Homeowners insurance, or home insurance, is an incredibly important and often required protection measure for your home against theft and damage. Nearly every mortgage lender (banks, credit unions, etc.) will require homeowners insurance coverage for the total or near total value of the property. They will require proof of homeowners insurance before they approve a mortgage loan, so it’s important to protect your assets but also a requirement for a lender.

Even if you don’t own your home and you are renting, many landlords require that their tenants acquire renter’s insurance coverage. So, no matter which way you look at it, whether it’s a requirement or not, homeowners insurance is an incredibly smart idea. Here we’ll see what homeowner insurance is, what it can cost, what it protects, and how you can get it.

Major Themes

  • Home insurance protects a residence’s exterior and interior from damage, destruction, personal liability (someone injured at your home), and theft.
  • Policy costs are determined by the individual insurer’s risk to file a claim based on their history of the individual/family, home, neighborhood, town, and the home’s current condition.
  • 8 coverage varieties exist (HO-1 to HO-8)
  • 3 coverage levels exist: cash value, repair costs, replacement value/cost.
  • Get quotes from several homeowners insurance providers and check with your current insurer if you have one. Our favorite is Quote Wizard

What Does a Homeowner’s Insurance Policy Do?

Homeowners insurance protects homeowners from financial burden following damage, theft, or an accident in their home. The insurance policy will pay for repairs and legal fees depending on the specific policy details and levels of coverage. It is often required to receive a mortgage and is incredibly important should some disaster strike.

  • Coverage for damage to the exterior or interior of the home
  • Personal liability protection for injuries or damage
  • House, hotel, or motel rental when home is being repaired or rebuilt

Physical Damage to the Exterior or Interior of the Home

If there is damage to your home through natural causes (hurricane, tornado, fire, lightning, etc.) or damage through accidental or purposeful actions; your insurer compensates you for the cost or repairs and even home replacement if necessary.  Damage caused via earthquakes and floods aren’t typically covered in a standard homeowners insurance policy and must be added on (depending where you live). Damage caused by poor home maintenance is usually not covered either. Add-on structures (like a garage) are not typically covered by a policy but can be covered separately.

The contents of your home are also covered with homeowners insurance. Things like electronics, furniture, clothing, appliances, jewelry, artwork, etc.; are covered if they’re destroyed. You can even get covered for things you lose out in the world, like a piece of jewelry, but there can be limits on the amount the insurer will cover. Most policies cover between 50-70% of the contents within the home. If your home is insured up to $300,000, your coverage at 50% would be $150,000 of possessions.

If you have a lot of expensive valuables (jewelry, art, appliances, etc.) you can pay up and add extra protection for your items. Or if earthquake insurance is not covered and you live in an area with a risk of earthquakes, you can add what is called a “rider” which covers additions like this.

Personal Liability

We’ve all heard stories of homeowners being sued by a guest who injured themselves in the home or on the property. Personal liability protection of your homeowners insurance policy will protect you and your assets from a lawsuit of this nature. It could be a friend, neighbor, delivery person, or even a family member. No matter how the accident happened, if it happened in your home or on your property, you could be held liable to cover medical expenses and damages to the person. If you have a dog who bites a friend (either at your home or their home), then your policy can also cover suit expenses or medical expenses.

Personal liability protection can be lower than $100,000 but insurance experts all recommend a higher threshold for liability protection. $250,000 or more will be a safe coverage level but you can also get $1 million in coverage or more through an umbrella policy with a small monthly increase to your premiums. It is highly recommended you do so as even a minor accident on your property can turn costly very quickly in court.

 Rental During Home Repair / Rebuild

In a case where you must leave your home due to damages, your homeowners insurance policy will reimburse you for rent, hotel/motel room, meal reimbursement, and incidental expenses incurred while your home is being repaired. But remember that there are some limitations to the “additional living expenses” covered by a homeowners insurance policy. You can choose to stay at the most expensive hotel around but that doesn’t mean your insurance policy will cover every penny of your stay. You can always pay a higher premium and have these limits increased.

Homeowners Insurance Policy Types

There are several forms of homeowners insurance here in the United States that are more are less industry standards. Depending on your needs they fall between HO-1 to HO-8 based on home value, home variety, and more. Let’s look at the most common and what they cover.

HO-3 Insurance

This is the most popular variety of homeowners insurance. Nearly 80% of homes occupied by the owner use an HO-3 policy. If you’re applying for a mortgage (or have one already), the lender will likely require at the very least this much coverage. The main categories of damages that are covered:

  • Hail & Windstorms
  • Smoke
  • Lightning & Fire
  • Vandalism & Theft
  • Falling Objects & Weight of Snow, Ice, and Sleet
  • Vehicle or Aircraft Caused Damage
  • Riots & Explosions
  • Water Damage caused by Overflow or Discharge of Household Systems
  • Freezing of Water Connected Household Systems
  • Damage to Hot Water, Air Conditioning, Steam, Gas or Fire Protective System
  • Power Surge Damage

As you can see this will cover most types of damage and will be good for most areas of the country.

HO-5 Comprehensive Insurance

This covers what is listed in HO-3 but also other forms of damage (it will cover everything except what the policy specifically excludes). HO-5 policies are only typically awarded to homes that are well maintained in low risk areas (areas with a stable climate and low natural disaster risk).

HO-1 & HO-2 Basic Insurance

These policies are very slim and offer the most basic coverage. They are not widely used and should be looked at carefully as they do not cover the basic damage varieties most homes face, covering less than an HO-3. Your mortgage lender may not allow this level of coverage either.

Other Varieties:

HO-4: Insurance for Renters
HO-6: Condominium Owners Insurance
HO-7: Mobile Home Insurance Policies
HO-8: Older Home Limited Coverage

Homeowner Coverage Varieties

Between HO-1 and HO-8 coverage there are a lot of differences as we saw above. What each policy will cover may be different, but the way in which coverage is delivered is the same. These are the 3 levels of coverage:

Actual Cash Value

This coverage level covers the cost of the home as well as its contents (your belongings) after depreciation.

Replacement Cost

this covers the actual cash value (see above) but does not calculate depreciation. You would therefore be able to rebuild or conduct repairs with costs up to the original value. Coverage for an equal replacement.

Guaranteed Replacement Value/Cost

This level of coverage is the most comprehensive and takes into account inflation rates should you need to use the policy to cover the costs of a home replacement (even if that cost is greater than your policies limit).

What Coverage Level is Right for Me?

Many advisers recommend homeowners to go with Guaranteed Replacement homeowners insurance. This is because it not only covers the cost of your home it also covers the cost of rebuilding your home entirely with inflation accounted for. You should get a level of coverage that is greater than that of your current home’s value. That way if you need to rebuild you are covered for more than the Actual Cash Value because of increased construction costs due to inflation.

So, instead of focusing on the price you paid for your home and mortgage level, look to cover the cost to rebuild. Take your home’s square footage and multiply that by the local construction costs for your area. This way if you need to rebuild you are covered.

For contents within the home and personal property you’ll want to make a thorough itemized inventory. This way if you need to file a claim you have a detailed list of items and costs that the insurer already has approved. Instead of a spreadsheet, you could do a home walkthrough recording on your smartphone or with a video camera (it’s a faster way to get a full list of items). If you have tallied up the cost to replace all of your belongings you can keep that level of coverage, or increase it if you think you’ll need more to replace the items, or less (to cover less but also pay a lower premium).

Understanding Homeowners Insurance Deductibles

An insurance deductible is the amount you’ll have to pay before you insurer will start paying. These numbers can be determined in 2 ways usually:

  • A percentage of the home’s insured value (like 1% or 3%)
  • A flat rate whole dollar amount (like $1,000 or $2,000)

If your deductible is based on a flat whole dollar amount it would work like this: your insurer has approved a claim for repairs in the amount of $20,000. Your deductible is $2,000. This means that the insurer pays $18,000 and you pay $2,000.

The higher your deductible the lower your monthly or yearly premium will be, and the opposite is true in the other direction. A lower deductible will mean a higher monthly or yearly premium. Keep in mind that certain types of policies will have different deductible levels for different types of damages. For example, a hurricane could have a different deductible rate than water damage from a water main break. So be sure you’re aware of what the deductible levels are for different types of insurance claims you may need to file.

What Will Homeowners Insurance Cost Me?

This figure can be quite different from one policy to another for a lot of different reasons.

  • value of the home
  • location of the home
  • cost to rebuild the home
  • city’s fire protection rating
  • distance from emergency help
  • the climate & weather history of the area
  • the level of coverage selected including the deductible and any limits
  • home age & condition
  • history of claims in the neighborhood of the him
  • your personal history of home insurance claims
  • your credit scores
  • and others depending on the insurer and policy

You can also reduce your costs a few different ways. Install a security system, get rid of the kids trampoline, upgrade door & window locks, start a neighborhood watch, bundle your home & auto insurance together, pay off your mortgage, plan for future renovations, etc.

Remember that homeowners insurance is often required and is absolutely necessary. Consider that rebuilding your home could cost hundreds of thousands of dollars out of pocket if you didn’t have homeowners insurance. This makes those monthly premiums seem far more reasonable.

Compare Policies

It’s a smart idea to get a policy quote from no less than 5 different homeowners insurance providers. This way you have a great list of comparisons to make. What are the differences in cost for levels of coverage? Here is a list of basic comparison guidelines:

  • Compare multiple statewide insurance costs from different insurers
  • Perform a health check on the insurance company to see the reputability of any insurance company. The BBB would be an example.
  • Determine who will be handling your claims (avoid insurers who use 3rd party or outsourced claim companies)
  • See the satisfaction level of current policy holders.
  • Get more than one quote
  • Talk to an advisor for assistance

Homeowners insurance, like any other insurance, will have loads of different companies vying for your business. Some have incentives you could take advantage of, but you’ll only know if you search more than one. Be sure to get quotes and do research on no less than 5 homeowners insurance providers.

Get Your Quote

Getting a quote doesn’t have to be difficult either. There are loads of free tools online you can use to compare different homeowners insurance policies and get different quotes.
Our favorite is Quote Wizard. Get a fast and free quote right now.

Verdict: Homeowners Insurance is Critical

It is usually required to get a mortgage and will be absolutely essential to protect you and your family should something happen. You cannot predict the future, but you can make sure you are protected in the future. One of those ways is through homeowners insurance, so be sure you have a policy if you are a homeowner.