Homeowners insurance is a cost you must factor in when you're planning to buy a home.
It provides coverage if your property gets damaged or if you sustain losses within your property. Not only is the structure of your home protected, but with the right policy, your personal belongings, like your furniture and electronics, are protected as well.
Homeowners insurance typically kicks in when any of the following occur:
- Fire damage
- Water damage not caused by flooding (flood insurance is separate)
- Wind or hail damage
- Damage from falling objects outside your home
- Damage from outside electrical issues
Homeowners insurance also protects you if someone gets hurt on your property.
What homeowners insurance consists of
Most homeowners policies offer multiple types of coverage:
- Dwelling protection: damage to the home and surrounding attached structures, like decks and garages, as well as non-attached structures, like fences or sheds.
- Loss of use: when you can't live in your home following extensive damage, such as damage caused by a fire.
- Personal property damage: when the items in your home are damaged in a covered event (see the list above).
- Liability coverage: when someone is injured on your property
Items not automatically covered by homeowners insurance
Your homeowners policy won't cover every possible scenario that results in damage to your property. Here are a few items that may not be covered by a basic policy (although you can purchase separate coverage for them):
- Flood damage
- Water backup damage (such as when a sewer line backs up)
- Earthquake damage
- Termite damage
- Mold damage
- Any damage caused by general wear and tear
Choosing a homeowners insurance policy
When buying homeowners insurance, you'll want to get enough coverage to rebuild your home and replace its contents if it's completely destroyed.
If it would cost you $300,000 to rebuild your home and another $100,000 to replace items of value, you'd aim for a $400,000 policy. This is a very simplified means of calculating your coverage amount. The point is to give you a general sense of how much coverage you need.
You'll also need to figure out what deductible makes the most sense for you. Most claims against your homeowners insurance policy will be subject to a deductible.
If you have a $750 deductible and are awarded $2,000 from a claim, you'll get a $1,250 check from your insurer. The higher the deductible, the lower your monthly or annual premium. You'll need to decide: Do you want to pay more money off the bat or pay less for coverage but get smaller checks if you make a claim?
How insurance companies determine their rates
It pays to shop around for the most affordable homeowners insurance policy you can get. When calculating rates, insurers will generally account for
- the size and age of your home,
- the location of your home,
- the cost of rebuilding your home,
- potential safety hazards on your property (like a swimming pool), and
- protective measures for your home (like an alarm system).
If you own a vehicle as well as a home, it pays to ask your auto insurance company for a quote on a homeowners policy. Sometimes, you'll save money by buying two policies from the same insurer.
Do I really need homeowners insurance?
Unlike auto insurance, which is required by law, you technically don't have to purchase homeowners insurance. But good luck getting a mortgage without it.
Most lenders want proof of coverage before agreeing to a home loan. Furthermore, by not having homeowners insurance, you'll face significant financial losses if your property sustains damage. That's not a risk worth taking.