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How To Buy Homeowners Insurance: A Guide To The Features You’ll Want And Need

Dori Zinn4-Minute Read
October 07, 2021

Buying a house is likely one of the biggest investments you’ll ever make – so you’ll probably want to make sure that when you do find your dream home, it’s well protected. While homeowners insurance isn’t required by any state law, lenders typically require that you pay to cover your property for the good of both parties.

But what is homeowners insurance, and how do you make sure you’ve got the right policy for your home and budget? Let’s take a look at what homeowners insurance is, how it works and how to find the right coverage for your house.

What Is Homeowners Insurance?

Homeowners insurance, also called home insurance, is a type of property insurance that covers damage to your house and assets in the home, such as furniture. Homeowners insurance is meant to cover the costs to restore your home to its former state of value should it be damaged or destroyed.

Most lenders require that you purchase homeowners insurance to protect your home in case of emergency. If your home were damaged or destroyed to the point where it was unlivable, there would be no point in paying a mortgage on a home that’s not there – so in that way, homeowners insurance protects you, your house and your lender.

Your lender will typically have you pay for your homeowners insurance through an escrow account, which allows you to factor it into your monthly mortgage payment.

What Types Of Damage Does Homeowners Insurance Cover?

Your homeowners insurance policy will typically cover interior and exterior damage to your home, loss of or damage to your assets and any injuries that may occur on the property. These covered damages can be split into two categories: dwelling and liability. Dwelling coverage takes care of damages to the physical property, while liability covers potential lawsuits involving you and your property.

Damage To The Interior Or Exterior Of The Property’s Structures

Damage to the structure of a house, including walls, roof, foundation, etc., is one of the basic things covered in most homeowners insurance policies. Coverage of other structures on your property, such as sheds, decks or detached garages, may also be included. If these structures or the things inside them are damaged by vandalism, fire or certain natural disasters (which we’ll touch more on later), it is typically covered.

Personal Possessions 

In addition to the structure of your home, the personal possessions inside may also be covered in your policy. This includes clothes, furniture, collectibles, jewelry, etc. Typically, these items are covered and can be replaced if they are stolen or damaged by a fire or similar incident. Most policies will cover these items up to a certain amount of money, so if you are a keeper of collectibles that might have significant value, you may need to purchase special coverage specifically to make sure those items can be insured for their appraised values.

Alternative Living Arrangements 

Alternative living arrangements, also known as additional living expenses (ALE) may also be covered in your homeowners insurance policy. This means that if your home is destroyed by a fire or certain natural disasters, the costs for you to live and eat elsewhere, like at a hotel, would be covered while your home is being rebuilt. There is often a limit on how long you will be covered to live elsewhere, typically a certain number of days or weeks – usually not months at a time.

Third-Party Liability 

If a visitor to your home is injured on your property and decides to sue you, third-party liability makes sure that the cost to defend you in court along with any court-ordered fees are covered. Liability coverage extends from lawsuits involving bodily harm to property damage caused by your family or pets.

What Causes Of Damage Are Covered?

There are many different types of property insurance available to homeowners that cover a variety of different ‘perils,’ or situations/damages. Depending on your policy, not every type of damage may be covered. For example, with basic homeowners insurance, there is limited natural disaster coverage. This means that damage caused to your home by certain natural disasters is covered, but damage caused by others won’t be.

Policies vary, but damage caused by fire, lightning, smoke, windstorms, vandalism, theft, volcanic eruption and people and/or vehicles is usually covered by standard homeowners insurance.

How Much Does Homeowners Insurance Cost?

The price of homeowners insurance will vary, since your premium is based on a number of different factors including things like your home’s location, the age of your house, and whether or not you live in a densely populated area. If you live in a geographical area more prone to wildfires or hurricanes, the cost of homeowners insurance might look different for you than it might for someone that lives further from these potential perils.

According to the National Association of Insurance Commissioners, the average cost of homeowners insurance for those insuring a value of $200,000 – $299,999 was $1,114 per year.

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How Much Of My Property Loss Is Covered?

So, now that you know what homeowners insurance typically includes and how much it costs – how much does it actually cover for you? The amount that you’re covered for varies based on the coverage you choose and the manner by which you’ll be reimbursed. Homeowners insurance policies are usually either actual cash value policies or replacement cost policies. Let’s take a look at what that means.

Actual Cash Value

Actual cash value policies, also known as actual cost policies, pay you to replace or restore damaged, lost or stolen items – but they factor in depreciation before giving you any money. This means that whatever property loss you suffered will be reimbursed to you at its current market value, not what you bought the item for originally. So, say some of your furniture is damaged in a house fire and you paid $1,500 for it originally. That furniture, were you to sell it now, would no longer be worth $1,500 – so your insurance company won’t pay you $1,500 for it, either. Insurance companies have ways of determining a new value to pay you for the items based on how many years of wear and tear the items have been subject to.

Replacement Cost 

Replacement cost policies, on the other hand, pay you the cost to replace whatever property was lost without factoring in depreciation, after you pay the deductible. Essentially, this means that when a piece of your property is damaged or destroyed, your insurance will pay for you to replace it with an item that serves the same purpose and is of comparable quality to the old item.

There are two types of replacement cost policies: standard and guaranteed replacement. Standard will pay you back what you paid for the item accounting for inflation, while guaranteed will pay the actual cost to replace the item. Guaranteed replacement cost policies are often utilized by people who want to insure collectibles, which may grow in value rather than depreciate.

What Are Property Insurance Riders?

Insurance riders, also called endorsements, add-ons or floaters, are optional additions to your homeowners insurance policy that can help you add more coverage if you wish. Some commonly purchased riders include coverage for a business property, building code coverage, water damage coverage (for backed-up sump pump, etc.), and scheduled personal property coverage.

If you read your policy and are unhappy with anything from coverage limits to exclusions, talk to an insurance agent about potentially including riders to supplement your current coverage.

What Deductible Amount Should I Choose?

A deductible is the amount of money you’ll pay out of pocket when you make a claim. You can typically choose the size of the deductible you want to pay, but keep in mind your deductible amount has an inverse relationship with your homeowners insurance premium. If you choose to pay a smaller deductible for potential claims, your insurance premium will be higher. Likewise, if you pay a higher deductible, your premium will be lower.

Homeowners who want to pay less for their yearly insurance premium may opt for a higher deductible amount, hoping that they won’t have to file any claims. Keep in mind that if you choose this strategy, you might get stuck paying a lot out of pocket, should an emergency come up. If your deductible amount is $1,000, you also likely won’t be filing any smaller claims in order to avoid the expensive fee.

Before choosing a deductible amount, consider your financial situation and how comfortable you are with the risk of potentially paying large deductibles in exchange for a low annual premium – or, conversely, how comfortable you are paying a higher premium in exchange for a cheaper deductible on each claim.

How Do I Shop For The Best Homeowners Coverage?

If you’re on the hunt for a good homeowners insurance policy, here are a few things you should keep in mind as you do your research.

Shop Around

Homeowners insurance protects your house and belongings, so it’s important to make sure you’re getting the best price for the best protection possible. Be sure to get multiple quotes from different companies and find an agent to work with that you trust before settling for any insurance company. 

Check Social Media

As with any purchase, it can be a great idea to check social media before buying to get an idea of others’ experiences with the insurance company you’re considering. Reading reviews from other customers can help you decide whether you should trust a company and what the quality of their service will be, should you decide to work with them.

Look For Rankings And Awards

You should also look for customer satisfaction surveys online and any awards the company you’re looking at may have won. Many sites will also compile and rank different insurance companies based on their rates and coverage options, which can be helpful for comparing options as well.

Research Available Discounts 

When looking at what an insurer offers, check to see if they have any available discounts you could take advantage of. Many insurance providers offer discounts for a variety of different reasons, from discounts for homeowners that recently built a new home to home and auto insurance bundle deals. These discounts could be fairly substantial, so it’s worth checking into. According to Insurance.com, some discounts can save you anywhere between 1% – 40% off your annual premium.

Evaluate The Company’s Financial Strength

You depend on an insurance company to protect your home and belongings, so it’s important that the insurer you choose is a safe and capable choice to trust the value of your property with. Investigating a company’s net worth is certainly not an absolutely necessary step, but making sure your insurer of choice is financially strong doesn’t hurt. Some analytics websites, such as S&P Global, rank and give insight on the financial strength of insurance companies that can help you make a more informed decision.

Does Homeowners Insurance Protect My Parked Car?

While an attached garage is likely covered under your homeowners insurance policy, your car parked inside it is likely not included in that protection. Some policies will cover items that are stolen or damaged that were inside your car, but if you want coverage of the car itself, you’ll need auto insurance.

How Do I Pay For My Homeowners Insurance, And Can I Change It?

You typically pay for your homeowners insurance via an escrow account set up by your lender, which allows you to bundle together your homeowners insurance payments and your monthly mortgage payments. You can also forgo paying for insurance via escrow and choose to pay for it as a lump sum payment once or twice a year instead, though keep in mind these payments will be much larger than the split up monthly payments.

If you ever want to switch your homeowners coverage, you can do so, even if you’re paying through an escrow account. Just make sure to check all the terms and conditions outlined in your current policy – and make sure to start your new policy before you cancel your old one to make sure there is not a point, even briefly, where you don’t have coverage.

The Bottom Line: Your Home Is Your Biggest Investment, So Protect It Accordingly

Choosing a homeowners insurance policy is a big decision, and one you shouldn’t take lightly. Homeowners insurance protects your home and valuables, so you should be sure to shop around for the right coverage for you at an affordable price.

For more help with your home insurance policy, read our advice on buying homeowners insurance prior to closing.

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Dori Zinn

Dori Zinn is a personal finance journalist for more than a decade. She loves helping people learn about money, covering topics like credit, debt, investing, banking, real estate, jobs & careers, budgeting, college affordability, financial literacy, borrowing and more. Her work has been featured in CNET, Wirecutter, Quartz, Forbes, Bankrate, Credit Karma and others.