You may opt out of insurance for small things like your cell phone or laptop (who needs the extra monthly bill?), but protecting an investment as big as your home is a no-brainer. That said, coverage for such an important asset can be complex.
Here, we’ll walk through some basic information about coverage and rates that should come in handy when you’re ready to shop for your own homeowners insurance policy.
How Homeowners Insurance Works
Just as auto insurance pays the mechanic bill if your car is damaged in an accident, homeowners insurance pays to repair or replace your home and belongings if something bad happens, like a fire or theft. In return for this promise of financial protection, you’ll pay a monthly bill or “premium” to your insurance company.
Your policy will also come with a deductible (generally $500 or $1,000) that you must pay out of pocket before the insurer will cut you a check. Choosing a higher deductible means you’ll have lower premiums, but it also puts you on the hook for a bigger out-of-pocket payment for any claim you make.
What Does Homeowners Insurance Cover?
All homeowners insurance policies cover six important areas:
- Your dwelling, i.e., the main structure of the home
- Other structures, like detached garages, sheds, and guest houses
- Personal belongings stored inside your home or on your property
- Loss of use, meaning alternate lodging while your home is under repair
- Personal liability in case someone is injured on your property and sues
- Medical payments for anyone injured on your property or by your pets
Each coverage type comes with a limit, which caps the amount your insurer would pay out on a claim. The overall “dwelling limit” is the most important number; it should equal the cost of a complete rebuild to your home, including materials and labor. Other limits are generally set as a percentage of that overall value.
For example: If your dwelling coverage is set at $250,000 and the personal property limit at 50%, your insurer would cover up to $125,000 worth of damaged belongings after a loss.
For more comprehensive protection, homeowners can add extra coverage or “endorsements” to their insurance, protecting things like:
- Recreational vehicles and watercraft
- Green home improvements
- Extra-valuable personal belongings
- Home office equipment
- Identity theft
- Personal umbrella liability
- And more
What Homeowners Insurance Pays For
The most common type of homeowners insurance, “HO-3,” is what’s known as an “open perils policy.” That means it pays out in every scenario except the ones specifically excluded by your contract (see below). These are the events for which homeowners file claims most frequently, according to the Insurance Information Institute:
- Wind and hail damage (38%)
- Water damage and freezing (37%)
- Other structural damage, like from vandalism (12%)
- Theft (6%)
- Fire and lightning damage (5%)
- Bodily injury and property damage (1%)
What Homeowners Insurance Doesn’t Pay For
A few perils are specifically excluded from most homeowners insurance policies. Unless you buy special coverage, your insurer won’t cover repair costs if your home is damaged by these causes. Situations not covered by most homeowners insurance policies include:
- Earth movement like earthquakes and landslides
- Water damage like flooding or groundwater seepage (though water damage originating within the house, like from a burst pipe, is covered)
- Poor maintenance on the homeowner’s part that leads to damages
- Societal perils like government ordinance, war, or nuclear hazard
- Intentional loss caused with the intent to file an insurance claim
The two big holes in an HO-3 policy are earthquake coverage and flood insurance. Without these protections, homeowners could end up paying huge costs out of pocket to repair or rebuild their home after a disaster. This is especially true for flood insurance; as of 2017, the average flood insurance claim totaled more than $90,000.
If you live in an area prone to earthquakes or flooding, you’ll likely need extra coverage. Earthquake coverage can be tacked onto a basic policy with many companies and generally costs between $0.50 and $3 per $1,000 of coverage. Flood insurance must be purchased separately, usually through FEMA, and costs vary widely by location.
How Much Does Homeowners Insurance Cost?
According to data from the National Association of Insurance Commissioners, a standard homeowners insurance policy in the U.S. costs about $1,200 per year. However, prices can vary a lot by address. Average premiums range from $650 per year in Oregon to almost $2,000 per year in Louisiana.
Of course, location isn’t the only thing that affects homeowners insurance prices. You rate will also depend on:
- Age of your home
- Risk of fire, flood, crime, and other hazards in your area
- Value of your home and belongings
- Types and levels of coverage you choose
- Size of your deductible
- Your insurance claims history
- Your credit score
- Types of pets
- And more
Every insurance company evaluates these factors a little differently. That means you could be quoted much cheaper rates from one insurer than from another. It’s important to compare homeowners insurance rates from multiple companies before buying to be sure you’re getting the best value on the coverage you need.