As you start the homebuying process, it’s normal to focus on the biggest hurdle: qualifying for a mortgage. Your approval is a big deal and worth celebrating. But before filling the champagne glasses, you’ll need one more thing—homeowners insurance.
“For most people, your home is the largest purchase you will ever make,” says Brandon Tritten, insurance agent at JBLB Insurance in Platte City, Missouri. “You need homeowner’s insurance to protect your investment.”
Figuring out what you need, including coverage options and limits, may feel daunting. But the more you learn, the less you’ll have to rely on an agent for guidance. Here’s a breakdown of everything you need to know.
What is Homeowners Insurance?
The purpose of homeowners insurance is to cover the cost of property loss or damage. You may experience a fire, storm damage, or theft—which can be costly to recover from.
Homeowners insurance isn’t required by law, but your mortgage lender may ask for it. The reason is to protect their interest in the property if disaster strikes. Whether it’s required or not, homeowners insurance is a must-have for all property owners.
It’s possible someone could sue you to collect for an injury, damage to their property, or even a dog bite. On top of covering your home, your policy offers liability protection—including the expense of unexpected lawsuits.
Homeowners insurance can protect your family from multiple financial catastrophes, but only if you have the right type of coverage and limits.
How Homeowners Insurance Works
The basic idea of homeowners insurance is simple: you pay a premium in exchange for coverage. If you stop paying the premiums, your coverage will lapse. Your mortgage lender may collect and pay the insurance premiums on your behalf through an escrow account. If you experience something like a fire or burglary in your home, you’ll be happy the policy is in place.
What Homeowners Insurance Covers
A standard homeowners insurance policy covers four areas of your property:
- Home structure (including detached buildings)
- Personal belongings
- Liability protection
- Additional living expenses
It may not be possible to live in your home after a disaster. If your policy covers the disaster, you may be reimbursed for hotel bills or meals during the rebuilding phase.
These four areas may have a few different types of homeowners insurance coverage, according to the National Association of Insurance Commissioners: basic, broad, special form, and comprehensive. Each form offers protection for a specific set of risks—or “perils.” You’ll notice each type of insurance offers more protection than the previous form.
Basic form policy
The basic form policy offers the least amount of protection. It protects your home and personal property from damage caused by civil unrest, explosion, fire, hail, lightning, smoke, theft, vandalism, vehicles, or wind.
The policy covers the actual cash value of your home or personal property, which is the current value including depreciation. Actual cash value may not be enough to completely repair or replace.
Broad form policy
The broad form policy covers more than the basic form—but only to the extent of what is specifically listed in the policy. This policy covers the replacement value of your home and actual cash value of your personal property. The replacement value is the cost of replacing your home with similar materials.
Special form policy
The special form policy protects from all perils, except those specifically excluded. The policy offers coverage for the replacement value of your home and actual cash value for personal property.
The comprehensive, or open form policy, offers the most robust protection. The policy protects from all perils, except those excluded. It covers the replacement value of your home and personal property.
What Homeowners Insurance Doesn’t Cover
It’s also important to know what your homeowners insurance doesn’t cover. While there is protection for some natural disasters—like fire, lightning, or hail damage—floods and earthquakes aren’t included.
Depending on where you live, these additional insurance policies may be necessary. Ninety percent of national disasters in the United States involve some type of flooding, according to the National Flood Insurance Program (NFIP). You may buy a flood insurance policy through NFIP or a few private insurers.
You’ll also be on the hook for neglect or normal wear and tear. Your homeowners insurance policy won’t cover things like termite damage or other issues you may have prevented.
Choosing a Homeowners Insurance Policy
With a basic understanding of each homeowners insurance form, it may be easier to pick the right policy. There’s a price difference between each form, ranging from basic to comprehensive. Basic form is the cheapest, and comprehensive will have the highest premiums. The most common options include:
- HO-2 – Broad form coverage for your home and personal property
- HO-3 – Special form coverage for your home and personal property
- HO-4 – Coverage for renters
- HO-5 – Comprehensive form coverage for your home and personal property
- HO-6 – Coverage for condominiums
- HO-8 – Coverage for older homes
Depending on where you live, you may also buy additional coverage for disasters like flood or earthquake insurance. You can purchase flood insurance through the NFIP. It may be possible to add earthquake insurance as a separate endorsement or policy, like the California Earthquake Authority (CEA).
How much homeowners insurance you need
Another difficult part of homeowners insurance is deciding how much you need. Several factors may impact how much coverage you choose to buy. You should consider how much it would cost to replace your home, which may be more than the property’s current market value. For a rough estimate, multiply your home’s total square footage by your area’s per-square-foot building costs.
For liability insurance, most homeowners insurance policies offer $100,000, which may not be enough. The Insurance Information Institute recommends buying enough to cover your family’s total assets. You may also consider a personal umbrella liability policy above your homeowners insurance limits.
Homeowners Insurance vs. Home Warranty vs. Mortgage Insurance
There’s a big difference between a homeowners insurance policy, home warranty, and mortgage insurance. Homeowners insurance and home warranties protect your home and personal belongings from loss. Mortgage insurance protects your lender.
Home warranties are a service contract to repair appliances and systems. The annual premiums range from $300-$600 per year, according to ConsumerAffairs. You should weigh the pros and cons of a home warranty before signing up. The biggest downsides are the premiums and limited coverage, but a policy may still offer peace of mind when an appliance or system breaks.
Although you pay the premiums, you won’t benefit from mortgage insurance. This type of coverage protects your lender from default. You may have mortgage insurance if you don’t make a big enough down payment on a conventional loan. Federal Housing Administration (FHA) loans also require mortgage insurance.
How to Get Homeowners Insurance
It’s easy to feel overwhelmed by all the companies selling homeowners insurance. If you’re not sure where to begin, ask your real estate agent or mortgage broker for referrals. You may feel more at ease once you have a small list of reputable companies to choose from.
- You can search for complaints through the NAIC.
- You may also browse the latest D. Power U.S. Home Insurance Study.
How Much You’ll Pay for Homeowners Insurance
As you shop around for homeowners insurance, you’ll notice there’s a wide range of costs. The premiums depend on the type of policy and where you live. The average annual premium is $1,211, according to a November 2019 report from the NAIC—but this report only tells part of the story.
Whether you’re applying for the first time or looking for a new policy, Tritten says several factors may impact your premiums. These may include, but aren’t limited to:
- What is your credit score? You may qualify for lower premiums with a higher credit score—and vice versa if your scores are less-than-perfect.
- What is the age and condition of your home? This may include your roof and major systems like electrical, plumbing, heating, and HVAC.
- How was your home built? Materials like stone, brick veneer, or vinyl siding may impact the cost of your premiums.
- What is your fire protection class? If you live in a rural area, there may be slower response times from your local fire department.
- Do you have an existing homeowners insurance policy? How long have you been with the company?
- What is your history of loss? Have you made past homeowners insurance claims?
Ways to Save on Homeowners Insurance
When it comes to shopping for homeowners insurance, you may be eager to slash your premiums. But often, cheaper isn’t better. The underlying coverage and limits are important.
Tritten suggests trying to bundle your insurance policies for a discount. It may be possible to use the same agent for your vehicle, life, and personal liability policies.
Your deductible is how much you’ll have to pay before the homeowners insurance company starts making payments. You may also consider increasing your deductible without changing the underlying coverage.
Most homeowners insurance companies suggest a $500 deductible, but increasing it to $1,000 could save you up to 25 percent on premiums, according to the Insurance Information Institute.
“The higher the deductible, the lower the premium,” Tritten adds. “Don’t increase the deductible if you can’t afford it, though.”
The Bottom Line: Start Preparing for Homeowners Insurance Early
It’s never too soon to begin shopping for a homeowners insurance policy. By starting the process now, you can avoid scrambling to find a policy before closing on your home. You will have more time to compare each policy’s coverage, deductibles, and premiums—which you need to understand. If you have any questions, don’t be afraid to speak to your agent.