Homeowners insurance is a form of insurance that protects your home, as well as the property in your home. This type of policy can also help protect you financially when injuries occur on your property. Homeowners insurance isn’t legally required, but many mortgage lenders require it, and it’s a good idea to have it.
When purchasing homeowners insurance, it’s important to know how much coverage you need so you buy the appropriate amount.
Keep reading for more insight into what a homeowners policy is, why you need it, and how to buy homeowners insurance.
You can easily compare rates from top insurance carriers with Credible.
- How to buy homeowners insurance
- How much does homeowners insurance cost?
- What exactly does homeowners insurance cover?
- What’s not covered by homeowners insurance?
- Do you really need homeowners insurance?
- How much homeowners insurance do you need?
- When should you get homeowners insurance?
- Are hazard insurance and homeowners insurance the same thing?
Take these steps to buy a homeowners insurance policy that meets your needs and works for you.
Determine how much coverage you need
How much coverage you’ll need depends on whether you have a mortgage loan, and your risk level. For example, some mortgage lenders may only require you to insure 80% of the replacement value of your home. But you may feel more comfortable having 100% coverage, as that missing 20% would be very expensive to cover if you need to rebuild your home after a damaging event like a fire.
While you want to have a good amount of coverage, you don’t want to overinsure your home, either. You may find you don’t need to insure the entire market value of your home, since your land contributes to that overall value and will usually remain intact after a disaster.
When determining how much coverage to buy, it’s typically a good idea to get enough coverage to pay for the materials and labor that would be necessary to rebuild your home entirely. This is known as the replacement cost, or replacement value, and you can work with an insurance agent to determine what that amount is.
Research insurance companies
Take your time to comparison shop and find the best insurance provider for you. Not only do you want to shop around to find the best rates and coverage, but you want to make sure an insurance company has good customer reviews and handles claims well.
If you don’t have time to shop around, an insurance broker or agent can present different options to you. Before agreeing to work with one, inquire about how they’re compensated. If they receive larger commissions from certain carriers, they may only present you with options that financially benefit them.
You can visit Credible to compare homeowners insurance quotes from multiple insurance carriers, all in one place.
Choose your coverage and buy a policy
An insurance carrier will present you with additional options, add-ons, and separate coverages that can enhance a standard homeowners insurance policy, but these can also increase the cost. Some of these add-ons — like equipment breakdown coverage and water backup coverage — can save you money in the long run, so consider all these options carefully.
Once you select a carrier and policy, you’ll select your deductible amount. You’ll also set your policy dates and choose how to make your payments at this time. The insurance carrier may schedule a home insurance inspection as part of its underwriting process.
The average cost of homeowners insurance in the U.S. was $1,278 in 2019, or $106.50 a month, according to a report by the National Association of Insurance Commissioners. A handful of factors determine how much your homeowners insurance coverage costs. The biggest factor is which state you live in.
Insurance carriers may also take your credit-based insurance score into consideration. This score predicts how likely you are to file an insurance claim, and it functions like a traditional credit score (your payment history and credit utilization ratio are taken into account). But some states, such as California, Maryland, Massachusetts, and Oregon, bar these scores from being used to determine the cost of your policy.
Your deductible amount will also affect your premium. If you choose a higher deductible, you’ll have a lower premium but will have to pay more out of pocket when you file a claim. Insurers generally have minimum deductibles of $500 or $1,000.
How to lower your homeowners insurance premium
To reduce the cost of your premium — without losing valuable coverage — you can take the following steps:
- Improve your credit score. If you live in a state where credit scores can be taken into account when determining pricing, take some time to check your credit report and improve your credit score so you can qualify for good coverage at a lower cost. Paying down existing debt is a great way to boost your credit.
- Increase your deductible. Remember, higher deductibles lead to lower premiums. While you’ll face a higher cost if you need to file a claim, you can take some pressure off your monthly budget this way.
- Shop around for the best rate. Get a handful of quotes before choosing an insurance company to work with to make sure you’re getting the best rate possible.
- Ask about discounts. Insurance providers generally offer discounts for things like paying your annual premium in full or bundling your homeowners insurance policy with other forms of insurance, like auto insurance.
There are six different types of homeowners insurance coverage — here’s what they cover:
- Dwelling coverage — This covers repairs and replacement costs for your home if damage occurs due to fire, smoke, hail, lightning, wind, water, vandalism, or theft.
- Other structures coverage — This provides coverage for other structures on the property aside from the home, such as a garden shed or fence.
- Liability coverage — If someone is injured on your property, this type of coverage gives you legal and financial protection.
- Personal property coverage — You can receive reimbursement (up to a certain value limit) for belongings that are lost or stolen.
- Additional living expenses coverage — If you need to pay for somewhere else to live, such as a hotel, after an insured event while your home is being repaired, you can receive compensation from additional living expenses coverage.
- Medical expenses coverage — You can get help with expenses related to someone else’s injury (such as medical bills) that happens on your property whether or not you’re found liable for the injury.
The following events typically aren’t covered by standard homeowners insurance policies, but you may be able to purchase additional coverage for some of them:
- Flood and earthquake damage — You can purchase separate policies that cover these events.
- Regular wear and tear — Basic home maintenance requirements like fixing electrical issues, replacing appliances, and getting a fresh coat of paint aren’t covered.
- Other miscellaneous reasons — Losses that occur for certain reasons, such as pollution, war, or government seizure, aren’t covered by a standard policy.
Homeowners insurance isn’t a legal requirement, but it’s important to have it. Most mortgage lenders will require you to have homeowners insurance in place to protect the home they’re backing.
Even though you aren’t legally required to have homeowners insurance, it provides a great deal of protection for your home, your belongings, and your personal finances in the event of a disaster or an injury occurring on your property. Unless you can afford to cover these damaging events out of pocket, you’ll want to have homeowners insurance.
In an ideal situation, you’ll choose the most comprehensive policy you can afford that meets the needs of your home. Go over this policy with your insurance carrier each year to make sure you’re not over- or underinsured.
The amount of coverage you need depends on the type of coverage you’re looking for and the value of your home. For dwelling and other structures coverage, this varies based on the cost to rebuild your home and the structures on your property. But there are specific recommendations for the other four coverages:
- Liability coverage — $300,000 to $500,000
- Personal property coverage — 50% to 70% of the insurance on your house
- Additional living expenses coverage — 20% of the insurance on your house
- Medical expenses coverage — Typically $1,000 to $5,0000
You may also want to consider purchasing additional insurance riders to meet your home’s unique needs, such as:
- Water backup coverage
- Business property coverage for home-based businesses
- Identity theft restoration coverage
Important terms to know
Insurance coverages have varying levels that affect how much financial support you receive in the event of a claim.
Here are a few terms you should know:
- Actual cash value — This is a predetermined amount to rebuild your home after a covered loss, minus depreciation. If damages cost more than this amount, you’ll have to pay out of pocket.
- Replacement cost — With replacement cost, your insurance provider pays out the actual cash value first, then reimburses you for any extra costs after you submit receipts.
- Extended replacement cost — The insurance company ensures there’s a financial cushion in the event that the cost of rebuilding is more than its estimated replacement cost.
- Guaranteed replacement cost — You’ll receive the full cost of repairing the home back to its exact previous condition.
With Credible, you can compare rates on homeowners insurance from various insurance carriers in minutes.
If you’re buying a home in cash, you can choose to take out a homeowners insurance policy whenever you want (although it’s best to do so before closing on the home). If you’re taking out a mortgage loan, lenders will require you to get home insurance coverage before they agree to issue you a home loan. You’ll want to secure a homeowners insurance policy before or at the time of closing on your home.
Hazard insurance isn’t the same thing as homeowners insurance. You may hear mortgage lenders use the term "hazard insurance" in reference to the part of a homeowners insurance policy that covers your home’s structure. The term just means that the lender requires that you have homeowners insurance. Depending on where you live, the mortgage lender may also be referring to required flood or earthquake insurance.