Homeowners insurance provides financial protection against losses and damage to your home and personal belongings by a covered peril, like fire, burglary, or a storm.
Homeowners insurance is crucial whether you own a home, mobile home, condominium, or live on a farm. First, it covers the physical structure and your personal belongings inside it. You’re also protected against the personal legal responsibility for injuries to other people or their property while they are in your home. Second, mortgage lenders require proof of homeowner’s insurance before issuing a mortgage.
There’s generally a lot to sift through when considering coverage, including what is and isn’t covered, how much protection you need, how your rate is calculated, and how to save on insurance premiums. Below, we answer some of the most common homeowners insurance questions.
- Homeowners insurance offers property protection to your home and personal belongings, and liability protection for claims made against you.
- The law doesn’t mandate homeowners insurance but you need an active policy if you’re financing your home with a mortgage.
- The amount of homeowners insurance you need depends on whether you choose to insure your home and belongings for either the actual cash value or replacement cost.
- Your insurer can cancel your homeowners' coverage during the policy term if you fail to abide by the conditions in your policy
What Does Homeowners Insurance Cover?
Broadly speaking, homeowners insurance provides two forms of coverage: property protection and liability protection. In general, property protection covers the physical structure of your home and your personal property inside it from damage caused by perils like fire, lightning, storms, smoke, explosions, theft or vandalism, riot, vehicles and aircraft, and falling objects. Common forms of property protection include:
- Dwelling coverage: Pays for any damage to your house and any structures attached to it, including decks and garages. Coverage also includes damage to plumbing, heating, air conditioning, and electrical wiring systems.
- Other structures: Covers the cost to repair or replace structures not attached to your house but still on your property. These include fences, detached garages, workshops, or guest cottages.
You may need additional coverage if you have multiple structures, rent out, or use any of them for your home business.
- Personal property coverage: Pays for the value of your possessions, including clothing, furniture, and appliances lost, damaged, or destroyed. Coverage may also extend to items that aren’t on your property, such as jewelry stored in an off-site storage safe. Personal property coverage reimburses you for the used value of the item and not its full value. Coverage for items like collectibles, art, jewelry, and other valuables may be limited, so you may need to buy a separate policy or raise your policy’s limits.
- Additional living expenses (ALE) or loss of use: Loss of use coverage reimburses you for any living expenses above what you normally spend if you temporarily move out of your house while it’s being repaired. Such expenses include meals, accommodations, or boarding costs for your pet.
In addition to property protection, homeowners insurance also provides liability protection for claims made against you by others. Common forms of liability protection include:
- Medical payments: Covers the medical bills of people who are injured on your property or harmed by your pets, in general. Proof of negligence isn’t required to compensate the injured person.
- Personal liability coverage: Protects you against claims of bodily injury and property damage to others for which you are legally responsible. This coverage may help pay medical bills, property damage, and legal expenses.
What’s Excluded From Coverage?
A standard homeowners insurance policy won’t protect against all types of risks. Most policies don’t cover damage from:
- Earthquakes or earth movement
- Wear and tear
- Termites, insects, or rodents
- Damage from backed-up water from sewers or drains
- Losses from your house being vacant for a certain number of days
You will need additional coverage to protect against the things homeowners insurance doesn’t cover. For instance, you may need to purchase a separate flood insurance policy through the National Flood Insurance Program (NFIP) to cover flood damage.
How Much Homeowners Insurance Do I Need?
The amount of homeowners insurance you need depends on how much it would cost you to replace your home. You may decide to insure your home and belongings for either the actual cash value (ACV) or replacement cost.
Actual cash value is the cost to repair or replace the structure less depreciation from age and wear and tear. The ACV offsets the loss but doesn’t reimburse you enough to fully repair or replace the damage. For instance, let’s say you bought a TV for $800 five years ago and a fire in your home destroys the TV. If you have ACV, then your insurer will pay you what the TV is worth now. If they believe it’s worth 40% of the TV’s original value, they will pay you $320.
Replacement cost is the cost to restore, replace, or repair damages using similar materials. You are reimbursed money to repair or replace your property at current prices; depreciation doesn’t play a role. Although the replacement cost may be higher than what you originally paid for the property, there’s a maximum dollar amount your insurer will pay.
Your insurer may not compensate you for a loss if you insure your house for less than 80% of its replacement cost. Some insurers require you to buy insurance for 100% of the replacement cost.
How Much Liability Protection Do I Need?
Liability protection insures against claims of bodily injury or property damage for which you’re legally liable. Liability coverage extends beyond your home to also cover personal liability and the associated court costs. Most homeowners insurance policies provide $300,000 in liability protection. An umbrella policy, which extends the coverage of other property and casualty insurance you own, may provide $1 million to $10 million in extra liability coverage.
Does Homeowners Insurance Have a Deductible?
Most homeowners insurance policies carry a deductible. A deductible is typically a fixed dollar amount or percentage you pay before the insurer pays your claim. For instance, if you make a $10,000 claim and your policy carries a $500 deductible, you only have to pay $500 and your insurer would pay the remaining $9,500 (assuming the claim is for a covered situation and claim limits don’t affect your claim).
Liability and medical payment coverage of homeowners insurance usually have no deductible.
Can my Insurer Cancel my Coverage During the Policy Term?
Yes. Your insurer can cancel your coverage during the policy term if you fail to abide by the conditions in your policy. Also, an insurance company can cancel your coverage for any reason within the first 60 days of you buying the policy but it must provide a notice explaining the grounds for cancellation.
After the 60 days, your insurer is only able to cancel your policy for the following reasons:
- You don’t pay your premium.
- You lied on your policy application.
- You commit reckless or willful actions that increase the hazard insured against.
- Your risk has changed substantially.
- You’re convicted of a crime that increases the chances of a claim.
- It’s determined that the continuation of coverage would violate or cause the insurer to violate insurance law.
You may get a refund on a portion of your premium if you or your insurer cancels the insurance policy.
Is Homeowners Insurance Required by Law?
The law doesn’t require you to have insurance on your home or personal property. However, if you finance your home, your mortgage lender will require you to have homeowners insurance to protect their financial interest in your property. If your policy is canceled, lapses, or isn’t up to your lender’s standards, your lender will buy a policy and pay for it using your escrow funds, known as “force-placed” insurance.
You may elect to forego homeowners insurance if you’re not financing your home. If you do, remember you risk having to cover all damages to your home out of your own pocket.
How Much Does Homeowners Insurance Cost?
The average nationwide premium for the typical homeowners insurance policy (“HO-3”) was around $2,000 in 2022. HO-3 is the most popular type of homeowners insurance and it covers all perils except those specifically excluded by the policy.
The national average cost of homeowners insurance only gives you an idea of how much you can expect to pay since each state regulates its insurance cost. Some states are considered low-cost states, while others are high-cost states. High-cost states for homeowners insurance are Louisiana, Florida, Oklahoma, and Texas, while low-cost states include Arizona, Idaho, Ohio, Utah, and Washington.
How Are my Rates Calculated?
Multiple factors affect the rate you get on a homeowners insurance policy, including the company you choose. Rates may vary widely among carriers, so comparison shopping may help you get better rates. Factors that influence your homeowner insurance rates include:
- Location: Insurance rates vary by region and zip code. Your insurer may set a higher rate if you live in a region prone to natural disasters or that has higher crime rates, for example.
- Type of construction: Insurance rates vary based on the construction of your home. Different construction materials can raise the value of your home or make it more durable. For example, wood-frame houses cost more to insure compared to brick houses since they’re more susceptible to fire and wind damage.
- Age of the house: Insurance rates are typically higher for older homes in poor condition.
- Proximity to a fire department or water source: Your insurer will set a lower insurance rate if you’re close to a fire protection service or hydrant.
- Amount of coverage: The amount of coverage you take on will affect your rates. You’ll pay more if you have higher property damage or liability coverage limits or a smaller deductible. An insurer may also set a higher rate if you insure your home for its replacement cost rather than the actual cash value.
- Claims history: You’ll attract a higher insurance rate if you have more previous claims on file.
You may lower your premium rates by adjusting your coverage through bundled insurance, increasing your deductible, and lowering your coverage limits.
Are There Any Discounts Available?
Insurance companies offer premium discounts to help you save on policy costs. Some typical homeowners discounts include:
- Bundling discount: You may lower your premium by as much as 5% if you bundle homeowners and auto insurance with the same carrier.
- Home security discount: If you have installed dead-bolt locks, smoke detectors, and fire and burglar alarms in your home, it may lower your rate.
- New purchase discount: Newer homes tend to have lower rates.
- Claims-free discount: Your insurer may provide an insurance discount if you’ve not filed a claim for a specific period such as five years.
- Paid-in-full discount: You may earn a discount for paying your 12-month premium upfront.
Ask your insurer about discounts that may apply to you since this information may not be available when you compare quotes.
Will I Need an Inspection Before Buying Coverage?
In most cases, you’ll need an inspection before buying or renewing homeowners insurance coverage. A home insurance inspection is important to your insurer because it can help uncover potential risks that could increase the hazard or loss. It may also help you identify areas that qualify you for discounts.
A home inspection may increase your premium if the inspector discovers new liabilities. It may also lower your premium rate if the assessment identifies areas that qualify for discounts, say if you have installed a security or fire protection system.
How Do I Get Homeowners Insurance?
Getting homeowners insurance is just a matter of applying for it. Different insurance carriers will have different rates for similar coverage, so shop around for a company that best matches your needs. Insurance companies typically sell their products in any of these three methods:
- Independent agents: Represent multiple companies and can provide you with several insurance quotes
- Exclusive agents: Only sell products affiliated with one insurance company
- Direct market: Sales by telephone, mail, or online
Work with a licensed agent to understand the best type of insurance for your needs. The agent may also help you review additional coverage options and cost-saving perks that are available.
When comparing policies, consider aspects like the limits of liability, replacement cost versus actual cash value coverage, deductibles, premiums, and available discounts. Weighing these options will help you find the right policy or customize your own coverage.
Will my Rates Go up Over Time?
You shouldn’t be surprised if the annual renewal notice from your insurance provider comes with a premium hike. Insurance rates go up over time and rate hikes are often beyond your control. Most of the factors used in your original quote are referenced to raise your premium. Your insurer may revise your premium higher if:
- Weather catastrophes are worse in your region
- Your home is getting older, making it vulnerable to damage and loss
- Property additions have increased its value, say if you install a swimming pool
- Construction and labor costs have increased, thus affecting your home’s replacement cost
- Your insurance score drops
Is PMI the Same as Homeowners Insurance?
Private mortgage insurance (PMI) isn’t the same as homeowners insurance. PMI helps protect a mortgage lender if you default on your payments. Your lender will likely require you to pay for PMI if the money you’ve put down is less than 20% of the value of your property. Homeowners insurance protects your home and personal belongings from covered perils.
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