As a new homeowner, you may wonder exactly what does homeowners insurance cover and why do you need it. Your home is one of the largest investments you’ll ever make, so it makes sense that you’d want to safeguard it in any way you can. That’s why homeowners insurance is a necessity — it protects your home against damages or theft.
Before you sign up for a policy, however, it’s smart to understand what homeowners insurance covers. Keep reading to learn how a policy can protect your home, and how to compare homeowners insurance companies.
What is homeowners insurance and what does it cover?
Homeowners insurance is a type of coverage that may assist you in paying for repairs to your home and replacing damaged or lost belongings on your property in the event of a covered peril. A homeowners policy, for instance, may cover damage caused by fire, hailstorms, or other forces of nature, as well as theft. Under many policies, the insurer may also provide coverage if a visitor is injured on your property or if another individual’s property is accidentally damaged.
Mortgage lenders generally require their borrowers to purchase homeowners insurance for at least a minimum coverage amount when buying a house, which is usually the purchase price or the current value of the property. If homeowners insurance is required, homeowners may need proof that they’ve purchased a policy in order to proceed with the closing process.
Although homeowners can customize their policy, standard homeowners insurance typically will offer four insurance coverage types: dwelling, personal property, other structures on the property, and liability.
Dwelling protection covers the structure of your home, such as the walls, roof, and foundation. It may also help to cover structures that are attached to your main home, such as an attached garage, against covered perils. Policies usually cover repairs up to a certain limit.
Personal property coverage provides coverage to the contents of your home and any other personal belongings that you or your household members own. For instance, if there was a fire and your furniture was damaged, the insurance company may cover the cost to replace it.
Keep in mind many homeowners insurance companies may limit your coverage on certain kinds of personal property like antiques, cash, jewelry, and other valuable items. You can, however, purchase additional coverage — the exact insurance coverage types will depend on your insurance company.
Property coverage may also cover belongings that are stored outside of the home, such as those of dependents who are attending college and live on campus.
In addition to attached structures, most homeowners insurance policies will cover detached structures. This can include a garden shed, fencing, a gazebo, or a pool, though what exactly is covered will depend on your policy. Your policy generally will offer around 10% of the amount of coverage you have for your main dwelling for other structures on the property.
Liability coverage protects you and your household members against a lawsuit or claim arising from property damage or bodily injury (except for automobile accidents) that occurs on your property to someone who does not live there. For example, if a visitor slips and falls while walking up the stairs to your home’s entrance and decides to sue you, your policy will pay the claim and any legal fees up to your policy’s limit, assuming you’re found liable.
Liability coverage may also extend to medical expenses for people who are not members of your household who were accidentally injured on your property. Using the above example, if the visitor ends up getting medical treatment or even has to stay in the hospital as a result of the injuries sustained from their fall, your policy may pay for these expenses.
Note that liability coverage does not cover intentional harm or damage done to someone else or to people who live on the property.
Additional living expenses (ALE)
If your home was damaged under a covered peril and is temporarily inhabitable, additional living expenses coverage will kick in. Your insurance company will pay for costs such as restaurant meals, hotel bills, and any other related costs incurred that’s above your typical living expenses while your home is being repaired.
What isn’t covered by home insurance
Although homeowners insurance is extremely useful in protecting your home and belongings, there are certain items that it doesn’t cover. It’s important as you’re going through the homebuying process to understand what the limitations are so you can make plans to get adequate coverage.
Here are some common hazards that homeowners insurance does not cover:
- Flooding: Most homeowners insurance policies will not cover flood damage. If your home is located in an area that is prone to floods or designated as a special flood hazard area, it’s a smart idea to get flood insurance. You can purchase this additional coverage through the National Flood Insurance Program (NFIP) or certain private insurance companies.
- Earthquake: A standard homeowners insurance policy does not cover earthquake damage or landslides, but you can purchase earthquake insurance separately. In some areas, like California, your insurer has to offer to sell you earthquake insurance. This will cover certain damage from earthquakes and in some cases, additional living expenses if your home is damaged due to an earthquake.
- Full coverage of certain valuables: A standard homeowners insurance policy will generally have limits on the coverage it provides for personal belongings and special items, such as antiques, cash, guns, boats, jewelry, and other high-ticket items. Plus, your policy may only cover the actual cash value of an item — which means the payment will equal the amount an item is currently worth, factoring in depreciation. You can purchase additional coverage for certain items, higher coverage limits, or the replacement value (an item’s worth without factoring in depreciation) of your belongings.
What does homeowners insurance cost?
In the United States, the average cost of homeowners insurance is $1,899 per year, or $158 a month, according to a recent analysis from Policygenius, an online insurance marketplace. That being said, the cost of your homeowners insurance premium will vary depending on various factors, including:
- Your home’s location
- Type of dwelling
- Coverage amount
- Age of home
- Size of dwelling
- Materials your home is made of
- Proximity to fire hydrants or a fire station
- Any dogs residing on your property
- Proximity to bodies of water
- Whether you have additional structures like a pool
- Prior homeowners insurance claims
- Your deductible
Lowering your homeowners insurance premium
If the question of how much homeowners insurance costs concerns you, there are some ways to help mitigate costs: For instance, you may:
- Increase your deductible
- Shop around at multiple insurance companies
- Bundle policies from the same insurance company
- Install fire alarms or other security systems (many companies provide discounts for doing this)
- Review your policy limits and only get the coverage you need
- Take advantage of loyalty discounts for staying with the same insurer
- Reinforce your home (such as by installing storm shutters or making other relevant home renovations) to decrease your home’s risk of damage
How to compare home insurance companies
Shopping around multiple home insurance companies is wise because it will help to ensure that you get the right coverage at the most competitive price to meet your needs.
To start your search, you can ask around with homeowners in your area or, if possible, you can request recommendations from your mortgage lender. If you do get suggestions, don’t forget to check online reviews and vet the recommended companies.
You can also seek the help of a reputable insurance agent or do an online search for a list of companies offering coverage in your area.
Before getting quotes, it’s helpful to consider the types of coverage you want as well as the amount of coverage you’d like. For instance, if you have many valuables in your possession, it may be worth considering additional coverage. Understanding what you want in a home insurance policy will help you compare homeowners insurance companies and find one that offers the features you want so you can focus instead on the perks of owning a home.
Factoring in a company’s reputation is also important. If the insurer isn’t known to honor claims or doesn’t have the financial stability to do so, you may not be as well-covered as you think.
Ready to buy a home? Contact a local Finance of America Mortgage Advisor can help you explore your mortgage options.