Protecting your home and your belongings is a smart financial decision.
There aren’t a lot of things worse in life than losing everything to a natural disaster, or having your house robbed. Setting aside a little money each month to pay for insurance protects you and your family against worst-case scenarios. And, in fact, unless you’re buying a home in cash, mortgage companies require home buyers to have insurance.
But just because homeowners insurance is important and you’re required to buy some doesn’t make it easy. There are lots of different kinds of products on the market, offering different types of coverage. Knowing what homeowners insurance is, what it covers, and what it doesn’t cover are the first steps in making a good purchase.
What is Homeowners Insurance?
Homeowners insurance protects you against the financial consequences of loss of or severe damage to your home. It also provides insurance for other detached structures on your property, other belongings, and in some situations it offers liability protection in case you or your family gets sued.
What Kinds of Homeowners Insurance are There?
Homeowners insurance policies offer several different types of coverage. Here are the most common items covered by typical policies on the market today:
Other structures on your property
Guest medical coverage
Additional living expenses
But that’s only for the most common home insurance products. If your situation is unique, you should consider purchasing additional optional coverage, known as a rider, which can cover additional liabilities. Common riders include:
Appraised personal property, like antiques, jewelry, and/or artwork.
Business property. For example, you might own a company that stores its merchandise in your own garage.
Sports equipment, like surfboards and skis.
Landscaping, which includes valuable things like trees and lawnmowers.
Companies offer insurance to coverage a variety of different risks associated with owning a home. If it’s a real liability, odds are an insurance agent can write a policy to get you coverage.
What Does Homeowners Insurance not Cover?
It’s critical to understand that homeowners insurance does not cover every single reason your house might get destroyed. Floods are a case in point. When a major flood devastates a populated area, it destroys almost everything. Insurance companies wouldn’t remain in business if they had to pay out billions of dollars in claims every time hurricane season rolls around.
That’s why the government created the National Flood Insurance Program (NFIP) through FEMA, which subsidizes the insurance market for people who live in flood plains. Without a policy through the NFIP you aren’t covered for floods from hurricanes, heavy rains, or overflowing rivers. The NFIP also requires that owners in flood-prone areas carry insurance when they take out lines of credit. That way, lenders can be sure they’ll get their money back in case the worst happens.
Earthquakes are also in the same category as floods. Typical homeowners insurance policies won’t provide coverage in the case of losses due to an earthquake. Instead, you’ll need to buy a separate earthquake insurance policy. Floods are much more common than earthquakes, however, so there isn’t a federal program. Instead, there are local programs run at the state level for structures built on or near fault lines. For example, the California Earthquake Authority (CEA) is a nonprofit offering different types of coverage options in case the ground starts shaking.
It’s important to understand the distinctions between what homeowners insurance policies will and will not cover. They won’t cover damage from floods or earthquakes. However, imagine a storm hits your home and blows the roof off, causing rainwater to flood your basement. Or imagine an earthquake strikes your city, causing a fire that in turn burns down your house. In both situations, as long as the initial event did not destroy your house, the side effects would usually be covered.
How Much Does Homeowners Insurance Cost?
The most important thing to consider when deciding how much to spend on homeowners insurance is the amount of money it would take to rebuild your home. Insurance policies are designed to mitigate risks, so here are the key terms to pay most attention to:
Cash value coverage pays you the amount of money the home is worth at the time it was destroyed, less depreciation. Typically, this won’t be enough to rebuild a home from scratch.
Replacement cost coverage pays the amount of money a house is worth without subtracting anything for depreciation. It’s more comprehensive and therefore a better option, even if it’s more expensive.
Extended value policies cover the replacement cost of a home, plus some leeway for higher construction costs in the future. Imagine if a disaster destroyed your entire neighborhood–construction workers would probably charge a lot more if demand for their work skyrocketed.
Regardless of which type of coverage you select, a good rule of thumb, according to Zillow, is to expect to pay about $35 per month for every $100,000 of property value coverage. For a typical house costing $250,000, this comes out to $87.50 per month, or $1,050 annually. Actual prices will vary depending on the location where you live and the company you work with.
How to get Homeowners Insurance
It always pays to shop around, especially if you already know what you need to buy.
If you already have a relationship with a property or casualty insurance company, it’s smart to start by asking them for a quote. You will already know what their customer service is like, and many companies often offer discounts for bundling different types of policies together.
Mortgage companies commonly require you to carry homeowners insurance when you first take out a mortgage. In fact, it’s not only a prerequisite for getting a loan, but they usually make you pay for several months of coverage in advance. This protects the lender in case you buy a home that immediately burns down a day later.
Frequently Asked Questions
- What’s the difference between mortgage insurance and homeowners insurance?
Mortgage insurance and homeowners insurance are two different types of insurance products. Mortgage insurance protects only your lender in case you default on paying back your loan. It’s generally required if you put down less than 20% of the home’s value when taking out a mortgage, and it goes away after you build up more than 20% equity in the home. Homeowners insurance protects both you and your lender. It covers the property inside a home, the structure of the dwelling, liability for the owner in certain situations, and, depending on the policy, potentially other structures on the property, too.
- If my home is destroyed in a flood, am I covered? What about an earthquake?
In short, no and no.
Flood and earthquake protection require separate policies, usually backed by public dollars due to their risky nature. Homeowners insurance only covers things like fires, lightning strikes, windstorms and hail. Things can quickly become complicated, however, if an earthquake were to cause a fire, which in turn destroyed your house. Check with your insurance agent and the details of your policy to know what’s covered.
- What’s a home inventory, and why should I make one?
A home inventory is simply a record of all your possessions. There are a few different ways to make one. You could write down everything big-ticket item that you own, describing each thing one at a time. Alternatively, you could walk through your home and take pictures of everything. We suggest simply creating a video with your phone, narrating the items in each room as you walk through your home. That’s the easiest and fastest way to create a comprehensive inventory.
Remember to upload your inventory to the cloud. That way, if your house gets destroyed, you’ll still have access to the inventory.
You should take the time to create an inventory because it will expedite the homeowners insurance claims process, if you ever have to make one. Imagine trying to remember the total value of all your possessions from memory. An inventory takes the guessing work out of the equation and helps the insurance company approve legitimate claims more quickly.
- What is an umbrella policy?
Unfortunately, it’s relatively easy to get sued these days. Lawsuits can be extremely expensive, and if you end up losing one, you might be on the hook for hundreds of thousands of dollars.
An umbrella policy is like supplemental personal liability protection. Lots of people buy all of their insurance coverage through the same company (auto, home, etc.). An umbrella policy protects you financially in case there’s a claim on any one of your policies.
If someone else gets injured on my property, does homeowners insurance cover me?
Typically, yes. You should always check with your insurance company to review what types of things your policy specifically covers. Homeowners insurance pays for whatever damages you are liable for even if you are found to be negligent in some way. An umbrella policy adds a further layer of protection in case you are responsible for paying more damages that your homeowners policy provides.