- How Does Homeowners Insurance Work?:
- What Does Homeowners Insurance Cover?:
- What Isn't Covered by Homeowners Insurance?:
- Types of Homeowners Insurance Policies:
- How Much Coverage Do You Need?:
- Do You Need Supplemental Coverages?:
- How Does Buying Homeowners Insurance Work?:
- Mistakes to Avoid When Buying Homeowners Insurance:
- How You Can Save Money On Your Policy:
- Choosing The Right Insurance Company:
How Does Homeowners Insurance Work?
Homeowner's insurance is sometimes also known as home or property insurance. It protects your home and any covered possessions against damage or theft so you aren't left paying out of pocket in a disaster.
Most mortgage companies require home insurance coverage for the total value of a property before they'll make or approve a loan. Without proof of homeowner's insurance, you may not be able to buy a house.
If you've never purchased homeowner's insurance, it can feel confusing or even overwhelming navigating the numerous companies, policies, and additional coverages you might choose from. This guide will make the process easier and more understandable for you.
Purchasing a Policy
If you're buying a home, you'll likely need to purchase a home insurance policy before receiving your mortgage. On the other hand, if you're shopping around for coverage on a home you already own outright, there aren't any time constraints on your decision.
You should research any minimum coverage amounts that apply to you. Although no states require homeowner's insurance, there may be minimums required by your mortgage lender or even your homeowners association (HOA). Once you understand the minimum coverage necessary, you can begin shopping for quotes online, over the phone, or in person.
Once you've found the right policy, you can purchase the insurance coverage and obtain proof of your policy. This will require you to sign a legally-binding document.
Maintaining a Policy
The contract you sign will detail how to maintain your policy. Most homeowner's insurance policies require you to inform your insurance carrier if you change your lifestyle or home. Certain things could require extra coverage, meaning your current policy wouldn't provide full coverage for your home anymore.
Examples of lifestyle or home changes you'd need to report include (but aren't limited to):
- Getting a dog
- Putting in a pool or trampoline
- Updating the roof on your house
- Replacing or upgrading windows
- Renovating the kitchen or bathroom
- Replacing older household appliances with new ones
- Replacing or upgrading the flooring
- Adding internal or external security features
- Internal or external renovations or remodels of any kind
Filing a Claim
If the unexpected does happen and your property is damaged or stolen, you'll file a claim. Claims can usually be filed online or through a mobile app on your phone. However, some insurance companies don't offer these options and require you to speak with an agent over the phone or in person.
The claims process will include answering questions about the accident and verifying your coverage. If relevant, you'll need to provide pictures, and a claims adjuster may come to your home to inspect the damage.
Determining Coverage and Payouts
For anything that falls within your homeowner's insurance policy, you'll be provided with a monetary payment that allows you to replace or repair damaged or stolen items, as appropriate. Your payouts will be determined by the amount of coverage you have.
You'll pay a premium to your homeowner's insurance company every month. This premium may be lumped into your mortgage payment, or it may be made separately. Your premium must be paid on time each month to maintain your coverage and have the ability to file claims when something goes wrong.
As detailed above, you'll also need to ensure you've maintained the policy. For example, if you put in a new pool but didn't tell your insurance company, your policy could be voided for breach of contract.
However, if nothing is wrong, your insurance provider will help you through the claims process once you initiate it. You'll be provided an agent to assist you, who you can contact with any questions, comments, or concerns as they come up.
What Does Homeowners Insurance Cover?
A standard home insurance policy covers any repairs or replacements for your home and its contents in the event of damage. Many types of damage are covered, but it depends on your exact policy.
Some policies cover more than others, and most do not cover certain types or causes of damage. That’s why it's crucial to read over your contract and policy in detail to fully understand the kind of coverage you'll receive in an emergency.
Although every policy is different, most standard options cover damage that results from the following:
- External forces (like falling trees or flying debris)
What Things Are Covered for Repair or Replacement?
Your home's structure in its entirety, including the roof and windows, is generally covered under standard home insurance policies. Most companies will also cover damage to out-buildings like a garage, barn, or shed.
However, to receive this additional coverage, you have to remember to inform your insurance company whenever you change your lifestyle or home. For example, if you added a shed to your property and didn't inform your insurance company, its damage potentially won't be covered.
Besides your home and outbuildings, the following is usually also covered:
- Heating and cooling systems
- Kitchen appliances
- Other personal possessions
- Outdoor grills
- Swing sets
A pool may also be covered under your policy. However, you'll likely be required to carry additional coverage if there's a pool on your property since it presents additional liability issues.
Additionally, living expenses could be covered if your home is uninhabitable. In this scenario, you'd be given money for a hotel stay as long as your home is being repaired.
Liability Insurance May Cover Additional Things
If you have liability insurance included with your homeowner's insurance, you'll have additional coverage against certain things. If a visitor is injured on your property, your insurance company will reimburse related medical expenses and legal fees.
What Isn't Covered by Homeowners Insurance?
As mentioned above, a standard homeowner's insurance policy doesn't cover anything you failed to add to your coverage. Failing to maintain your policy by updating your insurance company of any home or lifestyle changes could potentially void all your coverage.
Besides this, a few other things aren't usually covered by a standard home insurance policy. These usually include:
- Valuable jewelry
- Damage from an earthquake or flood
Home insurance also doesn't provide identity theft protection, even if you have some coverage for the stolen items that allowed for this. For example, let's say you keep all your important documents in a safe. You included the safe in your list of valuable belongings and received coverage for it.
If the safe was stolen, the cost of it might be reimbursed. However, any financial problems because someone used those documents to steal your identity would not be.
Although standard policies don't usually cover the damages listed above, you can choose to add supplemental coverage or a separate policy. For example, if you live in an area prone to floods, you can purchase flood insurance. The same goes for areas prone to earthquakes.
Pools, valuable jewelry, and collectibles can usually be added to your standard policy by increasing coverage. While this does mean your monthly premium will be higher, it ensures your home and property have an appropriate amount of coverage should anything happen.
Identity theft protection isn't usually tied to your homeowner's insurance. Instead, you could purchase protection from a financial institution or similar source. Many banks and credit card companies offer some protection against identity theft.
Types of Homeowners Insurance Policies
There are many different types of homes you might purchase or call your own. As such, there are several standard homeowner's insurance policies you could choose from. Each option provides a different level of coverage that works best for a specific home type or situation.
An HO-1 policy is the most basic home insurance you can purchase. This policy offers no coverage for your personal property, nor does it provide liability insurance. In addition, any additional living expenses incurred when your home is uninhabitable are not covered.
What an HO-1 policy does cover is your home's structure, including the roof, windows, walls, and flooring. Any structures physically attached to your home, such as an attached garage, would also be covered. Major appliances, like those found in your kitchen, qualify for coverage under an HO-1 policy.
This policy type is called a “named perils” policy because it only covers your home in specific situations, which vary based on the particular insurance provider. Generally, an HO-1 will cover damage to your home caused by aircraft, vehicles, riots, theft, and vandalism. It will also cover damage from explosions, hail, high winds, fire, lightning, or volcanic eruption.
An HO-2 is also known as a broad form insurance policy. It covers everything an HO-1 covers and provides additional coverage for your personal belongings. A broad form policy may also include some liability coverage.
Besides those things covered by an HO-1 perils policy, an HO-2 policy also provides coverage for personal belongings in the same situations. This is in addition to the home's structure and major appliances.
An HO-2 will provide coverage in a few additional situations, like:
- Falling objects
- Sudden, accidental damage from electrical currents
- Accidental discharge or overflow from water or steam originating inside the home
- Accidental damage caused by some large household systems
- Weight from snow, ice, or sleet
- Frozen pipes and HVAC units
An HO-3 policy is the most common type of homeowners insurance since it provides a wide range of coverage for accidents, natural disasters, and other damage types. A standard HO-3 policy will cover your home, personal property, liability, medical payments, and additional living expenses.
However, there are some perils or situations where damage to your home or personal property isn't covered. Damage from the following events is usually excluded:
- Defective maintenance, construction, or renovations
- Foundation problems
- Damage from any pet or animal, including rodents and other infestations
- Government actions, including new laws or ordinances
- Pollution, corrosion, smog, or rust
- Mechanical breakdowns or power failures
- Normal wear and tear
- Intentional neglect or loss
- Flooding or earthquakes
- War, including nuclear hazards
- Wet rot, mold, mildew, and other fungi (unless caused by a covered peril)
HO-4 policies are also known as renter's insurance since they're intended to cover the personal belongings of those who rent their homes. Renter's insurance also usually includes liability and additional living expenses in a disaster or emergency. Since renters don’t own their dwellings, the building's structure is not covered under this policy.
Renter's insurance covers damage to personal property under all the same perils as an HO-2 policy. However, it also usually covers damage caused by frozen pipes.
For homeowners looking for the most comprehensive insurance option available, an HO-5 is the best choice. Coverage includes your home, personal belongings, liability, medical payments for others, and additional living expenses. An HO-5 policy will also allow you to have higher coverage limits for things like jewelry or collectibles.
This is the gold standard policy if you have any high-value personal items. Your home and items will also have an "open perils policy," which means they're covered under anything not explicitly excluded in your policy. Be sure to read your contract to see what items are expressly excluded to determine if additional coverage for floods or other uncovered events is necessary.
You can call an HO-6 policy, condo-unit owner's insurance since this coverage type is designed specifically for that. Everything inside your unit would be covered under this policy type, along with additional living expenses, personal property, and personal liability.
Condo insurance policies will also usually cover some parts of the dwelling since condo residents are often responsible for their interior walls and other aspects of the unit. However, coverage would be limited to your specific condo dwelling.
Other parts of the condo are generally covered under a separate policy held by the owners. However, if you're a condo owner, you likely contribute to these separate policies in the form of HOA dues or condo fees.
If you own a manufactured or mobile home, you'll need an HO-7 policy. This policy type also covers sectional homes, modular homes, trailers, and RVs. An HO-7 will protect your home's structure and personal belongings. It also covers medical payments, additional living expenses, and liability.
The exterior of your mobile home is covered by anything not explicitly excluded in your policy. However, your personal belongings will only be covered by those things specifically mentioned. The situations where personal belongings are covered will vary from one policy to the next, making it crucial to read your documents in detail.
If you have an older home, an HO-8 policy might be your best option. An HO-8 policy covers homes that are historical landmarks or architecturally significant. Included are houses built with materials or methods not common today or challenging to come by somehow.
You'll get standard coverage for your dwelling and personal property with this policy. Also included are liability, medical payments, and additional living expenses. Everything is covered under a named perils policy, which allows you to file a claim if anything becomes damaged under specific circumstances.
How Much Coverage Do You Need?
Determining how much coverage you'll need on your home insurance policy can seem tricky. However, a golden rule is that you'll need coverage for at least the costs of rebuilding your home. You should consider normal inflation for building materials and labor costs, too, if you plan on staying in your home for an extended period.
Take the average home construction cost in your area by the square foot and multiply it by your home's square footage to determine the minimum amount of coverage you'll need.
Special Considerations in Determining Home Value
The cost paid for your home could be more or less than the costs to rebuild, but it might be a good starting point. An even better option is to have your home appraised to understand your home's actual value.
An appraiser will consider things that would make rebuilding your home cost more than the average. A few of these special considerations might include:
- Unique architectural features
- Premium materials, including flooring types or high-quality windows
- Materials that are challenging to find in the current market
- The type of exterior wall construction
- Any additional buildings on the property (including garages, sheds, barns, and other outbuildings)
- Special features like fireplaces, swimming pools, decks, outdoor kitchens, and more
- Whether the home was custom built
These aren't all of the special considerations there might be. However, they do encompass the most common ones. Only an appraiser can offer an accurate estimate of your home's worth for insurance coverage purposes.
Coverage for Personal Belongings
Most standard home insurance policies cover personal belongings from between 50% and 70% of your dwelling's worth. This may be enough if you don't own anything expensive or of a high value.
However, if you own anything of high value, you'll want to take an inventory of your personal belongings. You can determine their estimated value and see if the standard coverage for belongings is enough for you. Most policies allow you to add extra coverage for high-value belongings if it's not.
Do You Need Supplemental Coverages?
What happens when you realize your standard home insurance policy doesn't cover everything you need it to? Supplemental coverages exist to fill these gaps.
Supplemental policies come in a few different forms. You can choose extra coverage for high-value personal items and sewer problems or if you live in an area prone to earthquakes or flooding. You could also choose an umbrella policy.
A standard homeowner's insurance policy will cover your personal belongings up to a predetermined dollar amount. In the last section, you learned how to determine if that's enough coverage for you. You can choose supplemental coverage for those items above your standard policy if it's not enough.
Most people don't need supplemental coverage for their belongings. However, you might need this additional coverage if you own any of the following:
- Rare or old books (including comic books)
- Trading cards that are rare or otherwise of high value
- Fine art
- Expensive jewelry
- Collectible figurines
- Priceless statutes or other standing art forms
- Expensive luxury brand clothing, purses, or shoes
- Any collectibles that are rare, vintage, or otherwise of high value
Before choosing supplemental coverage, you should know what your high-value items are worth. For things like collectibles, expensive jewelry, or fine art, you may consider using an appraiser to help you determine their value.
Most standard home insurance policies will cover damage from broken pipes, but they won't cover damage caused by sewer or drainage backup. Your sewer system could back up for numerous reasons, including:
- Sump pump can't handle excess water runoff after a heavy rain
- Roots from trees or shrubs make their way into the sewer line
- Pipes become damaged for any reason
- City sanitary main becomes blocked
- Your septic system is overfilled or blocked
Sewage can cause severe problems like electrical malfunctions, which can lead to fire or electrocution hazards. Sewage backup can also lead to mold, mildew, or even disease. Sewage is considered hazardous material and could cause serious harm to your family or pets.
Supplemental sewage insurance would help provide for damage done to the property and any necessary clean-up measures, as well as for medical bills that occur after sewage exposure in some circumstances.
Damage caused by earthquakes is commonly excluded from standard home insurance policies. Part of the reason for this is the extent of damages caused by the earth shifting. However, most major insurance companies offer earthquake coverage for those in areas prone to this type of natural disaster.
If you purchased a home in an area like California, where earthquakes happen frequently, you'd want to add supplemental coverage. The costs and exact damage coverages will vary widely from one provider to the next, so be sure to do your research.
Damage due to flooding isn't covered under most standard home insurance policies. When flood damage is covered, it's either very limited or only pertains to internal flooding. For example, a policy may cover pipes bursting, but it won't cover flooding due to a natural disaster.
If you live in a designated flood zone, you could qualify for coverage through the National Flood Insurance Program. Coverage through this program will help rebuild a home for up to $250,000. However, sometimes this isn't enough, and you may also want to purchase flood insurance coverage privately.
Not sure if you live in a designated flood zone? The Federal Emergency Management Agency (FEMA) has a helpful tool you can use here. After typing your home address in the query bar, you'll be provided with your area's flood risk.
Umbrella policies provide higher coverage than your standard policy and often include additional coverages. For example, it could consist of coverage from more perils than your standard policy does. The cost of an umbrella policy depends on how much coverage you already have and the type of liability the insurance company believes you present.
Most companies also require you to have a standard policy that covers at least $300,000 in damages first. If you don't possess that much coverage, you might not be able to get an umbrella policy. Instead, increasing your coverage amounts may be enough.
How Does Buying Homeowners Insurance Work?
If you're like most people, buying homeowner's insurance will almost be an afterthought when first purchasing your home. Thankfully, the process itself is very simple. However, you'll want to ensure you've taken all the necessary steps to buy the proper coverage.
Figure Out the Coverage You Need
Before anything else, you'll want to figure out what type of coverage you need, as well as how much. You may find it helpful to speak with your real estate agent if you need help determining coverage. Once you compare quotes, you can also talk to an agent from the insurance provider you've decided to go with.
Once you know how much coverage and the type of policy you need, you can compare quotes. You can do this online, and most major insurance companies provide free online estimates.
Remember to ensure your quotes are for the coverage and policy type you need. Most companies utlize a tool that will ask you a series of questions to determine the right amount of coverage for your quote. To get the most accurate estimate, answer the questions truthfully to the best of your knowledge.
Purchase the Policy
Once you've found the right policy and company for you, you can move forward with purchasing it. Some companies will allow you to buy home insurance online, while others will have you speak with an agent over the phone or in person.
When purchasing your home insurance, you'll need to provide information about yourself, your home, and your property. This will help the insurance provider verify the coverage you're looking to purchase is sufficient for your needs.
Some of the information you'll likely need to provide includes:
- Contact information for you and anyone else living in the home
- Your marital status
- The length of time you've lived at your home (or whether it's a new purchase)
- Whether you run a business out of your home
- If you own any pets (especially dogs)
- Whether there is a mortgage on your home
- Total home value
- Your home's square footage
- The year your home was built
- The roof age and materials used (composite shingles, metal roofing, etc.)
- Whether you have a pool or other features that present a higher liability
- Any upgrades made before purchase (or since you moved in)
- Any safety devices or features your home has (security cameras, alarms, etc.)
Once you've supplied your information, you'll have to sign a contract. Be sure to read the agreement in full, as it'll detail what your policy covers and doesn't cover.
Remember to Maintain Your Policy
Once you've purchased your property, you'll need to maintain it by providing any new information or changes to your provider. If you fail to report changes to your lifestyle, home, or property, you could be in breach of your insurance contract.
If you're in breach of your insurance contract, any claims you file may be voided. Sometimes, changes won't require anything outside of reporting them. However, some changes will require you to increase your coverage amounts or purchase supplemental coverages.
Mistakes to Avoid When Buying Homeowners Insurance
If you want to get the best coverage at the most affordable price, there are a few mistakes you'll want to avoid. Unfortunately, these mistakes are made all too frequently, especially by new homeowners.
Not Purchasing Enough Coverage
Be sure to take a thorough inventory of your personal belongings and know the actual costs of rebuilding your home. If you're left without enough coverage, you could end up in a bad financial situation should a disaster strike.
Setting Too Low of a Deductible
Your deductible is how much you'll end up paying out of pocket if you need to file a home insurance claim. Your deductible and your monthly premium go hand-in-hand. If you set too low of a deductible, you'll pay a higher premium. But, if you select a higher deductible, you'll end up with a lower premium.
Setting a higher deductible can save you significantly over the long run. You'll pay your premium every month, regardless. However, you'll only pay your deductible if an emergency or disaster happens.
Not Bundling Your Insurances
Most insurance companies provide several forms of insurance, and bundling these policies together can save you money. For example, you can bundle your car and home insurance policies together to save a percentage of the total costs.
Failing to Report New Safety Features
If you installed new safety features around your home or property but didn't report them, you could miss significant savings. Most home insurance companies will offer discounts if you have security systems, storm shutters, privacy fences, or other safety features.
Not Knowing Your Risks
Before purchasing homeowner's insurance, make sure you know your risks to be fully covered. For example, if you live in an area prone to earthquakes or flooding, you can mitigate these risks by purchasing supplemental insurance. If you present additional risks to the insurance provider because you own a pool, you'll know to expect a higher premium.
How You Can Save Money On Your Policy
Homeowners insurance is a big decision that you don't want to skimp on. However, that doesn't mean there aren't ways you can save money on your policy. Below are a few ways you might be able to save on your overall home insurance costs.
Shop Around Before Buying
Some insurance companies can offer lower rates than others, which can vary based on your location. Shop around online and get quotes from at least three different providers before deciding. If you don't shop around, you may find out later you're paying too much.
Install Safety Features
Most home insurance companies offer discounts if you install certain safety features. They offer this discount because safety features make the home less prone to burglary. As such, homes with security systems, alarms, doorbell cameras, and security cameras present less of a liability than those without.
If your home doesn't already have safety or security features, installing them could be worthwhile. Ask your insurance company what safety measures qualify for a discount.
Make Your Home More Resistant to Disasters
Some companies offer discounts if your home has been built or remodeled to be more resistant to disasters. For example, you could make your home more resistant to strong storms by installing storm shutters, buying more robust roofing materials, or having your home retrofitted if it's older. Modernizing your home's major systems can reduce water or fire damage risks.
Ask About Additional Discounts
Most insurance companies offer additional discounts that don't require anything besides asking for them. For example, if you're over 55, you may qualify for a senior discount. Current and former military members, police officers, and firefighters usually qualify for a discount, too.
Some insurance providers partner with local groups to allow members a percentage off their monthly premiums. An insurance agent can provide you with a list of these local groups or memberships that qualify through their company.
Maintain a Good Credit Score
Having a good credit score can help you save money on most things. Besides saving money on home insurance, having a good credit score can help you save money on your mortgage or car loan. To maintain a good credit score, keep all your accounts up to date and keep your credit usage under 30% whenever possible.
Stay With the Same Insurance Carrier
Most major insurance companies will offer discounts to loyal customers. Unless you find significant savings with another company or have another serious reason for switching, staying with the same insurance carrier can save you significantly over time.
Even if you've never purchased homeowner's insurance, you could save if you add this policy type to another insurance. Not only will you potentially save for staying with the same insurance carrier, but you'd also be receiving a bundling discount.
Choosing The Right Insurance Company
Choosing the right insurance company is nearly as important as picking the right policy, if not more so. Remember, the insurance company is who you'll have to deal with in an emergency. Thankfully, you can use a few methods to determine which insurance companies are your best options.
Ask for References
Chances are high that you know someone who has homeowner's insurance. Ask them what provider they use and whether they’d recommend it. Be sure to get the reason as to why they would or wouldn't recommend the company they use. You can also ask if they've used other companies before and why they switched.
Read Online Reviews
There are numerous sites that allow current or previous customers to leave reviews of companies. Before purchasing a home insurance policy, consider reading online reviews about the companies you’re considering.
Remember that one, or even a handful, of negative reviews doesn't make a company bad. Instead, look at the overall reviews and ratings. If a company has overall positive reviews with a rating of three stars or higher, you can feel confident in choosing them.
Avoid any companies with primarily negative reviews or average ratings below three stars. You likely won't have a good experience with these companies and may find it difficult to file a claim or get help when needed.
Look For 24/7 Customer Service
Disasters and emergencies don't only strike during regular business hours. In fact, it often seems like normal business hours are the only time problems don't arise. For this reason, you'll want to try finding an insurance company that provides 24/7 customer service.
While you're at it, look for companies that are easy to reach. For example, make sure there's a phone number you can call to reach an agent or customer service representative at any hour. Other contact options might include an email address, live online chat, SMS, or an online contact form.
Find Someone That Offers All Your Required Coverages
If possible, look for a company that provides all the coverage you need. If you require supplemental coverage, it's easiest if you can find a single company to provide them all. This may not be possible with certain supplemental coverages.
If you're left with more than one qualified company, compare quotes to see which will provide the cheapest premiums. However, price shouldn't be the only deciding factor.
Most companies will be around the same cost, with some costing a little less and some a bit more. However, if a company provides significantly lower quotes, you may want to be wary. This could be a sign they don't offer the coverage you need or that they've skimped on crucial business areas like customer service.