Homeownership may be the American dream, but a lot can—and often does—go wrong when you own a home.
A tree fell off the roof during a severe storm, your neighbor’s teenager drove the family car through your fence, a burglar stole everything but the kitchen sink while you were on vacation – now what?
This is where homeowners insurance comes in. It could be the difference between giving you peace of mind in an emergency or having to fork out your entire rainy day fund. Here’s what a typical policy covers, what it doesn’t, and how much it costs.
What is homeowners insurance?
Homeowners insurance protects you financially if your property or belongings are damaged by certain hazards. Insurance policies define a “peril” as an event that causes damage to your property or belongings. It is considered a “covered event” if it is listed on your policy.
After a fire, leak, or other unexpected disaster, filing a claim with your insurance company can help you pay to repair or replace items. A homeowners policy will also cover living expenses if your home becomes temporarily uninhabitable.
But what’s eligible for reimbursement depends on the type of insurance coverage you get and how much you have. In general, there are two types of homeowners insurance policies—called “Hazard Coverage” (HO-2) and “Open Risk Coverage” (HO-5), and a third: a Hybrid Policy (HO-3).
Broad Policy (HO-2) covers damage to your home or property caused by a list of named perils, including:
- Fire
- Lightning
- Winds
- hail
- Disorder
- Airplane
- Cars
- Smoke
- Vandalism
- Explosion
- Theft
- Eruption
- Falling objects
- Weight of snow, ice or sleet
- Overflowing or draining water from an air conditioner, household appliances or water supply.
- Damage from a sudden power surge
Special Policy (HO-3) covers damage to your personal belongings caused by specified hazards. But it expands the scope for structural damage so that all risks are covered except those specifically excluded in your policy (more on exclusions later).
Comprehensive Policy (HO-5) uses open peril coverage for all structures and contents on your property. This is the most generous and most expensive form of insurance, but it still has some exceptions.
There are different rules for homes that are at least 40 years old or considered a historic landmark (HO-8), as well as rules for renters (HO-4) and condo owners (HO-6).
What does homeowners insurance cover?
Most people who live in single-family homes have an HO-3 policy. It covers the following damages:
- Interior and exterior of the house
- Separate buildings on the site, such as a garage or shed.
- Personal items such as electronics and household appliances.
HO-3 also offers loss of use insurance, which covers additional living expenses if you have to move out of your home during renovations due to damage from a covered peril. It also provides personal liability and medical payments for injuries sustained by the visitor. For example, if your dog bites a friend at a dinner party, the insurance company may help pay the doctor’s bill.
As with most types of insurance, you must pay your share of the loss for physical and personal property damage before the insurance company gets involved. Most homeowners policy deductibles are relatively low, ranging from $500 to $2,000.
The home itself is usually insured for replacement cost. “It’s often greater than your purchase price and will likely increase over time,” says Angi Orbann, vice president of Travelers Insurance. “You could buy a house for $300,000, but it could cost $500,000 to restore.”
She suggests working with your insurance agent annually to review and update your home insurance coverage, which indicates other coverage limitations in your policy. Personal property coverage is typically 50% of home coverage. For example, if your home is insured for $500,000, your contents will be insured for $250,000 (limits reset annually).
You can increase the amount of coverage if this is not enough, but you should expect to pay higher monthly premiums. For loss of use and detached buildings, 10% to 20% of the residential area is typically covered.
Personal liability insurance has separate non-property limits, typically ranging from $100,000 to $500,000. Medical payment coverage can be up to $5,000.
What does homeowners insurance not cover?
A homeowners insurance policy is not a panacea for natural disasters. “Let’s say your roof starts leaking water, but there’s no wind or hail around, that can be ruled out, depending on the situation,” Orbann says. “Or if your refrigerator stops maintaining temperature, that’s wear and tear.” Pest infestations such as termites and mice are generally excluded as hazards, as is damage that was intentionally caused to the property by the homeowner or his immediate family.
And while much of the U.S. is increasingly affected by seasonal storms and hurricanes, weather-related flooding is not an insured threat, and neither are earthquakes.
“If this is a concern in an area, there are separate policies that can either be included in a homeowners policy or an entirely separate policy that homeowners must provide for these types of risks,” Orbann says.
Some types of personal property are excluded from a homeowners policy or have certain limitations, even if the damage is caused by a covered peril. For example, jewelry is covered under your policy’s limit for perils such as fire or weather damage, but theft has lower limits.
Most insurers will only pay up to $1,500 for stolen jewelry. Likewise, theft of a firearm is typically covered up to $2,500. To get full coverage for these risks, experts recommend purchasing a separate personal property insurance policy. In some cases, you may want to add additional insurance for high-value jewelry, such as an engagement ring or luxury watch.
If you operate your home as a business, homeowners insurance may not be enough to protect your business assets. In this case, it is best to consider adding a business insurance policy.
Finally, items insured under another policy, such as cars, boats or motorcycles, are not covered by a homeowners policy.
Is homeowners insurance required?
“Homeowners insurance is not a government requirement like auto insurance, but it is often required by the lender if you have a mortgage,” Orbann says. “Essentially, this is to ensure that their interests are taken care of if they lose,” she says.
It’s also a smart way for homeowners to protect their finances. In accordance with Insurance Information Institute (III), the average homeowners insurance claim is about $14,000. The most common claims are for wind and hail damage, averaging about $11,700 per incident. Fire and lightning are the most expensive property damage claims, averaging more than $77,000.
How much does a homeowners policy cost?
Homeowners’ insurance premiums have risen sharply over the past decade. Severe weather events, more expensive building materials and labor shortages much to blame. The average U.S. homeowner paid $1,272 a year for contents insurance in 2019, according to the latest data from the National Association of Insurance Commissioners. This is almost 40% more than in 2010. In some states, such as Texas, homeowners insurance can cost more than $4,000 per year.
“How much you pay for a policy depends on the features of your home and your homeowner’s insurance history,” Orbann says. “We always say that homeowners insurance doesn’t have a VIN number like auto insurance, where you have a number and you know almost everything about the house,” she says. Insurers rely on homeowners to disclose their past claims and then fill in any gaps using third-party data sources.
As with any real estate, the location of your home is of utmost importance. Property insurance companies use a risk rating system that helps them rate insurance policies based on geographic exposure to certain risks, namely weather.
“If you’re in California, you’re going to have a higher rate of wildfires,” Orbann adds. “If you’re on the East Coast, you’re likely to have a higher level of hurricanes. Wind, hail and tornadoes in the Midwest.”
Here are the main factors that influence homeowners insurance premium pricing:
- Location: Your home’s zip code can tell insurers a lot about the level of risk in your area, such as the frequency of theft or weather events. Location also helps insurers factor in local labor and building materials costs to estimate how much it will cost to rebuild a home after a total loss.
- House price: More expensive homes tend to be more expensive to insure.
- House characteristics: The unique features of the home are taken into account, from the number of bedrooms and bathrooms to the roofing material and the presence of a pool. The age of your home is also critical, as newer homes tend to have fewer hazards.
- Insurance claims history: The nature and frequency of your past insurance claims as a homeowner helps the insurer assess your level of risk.
- Marital status of the homeowner: Married couples tend to file fewer claims than unmarried people, a factor considered less risky by insurance companies.
- Coverage amount: Most HO-3 policies provide home replacement cost and actual cash value coverage for personal property. If you want your policy to replace lost property rather than pay the amount reduced by depreciation, it will cost more.
- Franchise: A higher deductible may result in a lower insurance premium.
Taking into account all the individual factors that go into pricing a homeowners insurance policy, it is the most and least expensive, according to 2019 data from the National Association of Insurance Commissioners.
Here are the most and least expensive states for homeowners insurance:
Most of the factors used to set bonuses are outside your control. However, you can take steps to qualify for discounts. Adding smart systems to your home, such as a security camera or a smoke detector that alerts your phone if you’re not home, can lead to lower insurance premiums. Installing a new roof can also make a big difference.
Typically, purchasing two or more insurance policies from the same company (called bundling) can result in a cheaper monthly payment.
Home ownership is dynamic, and the insurance you buy to protect what is likely your greatest asset is not a “set it and forget it” activity, especially in an era of high inflation. “The cost of everything is going up,” Orbann says. Visiting your insurance company once a year to adjust your home’s replacement cost and take into account new discounts is “especially important now,” she said.