Why do I need homeowner’s insurance?
Buying a home is likely the single biggest purchase you will make in your life, and along with the pride and security it provides, it also brings many new responsibilities. Among them is the seemingly endless number of potential risks from which you need to protect your home. Those risks include damage to the structure from outside, such as a tree falling on the roof, and internal damage, such as a leak from a broken pipe. You also must consider the possibility of extensive damage to your personal belongings from such incidents, and costs like medical payments or legal fees related to injuries someone might incur if they are injured in your home.
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Unlike vehicle insurance, states don’t require you to carry homeowner’s insurance, but if you have a mortgage, your lender will require you to have a policy in place. Even if you own your home outright, it’s wise to have a home insurance policy. While relatively few people experience a total loss of their home, if were to happen to you, it’s likely an expense you couldn’t shoulder. For a few hundred to a few thousand dollars a year, a homeowner’s policy ensures that you are covered if your home is destroyed. Even if you experience smaller, but costly events like the damages listed above having a homeowner’s policy in place can bring you peace of mind as well as easing the financial burden such an event can incur.
What does homeowner’s insurance cover?
Your home insurance is intended to cover costs related to repairing certain kinds of damage or, if needed, to rebuild your home after a disaster such as fire. So the policies generally cover damage or destruction of the building itself, interior and exterior fixtures including fireplaces, patios and decks, windows, etc., your personal belongings contained in the house, and any outbuildings you may have such as a shed or pool house. (Some policies will cover significant damage to landscaping, such as a row of trees that have been knocked down in a storm, but often you will have to purchase this as a separate rider.)
Most policies will also cover some additional expenses, such as your living expenses if you have to temporarily move because a covered event such as a fire or major roof damage from a storm has made the home temporarily uninhabitable.
The kinds of events homeowners’ insurance covers include fire, storm and wind damage, water damage from things like broken or leaking pipes, theft, and more.
Most homeowner’s insurance also covers your personal property when you are traveling. So if a camera is stolen or damaged while you are on a trip, you may be able to get reimbursed for any costs not paid out by the airline or another party. (Note: Some auto policies will cover your personal items if they are damaged in a car accident or stolen from your vehicle. If you have both auto and homeowners’ insurance, compare policy details to make sure you don’t have excess coverage or a coverage gap.)
Homeowner’s insurance offers other kinds of protection
Homeowner’s insurance also provides you protection from other types of losses, including costs related to your personal liability.
For example: Let’s say a visitor or a repairman is at your home and is injured due to the negligence of someone who lives in your home – anything from delayed or faulty maintenance that created a hazard, misbehavior, etc. Depending on the type of incident (and your relationship to the injured party) you could be on the hook for a range of expenses. Costs would include the person’s medical bills, their lost income if they have to take off from work, legal fees if they decide to sue, and even damages for pain and suffering. Even for a minor injury, the costs can add up quickly.
Most homeowner’s policies provide a specific amount of liability coverage, which will cover those bills for you. Typically, a standard policy will provide a starting amount of $100k in coverage, but you can purchase more if you want it. It’s impossible to say how much you might need, but as a rule, the more you have in assets, the more liability insurance you should have. For the ultimate coverage, most carriers will offer a $1M excess liability rider (also sometimes called an umbrella policy).
What homeowner’s insurance might not cover
Most homeowners’ insurance policies cover damage from the kinds of events you would anticipate (and some you might not), such as fire, water damage, theft, storm damage, damage from vehicles or falling objects, and the like. But most policies do not cover damage from floods, earthquakes, war or terrorism, among other things. In areas at high risk of hurricanes or wildfires, those hazards are often excluded or require purchasing additional, separate coverage.
When you compare your homeowner’s insurance quotes, read the policy carefully to see which hazards are specifically included — anything that isn’t mentioned isn’t covered, and it will vary from carrier to carrier.
Flood damage, in particular, is not covered by standard homeowner’s insurance – it has to be purchased separately. While many people choose to go without it if your home is in an area at risk for floods, it is a good idea to have it – and if you have a mortgage, your lender will require it.
Keep in mind too, that just because your home is not physically close to a body of water doesn’t mean it isn’t at risk of a flood. Water travels – and lets nothing stand in its way. Many homes that the owners thought were at no risk of flooding have been inundated by water from busted dams many miles away, ocean water driven inland during a storm, and similar events.
The federal government’s site at https://www.fema.gov/national-flood-insurance-program can provide you with more information about your particular home’s flood risk, how much flood insurance will cost you and more.
There are other circumstances that homeowner’s insurance will not cover or where you will have caps and exclusions in place. Home-based businesses and pet-related expenses are among them.
If anyone in your home works from the house even occasionally or has a home-based business, be aware that most homeowner’s policies will not cover business equipment or property, such as computers or inventory. Those that do are likely to have coverage caps in place that limit how much you can receive if they are lost or damaged. If the business property belongs to your employer, it’s likely covered under the company’s policy. If you (or the other resident) are the business owners, check your homeowner’s policy carefully for these exclusions or possible coverage caps. You will probably have to purchase separate business insurance to ensure the business property is fully protected against loss.
Homeowner’s policies typically will not cover any damage related to incidents resulting from your business use of the home. For example, if you use the garage to manufacture a product you sell and that equipment malfunctions causing damage to the home or injuring someone, the related costs are probably not covered under your homeowner’s policy. Once again, you would likely need a business policy for this coverage.
Pet owners will need to do some extra reading to ensure that their homeowners’ policy covers damage caused by the family pet – the coverage varies widely by carrier and location. For example, some policies exclude damage or injury from pets, while other policies not only cover those expenses they also include some coverage for health-related expenses for your pets, such as routine veterinary care. Some policies will even cover damage from some kinds of pets, but exclude certain breeds or types of animals from coverage.
Whatever your circumstances, talk to your insurance broker or agent to make sure you get the policy that best fits your needs – and that you fully understand what is and isn’t covered by your homeowner’s insurance policy.
How much homeowner’s insurance do I need?
There is no magic formula for determining how much coverage you need, but there are some guidelines you can use to figure out the amount that will work for you.
Many people wrongly believe that if they paid, say, $250k for the house, they need a policy for $250k. That’s a decent starting point, but it’s not entirely accurate. First, remember that in a worst-case scenario your homeowner’s policy is intended to rebuild your home after a total loss and rebuilding costs are not necessarily the same as the price you paid for the house – they often run higher, since labor and materials often get more expensive over time. Also, the value of your land is a significant part of the cost of the house, but irrelevant regarding the cost to rebuild.
The cost to rebuild will depend on where you are, the current economy and the size and type of house in which you live. Your insurance agent, or any number of online tools, can help you arrive at a good estimate of what rebuilding costs in your area might be. For example, let’s say rebuilding costs on the average $250k house in your area run $200k. That is the first part of your coverage need.
Your policy is also intended to help replace your personal items after a significant loss – and the cost of your clothes, electronics, artwork, etc., is not reflected in the price of the house. Most homeowners’’ policies automatically provide coverage for personal items at a certain percentage of the cost of your home (often between 66% and 80%). For the hypothetical home in our example, that would be another $185k-190k. That is the second part of your total coverage need. That may sound like a lot, but the cost of your personal belongings adds up quickly when you consider that after a total loss. For example, in a fire, you would have to replace every item of clothing, all your furniture, artwork and electronics, and even smaller items such as books, toys, and toiletries. And you’ll be buying it all at once.
While the roughly 75% of home value figure is appropriate for most people’s coverage needs, if you have belongings that are more expensive than average, such as pricey or extensive collectibles, a large number of electronics, jewelry, fine art, etc., you may need additional coverage. That’s because most policies have a limit they will pay for particular types of items. So, for example, if your policy has a coverage cap of $3000 for jewelry and your engagement ring and a pair of family heirloom earrings are worth a combined $6000, you would only get reimbursed for half the value of your belongings. To ensure you have adequate protection, you can purchase additional coverage through a rider that specifies extra coverage for those items at a small additional cost.
Trying to figure out how much coverage you need for your belongings can seem impossible, but you can do it in the course of an afternoon. All you have to do is an overall basic room-by-room inventory. Here’s how:
Walk through each room of your home and take stock of your personal belongings. Using whichever method works for you (a notepad, a video camera, etc.) document what you own and roughly what it cost. You don’t have to list every item, but make sure you include an estimate for every type or group of item that you might have to replace.
For example, you don’t have to document every item of clothing you own. But you could take a photo of your closet and open dresser drawers to document how many clothes you own and their costs – for example, you could note you own 10 dresses at an average cost of $100 each, and 5 sets of workout clothes at about $50.
When you are doing your inventory, don’t forget smaller items you might overlook. Rooms like your bathroom might not seem to have much in the way of personal belongings, but if you look more closely, a few sets of linens and your toiletries alone can add up to a few hundred dollars. When you include items like small electronics (a toothbrush, hair dryer, razor), prescription medications, maybe a small piece of furniture like a bench or linen cabinet, you could easily find thousands of dollars of personal items subject to loss in one small room.
This inventory not only helps you decide how much coverage you need – it also provides proof if you ever need to make a claim for the loss of these items. For that reason, make sure you have at least one close-up shot of any particularly expensive or unique items (electronics, original artwork, jewelry, etc., so in the event of damage or loss the insurance adjuster has enough information to establish the item’s value.
You should keep copies of these photos somewhere away from your home where you can easily access them even if you can’t get home. Some cloud-based applications can do this for free.
Once you have a solid estimate for both factors – rebuilding costs and the costs of your belongings, you have a good idea of the total coverage amount you should be seeking in your policy.
What does homeowner’s insurance cost?
Homeowner’s insurance costs can vary widely on several factors including the size and location of your house, the amount of coverage you want for contents and personal items, additional coverage you want for things like personal liability, and many other factors such as which insurance carrier you choose.
But for a ballpark figure of what you can expect, a 2017 J.D. Power & Associates survey found that nationwide, the average annual home insurance premium was just under $1,200 – a number that has stayed relatively steady for the past several years. Bear in mind that if your home is smaller than average, or much larger than average, your premium is likely to swing accordingly.
How can I get affordable homeowner’s insurance?
You don’t want to pay more than you have to, but how much you pay for homeowners’ insurance is directly related to how much coverage you get. In general, the cheapest policy will cover far less than the more expensive ones.
There are steps you can take to lower your overall homeowner’s insurance costs. You may be able to get even cheaper homeowner’s insurance if you have other policies – such as auto or life – with the same carrier. When you get ready to request your homeowner’s insurance quotes, check if the carrier offers multi-policy discounts (also sometimes called “multiline”). Compare those quotes to ensure you are getting the best insurance rates available. Bundling multiple insurance policies with the same carrier can save a significant amount off your total insurance premium.
Carriers also offer a variety of discounts for safety-related items you have, ranging from relatively small items such as deadbolt locks and smoke and fire alarms to more extensive projects, such as adding storm windows, a security system, or, if applicable making a home more earthquake-proof. Make sure your agent or broker knows about all relevant safety features in your home to make sure you get the maximum benefit from these discounts.
You may be able to get an additional discount for paying your yearly premium up front instead of in monthly installments.
Choose the right deductible
You can significantly lower the cost of your homeowners’ insurance by opting for a higher deductible. The deductible is the amount you have to pay out of pocket before your insurance coverage kicks in. For example, if your policy has a $1,000 deductible and you experience a loss of $5,000 in damages, your insurer would pay out $4,000. If you selected a policy with a $5,000 deductible, you would get nothing.
But a high-deductible policy lowers your overall insurance premium. Policies with high-deductibles slash the cost of homeowners’ insurance because it reduces the risk to the insurer by transferring some of it to you.
Neither low- or high-deductible policies are inherently good or bad – it depends on your particular circumstances and your comfort with risk. As a rule, high-deductible policies work well if you have enough savings to cover an unexpected expense from a loss and are comfortable taking on slightly more risk. Low-deductible policies ($500 or less) are a good choice if you have little savings and would have trouble covering a large, up-front expense or if you simply don’t want to have to worry about covering a big, unexpected bill. If you fall somewhere in between or aren’t sure what to do, a mid-level deductible of about $1,000 works for most people.
Another factor that affects the cost of your homeowner’s insurance is whether you choose a policy that provides actual cash value or total replacement cost coverage.
Actual cash value means you get the literal value of your property at the time it was damaged or destroyed. Let’s say your eight-year-old television that you originally paid $1,000 for is destroyed by a leaking bathroom pipe. At the time of the loss, your TV may be worth only $100 or $200. With an actual cash value policy, that’s what your insurer would reimburse.
With a total replacement cost policy, when that same, eight-year-old TV is destroyed, your insurer would pay out whatever it costs to replace it with a new, similar model. (The key word is similar – if a 28” basic flat-screen is damaged, the insurer won’t pay for you to replace it with a 56” smart TV. The insurance payout will cover the cost of another basic, small TV. You can upgrade if you want, but you’ll pay the difference out of pocket.)
Total replacement cost policies cost a little more because they pay out more if you have a covered loss. They’re a good choice if you have items, such as electronics, that quickly depreciate. Actual cash value policies are a way to reduce the cost of homeowner’s insurance premiums, but they also provide less protection if you experience a loss.
Other items or activities can increase your homeowner’s insurance costs. These vary widely depending on which carrier you use, but they can include:
- your credit rating
- a history of frequent and/or multiple prior insurance claims (even if it was a different kind of policy, such as auto)
- so-called “attractive nuisances” such as pools or tree houses
- the crime and safety rating of your neighborhood, and
- owning pets, especially certain breeds of dog.
If the homeowner’s insurance quotes you receive seem unusually high, you can ask your broker or agent if any of these factors are a reason.
How do I compare homeowner’s insurance quotes?
There is no one “best” homeowner’s insurance policy. To get the best policy for you, first decide what coverage you do (or don’t) need and then find the policy that most closely matches that list. Factors to consider include:
- What kinds of personal property you have and how much it is worth
- What kinds of hazards are most likely in your area
- What, if any, lifestyle factors may affect the coverage you need (for example, if you have kids and a dog, you have two factors that make it more likely your home or personal property could be damaged and/or cause injury to another person)
- If you’re willing to take a high deductible and pay for some damages out of pocket
Once you have an idea of what kinds and amounts of coverage you need, you can start getting homeowners’ insurance quotes. To get the best deal, make sure you shop around with a number of carriers. All insurance carriers have access to roughly the same data for underwriting, but they use different criteria for how they assess an individual’s risk. The lower your perceived risk of making a claim, the lower your homeowner’s insurance premiums will be.
Major homeowner’s insurance carriers
Homeowner’s insurance policies are available from many companies, but the following five carriers are among the best known and offer many extra features that make them worth checking out. They each were rated highly by J.D. Power for their homeowner’s insurance offerings.
Amica Mutual – received top marks for overall satisfaction, as well as its billing process, policy offerings, and price.
USAA – got top marks for its overall customer satisfaction estimation and settlement processes
Nationwide – received its highest rankings in overall customer satisfaction and service.
Chubb – got top marks for service interaction and ranked well, but not in the top tier in most other categories.
Encompass– earned top scores for service and its estimation and repairs processes and good marks for overall satisfaction and the settlement process.
Actual cash value – a policy that covers only the value of a damaged or destroyed item at the time of the event
Adjuster – a professional who examines the damage to the home, or personal property within it, to establish the financial loss from a covered event
Carrier – the company underwriting your insurance policy
Covered event – incidents including theft, fire, and water damage that are included in the coverage of a specific insurance policy
Deductible – the amount of a covered claim that must be paid by the insured person
Coverage caps – a limit on the amount of insurance benefit provided for certain items or expenses. For example, a policy may provide coverage for living expenses up to $10,000. In this case, the coverage cap is $10,000.
Exclusions – items or types of damage not covered by an insurance policy
Excess personal property coverage – additional coverage beyond what a standard insurance policy covers, provided at additional cost
Flood insurance – coverage for damages to a house caused by floodwaters from the ocean, lake, river or other body of water.
Homeowner’s insurance – an insurance policy that covers a tenant’s personal item’s as well as some other related expenses
Homeowner’s liability coverage – insurance for costs or damages a third-party incurs caused by the insured person’s actions or negligence
Insurance agent or broker – the individual or agency from whom you buy your policy. They may be independent and sell policies from many different companies, or they may work solely with one insurer.
Replacement cost – a policy that covers that cost of replacing a damaged or destroyed item with a similar new item
Riders – additional coverage for specific benefits over and above what the standard policy offers, purchased at additional cost