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What Is Home Insurance?

Home insurance protects your biggest investment.  The policy protects your home in various situations. It’s a necessity rather than a luxury.

However, you do actually have to be a homeowner to get a homeowners insurance policy. People who rent their apartments, houses, or condos aren’t eligible for a policy.

But what exactly does homeowners insurance cover? More importantly, how much does it cost to have your lovely home insured?

You’ll find the answers to that and many other questions about home insurance, in our extensive guide. Let’s get to it!

Contents show

Home Insurance 101 - What Does It Cover?

In general, you can break down homeowner insurance policies into three parts:

  • Damage and destruction of your residence (both inside and out)
  • Loss of possessions due to theft or other circumstance
  • Personal liability for bodily injury, harm, or property damage to others

When it comes to levels of coverage, homeowners insurance covers:

  • Extended replacement of cost or value
  • Actual cash value
  • Replacement cost

Now that we know the basics let’s see who can get a homeowners insurance policy. Typically, you can ensure any property. However, the type of coverage depends on the kind of property as well as the circumstances. So, we have six different coverage options:

  • Residence - this policy covers damages or loss of an apartment or a house with all attached structures (for example, a garage or a pantry).
  • Detached structures - the policy includes standalone objects that don’t share any walls with your original property (for example, a detached shed or toolhouse).
  • Personal property - the policy covers the repair, replacement, or extended replacement of all belongings within your property that you might have lost due to theft or damage anywhere in the world.
  • Additional living expenses - the policy includes a loss-of-use clause, which allows for coverage of other costs that are a direct consequence of damaged or lost property (such as relocation costs).
  • Personal liability - the policy also covers any additional costs due to injury or other bodily and property harm to a third party.
  • Medical payments - All property residents have medical coverage in case they acquire injuries or ailments due to property damage or destruction.

What Home Insurance People Usually Get?

Three policies are the most common:

  • HO-2
  • HO-3
  • HO-5

There are two ways your property can get damaged and thus two ways you can insure your home:

  • Named peril - the selective approach. Anything your insurance company can think of that could potentially damage or destroy your property will be explicitly detailed within the policy.
  • Open peril - the broad approach. This type of policy lists hazards that it doesn’t cover rather than the other way around.

HO-2 Policy

If you’re looking for the most straightforward policy, look no further than the HO-2 one. It’s a named peril type of policy that will insure your residence and personal property only. Here’s what it covers:

  • Weight of ice, snow, and sleet
  • Damage caused by vehicles
  • Fire
  • Damage from aircraft
  • Theft
  • Damage from artificially-generated electrical current
  • Water damage: overflow or discharge
  • Falling objects
  • Sudden tearing, cracking, or bulging of the property
  • Windstorms and hail
  • Riots
  • Explosions
  • Vandalism
  • Freezing of household systems
  • Lightning
  • Volcanic eruptions

HO-3 Policy

If you’re looking to do as others did, then you can opt for the most common policy in the US - the HO-3 policy. This policy will cover your residence and all other attached or detached structures on your property in an open peril manner. In contrast, your belongings and all the contents of your home will be insured on a named peril basis.

HO-5 Policy

A step-up from the HO-3 policy, HO-5 covers open-peril damage to your residence, detached structures, and personal property. The HO-5 policy isn’t as limited as the other two. Still, that doesn’t mean it covers everything. No insurance policy will cover you in case of:

  • Natural disasters (landslides, floods, earthquakes)
  • Nuclear disasters
  • Consequences of government actions
  • Natural wear-and-tear
  • Insect and other infestations and mold

Is That Really All? Is There Any Additional Home Insurance?

Of course, many policies cover more than just the perils mentioned above. What’s more, some policies insure you even if you’re not at your residence or property.

For example, your personal property is yours no matter where you are. Thus, it’s also insured. If you lose your luggage while traveling, you’re eligible for a replacement or cost coverage.

Many policies also include clauses regarding property and liability coverage for your garden (those trees, shrubs, and plants are all covered, don’t worry!). Also, cemetery plots and tombstones usually find their place in some policies.

That’s not all, though. Your dependents (for example, your college kids or parents who depend on you while they are in a nursing home) are also covered. If your kid is at college, their property is also insured (provided they live in on-campus housing).

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What Doesn't Homeowners Insurance Cover?

As mentioned, practically all insurance policies don’t cover some things. You already know about natural disasters, government actions, etc., as we’ve already mentioned.

However, the list of no-coverage perils doesn’t end there. So, make sure to read your policy correctly before signing it because you might find out it doesn’t cover:

  • Vandalism to uninhabited residences
  • Latent pollution and industrial smoke damage; any defects from corrosion,
  • Government actions
  • Weather conditions that exasperate other causes of loss that aren’t included
  • Pest, animal, and pet caused damage
  • Settling, wear and tear
  • Defective construction, damage due to design or maintenance
  • Freezing pipes in uninhabited residences
  • Theft from a building under construction
  • Damage to foundations or pavements from ice and water weight

Of course, you can always demand that these particular perils be included in your policy. It will increase its value and cost, and the threats will have to be explicitly named within the policy. Still, even with amendments to the policy, a homeowners insurance policy will never include:

  • Enforcement of building codes and similar laws
  • Intentional acts
  • War
  • Neglect (failure to take reasonable steps to protect your property)
  • Flooding
  • Earthquakes
  • Nuclear hazard
  • Power failures

Some companies do offer policies for natural disasters, but they sell them separately.

How Much Insurance Do I Really Need?

The answer to this question is entirely subjective. It depends on your financial situation, the number of properties you own, and other factors. Therefore, you’re the one who determines how much insurance to get.

To make the right decision and choose the appropriate coverage level, ask yourself some (or all) of the following questions:

  • Considering the present cost of materials and labor, how much would rebuilding the property (with all structures) cost?
  • What about your belongings and personal property? How much would replacing it cost? Would you even be able to replace it all?
  • In the case of a lawsuit, how valuable are your personal assets?

So, basically, you need to figure out the cost of potentially having to replace your home and all your belongings. This isn’t something you have to do on your own. The insurance company will definitely help with the calculations.

However, pay close attention to the wording here. The calculations you’re doing are for replacement cost. That’s not the same as market value. The insurance company is making these calculations based on how much it would cost to replace everything you own and rebuild your home. That has nothing to do with the current market value of your house as-is.

Personal Belongings

Besides figuring out how much it would cost to rebuild your home, you also have to consider your personal property. For example, let’s say you have some valuables in your home. Let’s also say you have significant assets inside of your house. That definitely increases the overall value. Some of those are replaceable, but others might not be.

The smartest thing to do here is to make a home inventory. That’s basically a list of all valuables and assets you own. Ideally, you’ll make this list before getting insurance. If you have a lot of valuables, you might need to insure them separately.

The insurance company will also help you determine whether you need additional insurance for firearms, jewelry, electronics, art, antique furniture, and other valuables. That extra coverage has its own sublimit, but you can extend coverage for them with riders or floaters. These are also known as endorsements.

Personal Liability

The coverage limit on your policy for personal liability should be enough to cover all your assets. That way, in case someone sues you, and you have to forfeit your assets, you won’t find yourself in a financial disaster. Therefore, it should either be equal to your entire net income or greater than it.

The Mystery of Deductibles Solved

Most people think they have a firm grasp of the concept of deductibles because they have car insurance. However, homeowners insurance doesn’t work in the same way. Car deductibles are related to premium cost, while homeowners insurance deductibles are deducted from the claim payout. In other words, you can’t raise the deductibles to decrease the monthly payment.

Percentage Deductibles and Dollar-Based Deductibles

If you have a kitchen fire in your home and the costs of repairing it are $6,000, with a $1,500 deductible, you’ll receive $4,500 from the insurance company for repairs. You’ll have to make up the rest on your own. That’s a dollar-based deductible.

If you have a percentage deductible, you’ll get a particular percentage from your residence coverage. So, if your entire residence (home) has a market value of $400,000, and you have a 1% deductible, it will be $4,000.

Replacement Cost Value and Actual Cost Value - What’s the Difference?

ACV (actual cost value) is a standard payout type in case of personal property loss or damage. The insurance company takes the current market value of your assets and calculates depreciation to get the amount of money you’ll need to replace your lost items. That’s the amount you get. Replacement cost value means you get as much money as you need to replace the lost items (at current market value).

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Additional Home Insurance Coverages

We mentioned floaters and rides before. Those are endorsements. They are all changes to your policy (add-ons and clauses you remove). For example, if you want to include valuable personal property in your policy, you’ll need an endorsement. Each endorsement has a sublimit:

  • All coins, money, and gold - $200
  • Furs, antique garments, watches, all type of valuable jewelry - $1,500
  • Water vessels, antique cars, and trailers - $1,500
  • Firearms - $2,000
  • Silverware - $2,000
  • Business property that’s on your personal property premises - $2,500
  • Electronics - varies

So, if you have valuables such as these, and they exceed your overall limit, you’ll have to get an endorsement.

Homeowners Insurance and Identity Theft

Typical homeowners insurance policies don’t have identity theft clauses. However, you can get an endorsement for it with coverage from $15,000 to $30,000. Of course, the details and premiums vary from company to company.

Endorsements for Floods, Earthquakes, and Wind and Hail Deductibles

Floods and earthquakes aren’t part of standard policies. FEMA or private flood insurance companies can cover you for damages due to this particular natural disaster. What’s more, some mortgage companies require additional flood insurance in areas often affected by it.

As for the earthquake coverage, you can get a separate policy with most companies, while some also offer earthquake endorsements. Companies in areas that often have earthquakes usually provide endorsements.

Additional wind and hail deductibles are a standard clause with some companies. You can also get a deductible for some other perils. Companies that have this practice aim to keep the policies affordable. Hence the deductibles.

Am I Required to Get a Homeowners Insurance Policy?

In a word - no. No law says you have to get a homeowners insurance policy. But, if you have a mortgage, you might be obligated to get a policy. Since the lender actually owns the home, they have a right to demand you protect their investment.

What’s more, you’ll probably have to do that at the lender’s discretion, and your mortgage will depend on it.

But even if you don’t have a mortgage, it’s still a good idea to get a policy. Paying homeowners insurance is much cheaper than actually refinancing your home after disaster strikes.

Best Tips and Tricks for First-Timers Home Insurance Buyers

If this is your first time getting homeowners insurance, there are some things that you need to pay attention to that you might not be aware of.

Home Inventories

Make a list of all your belongings to figure out if the quote you get from a company is fair or not. These lists might also come in handy later after you already have a policy. Also, making a claim will be much easier.

Updates and Add-Ons

If you have a policy, make sure to update it after every significant purchase. Did you buy an engagement ring? Add it to the policy. What if it isn’t covered? Add an endorsement.

Potential Discounts and How Not to Miss Them

Make sure to check if the company offers any discounts for multi-policies or new homes. Some companies also offer discounts to non-smokers as well as those for new roofs, claims-free policies, etc. To be sure that you don’t miss any deals, read your policy carefully.

Home Maintenance

If you have moldy ceilings or an old roof, your insurance company will see them as liabilities. Liabilities may affect your overall policy cost. So, make sure to maintain your home, so your premium doesn’t increase with time.

How Much Does Homeowners Insurance Cost (on Average)?

There isn’t one best home insurance policy that’s a one-size-fits-all. You’ll have to shop around and compare home insurance quotes you get from various companies in order to determine which one is the best one for you. After all, each home insurance policy varies depending on where you live, how big your home is, what materials were used, your credit score, etc.

To help you make the best decision, here are some numbers.

The average cost of insurance (per company):

  • Nationwide $1,737
  • Farmers $2,027
  • Allstate $1,635
  • USAA $1,736
  • State Farm $1,501
  • Liberty Mutual $1,830
  • Travelers $1,709

The average cost of insurance (per state):

  • Hawaii $442
  • Vermont $733
  • Utah $784
  • Oregon $840
  • Pennsylvania $851
  • New Hampshire $876
  • Delaware $880
  • New Jersey $934
  • Maine $961
  • Nevada $975
  • Idaho $982
  • California $1,031
  • Washington D.C. $1,035
  • Wisconsin $1,084
  • Virginia $1,100
  • Alaska $1,103
  • Washington $1,133
  • Wyoming $1,171
  • Michigan $1,176
  • Massachusetts $1,203
  • Maryland $1,211
  • New York $1,262
  • Ohio $1,265
  • Arizona $1,283
  • West Virginia $1,366
  • Rhode Island $1,388
  • Indiana $1,395
  • Illinois $1,443
  • Connecticut $1,481
  • Iowa $1,583
  • Georgia $1,619
  • New Mexico $1,661
  • Minnesota $1,773
  • North Carolina $1,794
  • Tennessee $2,033
  • Montana $2,042
  • Kentucky $2,053
  • North Dakota $2,128
  • Florida $2,133
  • Louisiana $2,193
  • South Carolina $2,196
  • South Dakota $2,288
  • Alabama $2,328
  • Missouri $2,377
  • Arkansas $2,405
  • Colorado $2,412
  • Mississippi $2,530
  • Texas $3,087
  • Kansas $3,535
  • Nebraska $3,547
  • Oklahoma $4,053

Top Players In the Home Insurance Game

It’s probably clear to you by now that there are plenty of options on the market. That’s an excellent thing. You can shop around. However, it can also be overwhelming.

To ease that feeling here is some information on the top ten home insurance providers on the market. They are the titans in the field and have plenty of great testimonials to their name.

The Biggest of Them All - State Farm

With 17% of the market share, State Farm dominates its field. It’s a financially stable and resilient company that has millions of satisfied users. Their most significant selling point are their insurance agents scattered across the US who will help you get a personalized policy.

Coming Up In Second Place - Allstate

Allstate has 8% of the market share and is a household name in the business. But that doesn’t make them automatically amazing. Customers praise and criticize them in equal measure.

The Military Oriented - USAA

USAA has a very high customer satisfaction score, but it deals primarily with ensuring military members as well as members of their families. Not everyone qualifies for a USAA policy.

Playing In Two Fields - Liberty Mutual

A titan both in the car insurance and home insurance fields, Liberty Mutual doesn’t really have stellar reviews regarding customer satisfaction.

The Kings of Personalization - Farmers

Much like State Farm, Farmers has plenty of agents that will personalize your policy. They also have more than decent ratings. No wonder they are the fifth most popular home insurance company in the country.

Flailing Lately - Travelers

Travelers used to be a company with high marks. However, today, it seems their offerings are below-average. Still, they can pride themselves in a stable financial situation which explains how they hold 4% of the market.

Losing Their Footing - American Family

American Family can’t really boast with a strong financial situation or stellar reviews. However, their homeowners policies seem to be more popular than their car insurance ones.

The 8th Favorite - Nationwide

Customers may not love them, but NAIC and A.M. sure do. Their homeowners insurance policies are their bestsellers which is how they continue to hold more than 3% of the market.

For the Upper Echelon - Chubb

Because Chubb mainly deals with high-value properties, it offers some coverage options as well as benefits and extra perks that many other companies don’t.

The 10th Favorite - Erie

Even though Erie is a regional company, it’s still well-known due to its better than average customer complaint score. It serves select states on the eastern coast.

FAQs - Home Insurance

How Does Do Home Insurance Payments Work?

When you get a home insurance policy, you pay premiums to the company. In return, the company makes sure you’re compensated in case of any loss or damage. Of course, you’re only entitled to compensation if the damage is caused by the type of peril that the policy covers. The payment you receive goes as high as your coverage limit allows.

Who Is Covered Under a Home Insurance Policy?

Home insurance covers everyone who lives in the house (or apartment). That means that your family members (spouse, kids, all relatives that officially reside in your home, and even pets) are not only covered for damages but also in case they cause damage to another person's property. What’s more, most policies also cover kids at college. Some companies will require that the names of all people living in the home be explicitly stated in the policy. Similarly, some companies will require that your college kids live on-campus in order to still be included in your policy even though they aren’t living on the property.

3. Is There Any Difference Between Homeowners Insurance and a Home Warranty Insurance Policy?

Yes. A home warranty policy will protect things that usually aren’t included in the homeowners insurance: heating and cooling systems and AC, electricall, kitchen appliances, internal appliances, and plumbing. So, home insurance covers the overall structure (and your personal belongings), while home warranty covers specific appliances. Electric and mechanical systems in your home are prone to wear and tear. What’s more, all repairs (or replacements) are quite costly. Furthermore, there’s a bigger chance that you’ll need to replace your appliances more frequently than, say, your roof. That’s why things that a home warranty policy covers aren’t included in the homeowners insurance policy.

Does Home Insurance Cover Mold?

Unfortunately, most companies don’t include damages caused by mold in their typical policies. That means you’ll have to get an endorsement that will probably have a low limit.

How Much Home Insurance Do I Really Need?

You need enough insurance to be able to rebuild your home in case of total destruction. The same goes for personal belongings. Your limit needs to be high enough to reimburse you for lost items.

Can I Deduct Home Insurance On My Taxes?

Unfortunately, no. If you’re living in your home, your home insurance isn’t tax-deductible. However, if you’re renting out your home to someone, then you can deduct the insurance off of your taxes. However, in some cases, you can deduct premium payments for home insurance if they are private mortgage insurance payments (if they go through the lender).
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