What is Homeowners Insurance?
Homeowners insurance is a specific type of insurance policy that protects homeowners against losses and damage caused by perils such as fires, storms, or burglary. It also covers legal costs if someone is injured in your home or on your property. Earthquake and flood coverage is typically not included in standard homeowners insurance policies, but you may be able to add on this additional coverage (flood insurance is often required in flood zones). Your home insurance premium is typically paid monthly, along with your monthly mortgage payment.
Homeowners insurance is almost always required in order to get a home loan. Don’t be surprised if your lender requires you to purchase homeowners insurance before the mortgage company will sign off on your loan (this protects the lender’s interest in your home). But even if you don’t have a mortgage, it’s a good idea to have homeowners insurance coverage to protect your investment.
Review your coverage each year with your insurance company to make sure you still have enough insurance coverage to meet your needs. Remember, you can add on to your homeowners insurance policy at any time, and add more coverage as your situation changes. Many homeowners opt to shop around for homeowners insurance from different companies to help reduce their monthly premiums.
What Does Homeowners Insurance Cover?
Homeowners insurance policies vary on what and how much they cover, but typically they’ll cover all or part of your financial losses. Coverage often includes:
- The home itself, including the structure and its plumbing, electrical wiring and central air and heat systems.
- Other structures on your property such as sheds and fences.
- The possessions in your home, such as electronics, appliances and clothes, even when they aren’t located on your property.
- Loss of use, such as paying for a hotel room while your home is getting fixed.
- Personal liability coverage (financial losses should someone get hurt on your property and sue you).
- Medical payments for people who get hurt on your property.
What Type of Policy Should You Get?
There are a number of different kinds of insurance policies — ranging from an HO-1 to an HO-8 policy — but most owners of single-family homes should opt for an HO-3 policy. This policy is fairly comprehensive, providing liability coverage and covering most “perils” to your home such as fire, wind and theft (but typically excluding flood, earthquake, war and nuclear accident). (The HO-1 and HO-2 policies cover less than the HO-3; the HO-4 is for tenants and renters).
Homeowners in certain high risk areas for flooding, such as the state of Florida or other coastal states, may also be required to add flood insurance to their policy. Others in high risk areas for earthquakes might want to add optional earthquake coverage for to make sure you’re covered in the event of a quake.
How Much Insurance Coverage Do You Need?
There are a number of things to consider when figuring out the details of your insurance policy and how much coverage you’ll need.
First, ideally you will want to purchase enough insurance to cover 100 percent of the cost of rebuilding your home should it get damaged or destroyed. You can opt for several different options:
- “Actual cash value” coverage: This pays you what the property was worth at the time it was destroyed, minus depreciation.
- “Replacement cost” coverage: This is a more comprehensive option which does not factor in depreciation
- “Extended value” coverage: This will pay you up to 20-30 percent over your policy coverage limit. So a $100,000 policy might have $120,000 – $130,000 worth of coverage; this is designed to protect you against things such as sudden hikes in construction costs due to storm damage.
It’s usually best to get a more comprehensive option so you can cover 100 percent of the cost to rebuild your home.
Next, consider the contents of your home to see what you need coverage for. Make an inventory of your home’s contents (the Insurance Information Institute’s website can help you do this) to determine how much insurance you’ll want to cover your home’s contents. Again, rather than opting for an “actual cash value” option, go for a more comprehensive option, so you can afford to replace everything you own.
Make sure your homeowners policy has enough liability coverage to cover the total dollar amount of your financial assets, like your home, retirement accounts, investments, and anything else worth money.
You may also need to add extra coverage to the insurance policy. Most standard homeowners insurance policies do not protect your property in the event of floods and earthquakes. So if you live in a state or area prone to these types of events, you may want (or be required to by your lender) to purchase extra insurance coverage. If you have many valuable items in your home such as fine jewelry or expensive artwork, you may want to add a so-called personal property provision to your insurance policy, which will make sure you are fully reimbursed for these if they are destroyed, damaged or stolen.
How Much Does It Typically Cost?
In very broad terms, expect to pay about $35 per month for every $100,000 of home value, though it depends on your city and state. And of course the cost will vary by insurance company, so it pays to shop around for coverage. People in risky areas (areas prone to storms, crime and other perils) can expect to pay more, as can people who add extra coverage to their policies(for things such as floods or personal property.
To save money on homeowners insurance, see if you can get a discount for bundling multiple policies — like your home and car insurance policies — with one company. You should also call your insurance company to ask how you can lower your rates (by installing a security system, for example) or to find out if you have too much coverage. You can also consider raising your deductible, if you have the savings to pay the higher deductible.
To shop for homeowners insurance, it’s best to get quotes from at least four different companies that offer homeowners insurance coverage such as State Farm, USAA, Nationwide Mutual, Allstate and Liberty Mutual. Before you buy homeowners insurance, you can check out the insurance company’s financial health at ambest.com or standardandpoor.com.
What Is a Home Insurance Binder?
A homeowners insurance binder is basically a temporary homeowners insurance policy. It often takes a while to issue a permanent policy, so this policy may be issued in the interim until a formal policy is accepted or denied. Getting this policy can help facilitate closing on a home (because lenders require insurance coverage).