Homeowners insurance can protect your home and belongings from theft, damage and destruction. Read on to learn how it works.
Homeowners insurance — also called home
insurance — is a type of property coverage that pays to repair or replace your
home and belongings if they are damaged, stolen or destroyed. It also provides
personal liability protection for legal and medical payments if someone is
injured at your home or you damage their personal property.
Typically required by mortgage lenders, a homeowners insurance policy is a solid investment and essential for most homeowners. Read on to learn the basics of homeowners insurance and see how you can protect your home and family with a policy.
How does homeowners insurance work?
Standard homeowners insurance policies provide
a range of protections, divided into these categories:
·
Dwelling
and other structures: Home
insurance pays to repair or rebuild your home if it is damaged or destroyed by
a list of covered incidents such as fire, burglary or lightning. This coverage
can also extend to other structures on your property, including detached
garages, tool sheds and swimming pools.
·
·
Personal
property: Homeowners
insurance policies also pay to repair or replace belongings, such as your
jewelry, clothing and furniture, if they are damaged, destroyed or stolen. You
may also purchase extended coverage for expensive items.
·
·
Liability: If you or a family member living in your
home are responsible for property damage or injury, your policy can help foot
the bill for medical bills and legal fees. For example, this coverage could
apply to your dog biting a neighbor or a friend slipping and breaking an arm on
your front steps.
·
·
Additional
living expenses: Also called loss
of use coverage, additional living expenses (ALE) coverage applies when your
home is unlivable due to a covered loss. In this case, your policy will pay for
expenses such as housing and food while your home is being repaired or rebuilt.
·
A homeowners insurance policy is an agreement
between you and an insurance company in which you pay monthly or annual
premiums in exchange for coverage. When you purchase a policy, you agree to a
set of established coverage limits (the amounts of coverage that may be paid
out for claims) and deductibles (the amounts you will pay out of pocket when
claims arise before your coverage kicks in).
In most cases, dwelling coverage limits are
equal to the total cost of rebuilding your home, with other structures and
additional living expense limits totaling around 10% of the home’s dwelling
coverage limit. Personal property coverage limits typically equal around 50% of
the dwelling coverage limit and can often be extended with additional coverage
for costly items such as fine jewelry, collectibles or artwork.
Most homeowners policies provide a minimum of
$100,000 in liability coverage, with the option to increase coverage limits for
added financial protection. Home insurance companies also offer policy
endorsements, allowing you to customize your policy with added coverages
ranging from identity theft prevention to sewage and sump pump overflow
protection.
Policy endorsements can vary based on the
provider you choose and where you live. We at the Home Media reviews team have
evaluated dozens of home insurance companies,
breaking down their standard policies and optional add-ons to help you compare
coverage.
What does homeowners insurance cover?
Most homeowners purchase an HO-3 policy, also
called a special form home insurance policy. With an HO-3 policy, your home’s
structure is protected against open perils, meaning everything except a short
list of perils — including wear and tear, government actions and vandalism in
vacant dwellings — is covered.
This type of policy covers your personal
belongings from the 16 named perils below:
·
Accidental AC,
plumbing or heating overflow
·
Burning, cracking or
tearing of water heater
·
Damage caused by an
aircraft
·
Damage caused by a
vehicle
·
Damage caused by an
electrical current
·
Explosions
·
Falling objects
·
Fire or lightning
·
Frozen pipes
·
Hail or windstorms
·
Riots
·
Smoke
·
Theft
·
Vandalism
·
Volcanic eruption
·
Weight of ice, snow or
sleet
What doesn’t homeowners insurance cover?
Home insurance policies typically exclude
“acts of God,” such as natural disasters and “acts of war.” One of the most
common exclusions of homeowners insurance that can lead to costly home damage
is flooding.
While standard homeowners insurance does not
cover damage from floods, you can purchase a flood policy through the National
Flood Insurance Program (NFIP) or via a private insurer such as Allstate if you live in
a high-risk area prone to floods.
You can also purchase an individual earthquake
insurance plan or policy endorsement from some home insurance companies.
Some consumers confuse homeowners insurance
with home warranties. Home warranty companies cover
your home’s major systems and appliances when they break down. It includes
damage from general wear and tear, which homeowners insurance does not cover.
What are the types of homeowners insurance coverage?
Depending on your policy needs and budget, you
can choose from the following types of home insurance coverage:
·
Actual
cash value: Actual cash
value coverage pays to replace your home or possessions after factoring in
depreciation, which can leave you with a lower claim payout.
·
Replacement
cost: Replacement cost
coverage does not account for depreciation or inflation, allowing you to
replace your home and belongings with comparable new ones.
·
Guaranteed
replacement: Also called extended
replacement, this coverage shields you against inflation, paying whatever it
costs to replace your home, up to a specific limit, even if it exceeds the
amount of coverage you purchased.
Some homeowners insurance companies offer
replacement cost as a standard coverage, while others require you to upgrade
your policy to access it. While replacement cost coverage may be more expensive
than actual cash value, it can be a wise investment if the premiums work with
your budget.
Is homeowners insurance required?
Homeowners insurance is not required by law,
but nearly all mortgage lenders mandate it.
Just as landlords require tenants to maintain
a renters insurance policy
with a minimum amount of personal liability coverage, mortgage lenders require
borrowers to show proof of a homeowners policy. Lenders typically require you
to carry at least 100% of your home’s replacement cost.
The replacement cost is the amount of money
required to rebuild your home with comparable building materials. To arrive at
this figure, your insurance company will consider the home’s square footage,
roofing and siding materials, age, architectural style, layout and more.
What does homeowners insurance cost?
The average cost of homeowners insurance in
the United States is $1,249 per year, according to 2018 data from a 2021 study
by the Insurance Information Institute.
However, homeowners insurance costs can vary drastically based on various
factors.
When you apply for a homeowners insurance
policy, the insurance company will ask a series of questions and reference data
points to determine the level of risk involved in insuring you.
The company will consider the following
factors to establish the likelihood of you filing a claim and determine the
appropriate cost of coverage:
·
Where
you live: Your location
plays a significant role in determining home insurance costs. Homeowners rates
fluctuate across different states and cities, with metropolitan areas seeing
the highest rates, on average. Providers will consider local construction
costs, crime rates and weather-related perils in your area.
·
Your
credit history: Having a good
credit score (580 or higher) suggests to insurers that you are less likely to
file a claim, and it can result in lower home insurance premiums. When you
apply for a policy, the company may run a soft credit check to verify your
credit history, which does not impact your credit score.
·
Your
claims history: Similar to your credit
history, your home insurance claims history can give insurers an idea of your
likelihood to file future claims. The fewer claims you’ve filed in the past,
the lower the home insurance premiums you can expect to pay.
·
Replacement
cost: One of the most
significant determining factors for home insurance is replacement cost. When
you apply for a home insurance quote, you can expect to answer questions about
your home’s age, construction and condition, which all help the company
determine a value for its replacement cost.
·
The
roof: Roof problems can lead
to expensive damage to your home’s structure and interior. Home insurance rates
can be affected by the materials used to build your roof, as well as the year
it was built or replaced. Some companies provide discounts for fire- and
impact-resistant roofing.
·
Age: Older homes are typically more expensive
to insure because they are harder to replace. Construction materials and
methods, as well as electrical wiring and plumbing, change with time.
·
Home
security: Anything you can
do to reduce the risk of filing a claim, including installing home security
features, can help lower your home insurance premiums. If you arm your house
with burglar alarms, fire alarms, sprinklers or deadbolts, it could earn you
lower rates.
·
Your
policy’s structure: The
policy limits, deductible and whether you opt for actual cash value or
replacement cost can significantly impact the cost of coverage. For example, if
you choose a higher deductible level, you could pay less in monthly premiums,
but you’ll need to pay more out of pocket on a claim. Extending coverage on
personal property and adding other endorsements to your policy can also
increase premiums.
·
Your
pets: Owning a dog could
also impact your home insurance premiums, especially if your furry friend has a
history of biting or is considered at a higher risk of hurting someone based on
its breed. Restricted dog breeds vary by state and insurer, but pit bulls, chow
chows and German shepherds are a few common breeds that can lead to a higher
premium or exclusion from full liability coverage.
·
Discounts: Homeowners insurance companies offer a
range of diverse discounts to homeowners policyholders. For instance, you may
be able to unlock significant savings by bundling your home insurance with an
auto insurance policy with larger companies that offer multiple lines of
insurance products.
·
Pools
and trampolines: Both of these
structures come with an added risk of injury, which can lead to elevated costs
for liability insurance if they’re on your property.
·
Renovating
your home: Renovations and
remodels can alter the replacement cost of your home and impact rates. If
you’re considering a renovation project, consider the cost of different
building materials and how costly they might be to replicate.
·
What
company you choose: Not all
homeowners insurance companies are created equally. Some providers may be more
competitively priced than others based on your area, home and coverage needs.
How do I choose a home insurance company?
When you start shopping for a homeowners
insurance policy, it’s essential to do your homework As you compare homeowners
companies yourself, follow these steps:
1.
Read
customer reviews: Reviews from
policyholders can give valuable insight into how a company interacts with
customers, processes claims and responds to complaints. You can find customer
reviews on platforms such as the Better Business Bureau, Trustpilot and Google.
2.
Check
third-party ratings: Ratings are
another crucial indicator of a homeowners insurance company’s reputation.
Agencies such as AM Best provide ratings based on a company’s financial
standing and its likelihood of paying out claims. Additionally, the annual J.D.
Power home insurance survey scores the nation’s top providers based on overall
customer satisfaction.
3.
Review
coverage options: Look
at the basic coverage and endorsements offered by different providers to narrow
down the list of companies you’re comparing. You may find that one company
stands out among the competition and has endorsements that fit your unique
situation well.
4.
Evaluate
the claims process: As
you read consumer reviews and analyze the company’s website, take a look at the
claims process. Is it straightforward? Does the company state an average
turnaround time? What do current policyholders have to say about their claims
experiences?
5.
Talk
to an agent: If you have
questions about the coverage, claims process or quotes, most homeowners
insurance companies have a team of accessible agents who can answer your
questions. You can also reach out to an independent insurance agent who is not
tied to any one company during your comparison process.
6.
Compare
quotes: The best way to see
what rates and coverage you’re eligible for is to compare quotes. The quotes
process can vary among providers, with some asking for only minimal information
and others requiring your Social Security number. We always recommend getting
quotes from at least three providers. That way, you can lock in the lowest
rates possible and choose the best provider for your needs.
