, technology, sustainability, and a plethora of other topics. By night, Celita can be found developing her talents, which include her black belt in karate, her fluent Italian, and her knack for vegan cooking.
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