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Homeowners insurance: All you need to know

  • Cars Explained
  • Renee Martin
  • 9 minutes

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Homeowners insurance protects what may be your family’s biggest investment. Here’s what home insurance covers, how much it costs, and tips to find the best deals.

Owning a home is probably the biggest investment you will ever make in your lifetime. Hence, it is important to know the ins and outs of homeowners insurance to keep your home protected at all times. But what is homeowners insurance, and what does it cover? How much does it cost to get homeowners insurance? Find the answers to these and much more here.

Homeowners Insurance

What is homeowners insurance?

Homeowners insurance is a type of property insurance that protects a home and its contents by compensating the owner in the case of damage or theft. Homeowners’ insurance may also include liability coverage that covers accidents that occur in the home or property. Most mortgage companies require homeowners to have insurance coverage for the full value of a property and will refuse to grant a loan or finance a residential real estate transaction until you provide proof of coverage.

Sometimes, you don’t even have to own a home to get insurance. Several landlords insist that their tenants have insurance. Regardless of whether it is a legal requirement or not, it is wise to have some level of security.

Want to know more about renters insurance and what it covers? Head here.

Types of homeowners insurance

Homeowners Insurance comes in several forms. In the U.S., homeowners insurance is labeled HO-1 through HO-8. Each provides varying levels of protection. Most often, these depend on the homeowner’s requirement and the type of residence covered. Like most forms of insurance, the more you pay, the more coverage you receive, and vice versa.

Generally, homeowners insurance, or home insurance, can be classified into three types. They are actual cash value, replacement cost, and guaranteed or extended replacement cost. Let’s take a closer look at what they offer.

Actual cash value: This type of coverage covers the cost of the house and the value of your possessions after factoring in depreciation.

Replacement cost: Replacement cost coverage goes one step ahead of actual cash value coverage. With it, you can rest assured that you will receive compensation for the real cost of your home and your possessions without depreciation. Thus, having replacement cost coverage could go a long way in helping you repair or rebuild your home to its former condition.

Guaranteed replacement cost: This is the most comprehensive form of homeowners insurance you can get. However, there is typically a cap on it – usually between 20% to 25% higher than your policy limit. This inflation-buffer policy will help you repair or rebuild your home no matter your policy limits. Some insurers even offer an extended replacement that gives you more coverage than you purchased.

Tips from the experts: Many insurance agents and experts believe that all homeowners should get guaranteed replacement cost plans. After all, it isn’t just enough to cover the worth of your property, is it? It would be best if you also had enough insurance to rebuild it at the current prices, which has probably gone up since you first built your home.

Read: How does car insurance work?

homeowners insurance

What does homeowners insurance cover?

All homeowner’s insurance policies have certain standard elements. These specify what costs the insurer will cover in the event of any damage to your property or theft.

Damaged interior or exterior

Your insurer will compensate you if your home gets damaged by fire, hurricanes, lightning, vandalism, or other covered disasters. Floods, earthquakes, and poor property maintenance are generally not covered. So you may need to purchase separate riders if you want that type of coverage. Garages that are separate from the home, sheds, and other structures on the property may require their own coverage.

Clothing, furniture, electrical appliances, and most of your home’s contents are covered if they get damaged in a covered disaster. You can also get “off-premises” coverage, which means you can file a claim for misplaced valuables from around the world. However, there could be a limit on how much your insurer will reimburse you. 

Typically, most insurance carriers cover 50% to 70% of the home insurance policy you have. For example, if you insure your residence for $200,000, your personal belongings are covered for up to $140,000.

If you have many expensive items, you may wish to pay extra to get a rider to cover them.

Personal liability

Liability insurance protects you against third-party litigation. This clause also applies to your dogs! So, if your dog attacks your neighbor, your insurer will cover their medical expenditures. And that applies even if the injury occurred at your house or theirs. Personal liability coverage also keeps you protected from someone suing you for pain and suffering or lost income after sustaining an injury at your home.

Tips from the experts: While homeowners insurance policy starts from as little as $100,000, the Insurance Information Institute recommends having at least $300,000 in coverage. You could even get an umbrella policy that could buy you coverage worth $1 million for just a few hundred dollars more in your annual premium.

What does homeowners insurance not cover?

While homeowners insurance covers most scenarios where a loss could occur, some insurance carriers exclude a few probable events from policies. These include natural disasters, “acts of God,” and acts of war.

If you live in a flood-prone area, or perhaps an earthquake-prone region, you will need riders or an additional policy for earthquake and flood insurance. 

How much does home insurance cost?

Your home insurance rate depends on several factors, including the location of your home and your credit score. However, we found that the national average cost of home insurance for a dwelling that costs $250,000 is around $1,300 per year. Premiums, on the other hand, are heavily influenced by the location. Some sections of the country, for example, are more vulnerable to natural disasters, while others may have higher reconstruction expenditures. 

The most expensive states for home insurance include Kansas, Arkansas, Oklahoma, New Mexico, and Nebraska. Natural disasters play a significant role in deciding the cost of your home insurance. Hurricanes are more likely to wreak widespread damage in states along the Atlantic and Gulf coasts. 

Due to the catastrophic destruction produced by summer storms, states in “Tornado Alley” have higher rates. In addition, wildfires in Western states may wreak havoc on homes. 

Hawaii, Utah, Delaware, Vermont, and Oregon have the least expensive average annual homeowners insurance premiums. Hence, knowing the hazards connected with your state and ZIP code will assist you in making informed decisions about home insurance.

cost of home insurance

What are the factors that affect the cost of home insurance?

Insuring a property is a risk for any insurance provider. Certain localities or even types of houses increase the firm’s chances of paying claims. Thus, you could say home insurance is similar to car insurance. If you’ve been following our blogs, you already know that understanding the rating elements that influence your car or home insurance rates might help you find a better deal.

Home-based factors

Since each home is unique, insurance companies assign a distinct rating to each one. The features of your home will influence how much you spend on homeowners insurance.

Year of construction: Insuring older properties might be more expensive than modern homes since repair costs are generally higher. Custom molding, plaster walls, and wood flooring may require specialists to fix or replace, making these elements more expensive to repair in the event of a claim.

State of your roof: The age and condition of a home’s roof are a few factors that could impact your home insurance rates. Older roofs may not be as resistant to wind and hail damage as newer roofs. Similarly, the materials used on your roof might affect the cost of your homeowners insurance. Opting for a more weather-resistant roofing material could help you lower your premium.

Quality of construction: Following a claim, many homeowners policies do not pay the cost of fixing your home to meet the current building code. Insurance carriers commonly offer ordinance or law endorsements, and they can help pay for expenses linked to code changes performed during insured repairs.

Features: Hot tubs and swimming pools can add value to a property, but they can also boost homeowners insurance premiums by increasing repair and replacement expenses and increasing liability concerns. Homes with recreational elements may require more liability insurance if a guest is injured.

Location-based factors

Since each section of the country has a varied risk profile for potential losses, your geographic location can impact your insurance rates significantly. For example, some locations may be more vulnerable to wind damage, but fires frequently cause damage in other parts of the country.

Weather-related risks: Most homeowner’s insurance policies do not cover flood damage or earthquake damage. Some insurance firms refuse to cover homes in flood zones. To defend against these types of calamities, several insurance firms sell private flood insurance or offer earthquake coverage in separate policies or endorsements.

Fire risk: Fires cost billions of dollars in property damage every year. Because speedy emergency response generally lowers damage, insurance firms base homeowners insurance rates on proximity to a fire station and fire hydrants.

Risk of crime: If you reside in a high-crime area, your insurance prices may be affected. Installing additional safety features to your home, including a security alarm system, can help offset the cost.

Read: Factors that affect the price of your auto insurance

How to save money on homeowners insurance?

Here are a few fast strategies on how to save money on homeowners insurance:

  • Combine your insurance policies with a single provider.
  • Shop around and inquire about discounts.
  • Select the right insurance coverage options.
  • Raise your deductible.
  • Maintain a healthy credit rating
  • Make improvements to your home.

We hope these suggestions help you find the best homeowners insurance deals in your state. 

Check out our blogs for info on finding top-rated airport parking, the best parking spots in your city, and affordable car washes near you.

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