Edited by Paul Martin
If you’ve just bought a house, congratulations! You’re a homeowner now. But that means it’s probably time to shop for a homeowners insurance policy.
So, what is homeowners insurance, and why do you need it?
Similar to a car insurance policy, with which you may be more familiar, homeowners insurance helps cover the cost of damage to your property and for liability for injury for damage you cause as a result of your home. Your home and the items inside it are susceptible to damage from external elements like fire, wind or theft (some homes may also be at risk for earthquakes or floods).
If your home becomes uninhabitable due to damage, homeowners insurance can help cover the expenses you have to live elsewhere while repairs are made, such as a hotel or a rental property
As you begin shopping around for a policy for your house, here’s what you need to know.
Do I Need Homeowners Insurance?
For many with a mortgage on their home, having a homeowners insurance policy is a requirement of the bank for the duration of the mortgage to protect the bank’s investment. Even if you don’t have a mortgage, homeowners insurance is an important financial consideration to help protect you from taking on unexpected high costs of a loss by yourself. Imagine taking on the risk of the cost of rebuilding a home that costs hundreds of thousands of dollars.
Most maintenance costs associated with home ownership can be reasonably anticipated. In fact, it’s estimated that the average homeowner will spend around 1% of their home’s value annually on maintenance. If you purchase a $500,000 house, you should expect to spend about $5,000 a year on repairs and upkeep. The largest expenses will likely happen when major home systems, such as your roof, windows, furnace, water heater, or septic need replacing.
You are responsible to pay for expected repairs to your home. But homeowners insurance is designed to help you pay for unforeseen losses that are beyond your reasonable control, such as natural disasters or theft. When you purchase your insurance, the policy will outline what losses are covered and how much coverage you’re entitled.
Parts of Your Homeowners Insurance Policy
Every homeowners insurance policy is different, and the insurance policies and laws can vary from state to state, so it’s important to understand what each line item on your policy means to ensure the coverage you purchase is sufficient for your particular property.
>> Policy Period: When your homeowners insurance coverage begins and ends.
>> Policy Premium: The cost of your homeowners insurance coverage for the duration of the policy period.
>> Deductible: How much money you are responsible for when you file a claim.
For example, if you file a claim for $5,000 in repairs but have a $500 deductible, you pay the first $500 and your insurance pays the remaining $4,500.
You may be able to lower the overall cost of your homeowners insurance policy by selecting a higher deductible.
>> Declarations: The first section of your policy summarizes the property being insured, the insurance company, the amount of coverage, and the cost.
>> Coverages and Liability Limits: The coverages section of your policy is usually broken into two columns: property coverages and liability limits.
The property column most commonly shows a list of properties covered, including your primary dwelling (main house), any secondary structures if applicable (shed, pool house, barn, fence, gazebo, etc.), and your personal property .
Next to each line item in the property column is usually a dollar amount in the limits column. This is the maximum amount the insurer would pay (minus your deductible, if you have one) for damage to the properties in the property column. It is critical to ensure the limit is high enough to cover the costs of completely replacing your home, secondary structures, and/or personal items in the event of total loss.
The coverages section also often includes personal liability coverage to protect you should you be found liable for anyone else’s bodily injury or property damage that occurred on your property or as a result of its use.
>> Additional Living Expenses: Should you be unable to live in your home after it was damaged and needed to temporarily relocate while it was repaired or rebuilt, your homeowners insurance may cover costs incurred beyond your normal expenses, like hotel bills.
>> Exclusions: This section outlines what your homeowners insurance policy does not cover and could include things like flood and earthquake damage, pest and mold damage, and sewer/drain backups.
Read the exclusions section of your policy carefully to see if any of the excluded coverage could be relevant to your particular living situation. For example, if your home is in an area where water damage from flooding is common, you may want to consider purchasing additional flood insurance to fill this gap in the form of an endorsement (see below) or a separate policy.
>> Conditions: The conditions section describes the responsibilities that both parties – you and the insurance company – must adhere to when there is a loss
For most, the policyholder agrees to take reasonable measures to protect the property, report losses in a timely manner, and provide the insurance company with any requested information. The insurance company agrees to take the necessary steps to investigate, settle, and pay a claim when appropriate. Not directly addressed in the policy is the insurance company’s obligation to follow state law in the handling of claims.
>> Endorsements: Endorsements to your homeowners insurance policy, also known as add-ons, riders, or amendments, change the standard policy by adding, limiting, or excluding certain coverage.
Common endorsements are additional coverage for high-value items (such as jewelry or art), home businesses, or specific perils like flooding.
Other types of endorsements help protect you when costs to repair or replace increase due to inflation or depreciation. These include guaranteed replacement cost coverage, where the insurer pays the full cost to rebuild and restore your home regardless of your limits; extended replacement cost coverage, which can increase your liability limits by a certain percentage; personal property replacement cost coverage, where the insurer agrees to replace your items regardless of their age with equivalent new items; and inflation guard coverage, which increases your limits by a per-day percentage to keep up with inflation.
It may be helpful to work with an experienced insurance agent to help determine if any endorsements would be beneficial to your specific policy.
How to Purchase Homeowners Insurance
Now that you understand the different parts of a homeowners insurance policy, it’s time to shop around for one by requesting quotes online from specific insurance companies or using an insurance agent to shop for you. You will likely need to provide either the insurance company or insurance agency with basic information about your property and yourself.
You need to align your annual insurance budget with the amount of homeowners insurance you and your specific property require. Less coverage can equal a lower policy premium, but it can also leave you footing a larger bill should your property suffer any damage. When different quotes come in from different insurers, be sure to look them over carefully to see if there are varying deductible amounts, covered perils, limits, and exclusions. Now is also the time to figure out if you need to add any endorsements.
Home Owners Insurance Discounts
Some insurance companies may have discounts available for your homeowners insurance policy. If you already have another insurance policy, like for your car, ask if bundling your car insurance with your homeowners insurance can get you a lower rate. Staying with the company that insures your car could also get you a loyalty discount, if offered.
Other common homeowners insurance discounts include:
>> New home discount: Because risks for a new construction are generally lower than those of an older dwelling, you may be able to save money on your homeowners insurance if you move into a brand-new home.
>> Protective systems discount: A security system or fire sprinklers can help protect your home from burglary or fire and smoke damage, which lowers your risk of filing a claim.
>> Secured community discount: Houses located in a community with entry gates and/or a private security company are more protected against theft or damage.
>> Senior discount: Some insurance companies offer discounts for homeowners over a certain age.
Some banks may opt to pay your homeowners insurance policy premium for you by setting up an escrow account with your mortgage that you contribute to monthly. This ensures that your policy is always paid on time and in good standing for the lender. If the price of your policy increases year over year, your monthly mortgage payment will likely also increase to ensure there are enough funds in the escrow account to cover this difference.
What Happens After You Purchase Homeowners Insurance?
Once you and the insurance company have worked out every element of your homeowners insurance policy, the policy becomes active at the start of the policy period (also known as the effective date). If required, you can now provide your mortgage lender with proof of insurance.
At this point, the insurer may send an inspector out to your property to check for any potential risks, hazards, or damages that were not disclosed. The inspector can check both the exterior and interior of your dwelling, including major systems and security features, and look for evidence of past damage like water or fire. The results of the inspection can lead to your policy being approved, denied, or adjusted. The insurer also may require that repairs be performed before the policy is continued..
Similarly, if your home undergoes a renovation, addition, or any significant change during the policy period, it is important to alert your insurance company. They can adjust your homeowners insurance policy to reflect these changes if needed.
Overall, homeowners insurance is an important part of homeownership. It’s so very important to protect what will probably become the biggest purchase of your life.
FAQ
Do I have to get homeowner’s insurance?
If you have a mortgage, it’s usually required by the bank that you must have a certain level of insurance coverage. Even if you don’t have a mortgage, you should get homeowner’s insurance as it protects you against many potential problems.
Will my insurance replace my house if it is completely damaged or destroyed?
Yes, most policies have a replacement cost value in the policy to cover completely replacing your house and belongings in case of a catastrophic event.
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The information provided on this website is for general informational and educational purposes only and should not be considered legal, financial, or insurance advice. While we strive to keep content accurate and up to date, insurance laws, policies, and regulations can vary by state and may change over time.
Nothing on this site constitutes professional advice or a recommendation of any specific insurance product, provider, or strategy. You should consult with a licensed insurance agent, financial advisor, or legal professional regarding your individual situation before making any decisions.
