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There’s no law that requires homeowners insurance, but most homeowners choose to insure their home anyway. Are they just throwing money away? On the contrary, homeowners insurance protects the investment you’ve made in your home, and your policy protects you in more ways than you might realize.
This past weekend I was cooking breakfast for myself. Although less flattering, burning breakfast is probably a more accurate description. While flipping the pan like the fancy chefs on TV, flames erupted from the pan, licking the stove hood. The smoke alarm shrieked. The dog whimpered.
All ended without a major incident. But If my home burned down tomorrow, perhaps due to one of my cooking mishaps, I would still have to pay the mortgage. The average mortgage balance in the US reached more than $208,000 in 2020. That’s a lot of money for most households.
Fortunately, homeowners insurance covers accidental fires, as well as many other common risks.
What Does Homeowners Insurance Cover?
Home insurance policies come in several forms, but the most common type of policy for single family homes is called an HO-3 policy. With an HO-3 policy, your policy provides “all risk” coverage for your home and other structures while protecting your belongings with “named peril” coverage.
All risk coverage, as the name suggests, covers all risks to your home. However, all home insurance policies also use exclusions. So, some risks may not be covered, such as floods, insect damage, neglect, or intentional damage.
Named peril coverage limits coverage to risks specifically listed in the policy.
Fortunately, named peril policies still protect against many common risks in most cases.
These risks include:
- Water damage due to burst pipes
- Water damage due to spills
- Falling objects
- And more
If one of my cooking incidents caused a fire, both all risk and named peril coverage would apply. All risk coverage for the house itself would pay to repair damage due to the fire. All risk covers every risk except those named in the policy exclusions. Named peril coverage would apply to my belongings if any were damaged in the fire because fire is a risk named in the policy.
However, there are situations in which named peril coverage will not protect your belongings.
Recently, I had to move a bulky TV from an upstairs room to the van so we could donate it. If I had dropped the TV, my insurance would not cover the cost of the TV itself because dropping the TV down the steps is not a named peril. Most home insurance policies use named peril coverage for belongings.
If the TV fell through the steps and landed in my kitchen, however, my insurance would cover the claim because the house itself enjoys all risk coverage and dropping a TV through the steps is not a named exclusion on my policy.
The ABC’s of a Homeowners Insurance Policy
Home insurance uses a lettering system to describe the various coverages in a home insurance policy. For example, coverage A is dwelling coverage. It protects your house itself, as well as attached fixtures.
Here are the coverage types:
- Coverage A (Dwelling coverage): Your dwelling coverage protects your home’s structure itself, as well as attached structures and fixtures. This coverage also covers attached decks, counters and cabinets, and plumbing and electrical systems. However, coverage may depend on how the damage occurred.
- Coverage B (Coverage for other structures): Many homes have detached garages, gazebos, pool houses, sheds, or fences. Your home insurance policy covers damage to these structures with coverage B. In many cases, the default coverage amount for other structures is limited to 10% of your home’s insured value. You can adjust this amount, however.
- Coverage C (Personal property): Clothing, furniture, computers, appliances, and other belongings are collectively known as personal property. Typically, home insurance insures your personal property for up to 50% of the insured value of your home. You can customize this coverage amount. Insurers also offer options to protect valuables like jewelry with specific coverage.
- Coverage D (Loss of use): If one of my cooking mishaps went south and a fire damaged my home, my home insurance would cover my additional living expenses if I had to leave my home while it was being repaired. You’ll also see this coverage referred to as Additional Living Expenses (ALE).
- Coverage E (Personal liability): As one of the most important parts of your homeowners insurance policy, personal liability coverage can pay for accidental injuries caused to others or accidental damage to the property of others. Your coverage also includes legal defense if needed. Coverage options usually begin at $100,000, but many homeowners choose $300,000 or more. Dog bites remain one of the most common liability claim types, with claims averaging over $50,000, but slip and fall accidents and similar risks are also common.
- Coverage F (Medical payments to others): Homeowners insurance also includes coverage for minor injuries that don’t involve lawsuits. For example, while breaking logs for a fire pit at a friend’s house recently, I sprained or strained my ankle when a particularly stubborn log finally broke. In that case, I just limped around for several days. But if I needed minor medical attention, such as x-rays or a medical boot, my friend’s home insurance coverage F could cover the claim.
The National Association of Insurance Commissioners publishes a home insurance consumer guide that details other types of home insurance policies.
In most cases, if you are insuring a single family home that you live in, your policy will be an HO-3 policy and follow the coverages detailed above.
However, other policy types are also available from some insurers, such as an HO-5 policy that extends all risk coverage to your belongings or a simpler Dwelling Fire policy which limits covered risks.
Why is Homeowners Insurance Important?
Unlike auto insurance, there is no law that requires home insurance. But homeowners insurance protects you in several ways by insuring your home, your belongings, and also providing personal liability insurance.
Protection for Your Home (and Mortgage)
If you have a home loan, you already know most lenders require borrowers to carry home insurance as a condition of the loan. And if you cancel home insurance when the lender requires coverage, the lender may buy insurance on your behalf, which can be costly.
Lender-provided coverage may also exclude important coverages, such as personal liability coverage.
Your home acts as collateral for the home loan, so the lender becomes a party to your home insurance policy.
But imagine a situation where you don’t have home insurance. Remember, the average mortgage balance is nearly $210,000. If a fire or storm destroyed your home, the $210,000 mortgage didn’t go away. You’ll still owe the money — and you’ll still have to pay for a place to stay.
When you compare the cost of home insurance to the risk of being left with a mortgage (with no home to show for it), homeowners insurance becomes a must-have coverage.
Protection for Your Belongings
Your home insurance also protects your belongings. Most homes likely have tens of thousands of dollars worth of personal property. Much of the value often centers on electronics, furnishings, and jewelry. But consider the value of everything in your home if you had to replace it all. That’s the potential loss your policy insures against.
Homeowners insurance policies usually assign a default coverage amount of 40% to 70% of the home’s insured value to coverage for personal property.
For example, if your insurer assigns a 40% personal property limit and the home is insured for $400,000, you have up to $160,000 in coverage for your belongings. Like many other parts of your policy you can change this limit if needed.
If you have valuables, your policy also protects these items. However, homeowners insurance policies can limit the amount of coverage for jewelry and similar items.
Ask your insurer about scheduled coverage that can provide full protection and safeguard against additional risks, such as breakage or mysterious disappearance.
In most cases, your home insurance even protects personal property when away from home. So, items in storage or in your car can be protected as well. Your policy can cover your belongings while traveling as well.
Liability Protection for Your Family
When we think of homeowners insurance, we usually think of the home itself as well as its contents. But liability insurance can be just as important.
A couple years ago at the local dog park, our dog had a misunderstanding with another dog over a ball. Dogs resolve their disputes differently than you and I might. Fortunately, the other dog only suffered a nip on the ear. A neighbor who had a similar mishap with another dog at that park had to take their dog for emergency surgery.
Dog bites are among the most common and costliest types of liability claims. Trampoline and pool injuries are also common.
But liability can come in ways we might not expect. I remember climbing on (and jumping off) a neighbor’s roof as a kid. The ways in which someone can be injured at your home are nearly unlimited. In many cases, you can be liable for costs related to accidental injuries, even if you are not home.
Fortunately, your home insurance can protect against many types of liability risk, and your liability coverage even protects you away from home. However, home insurance liability coverage is limited to personal non-auto risk.
Your auto insurance policy protects against auto-related liability. If you own a business or are self employed, you can also consider business liability insurance or professional liability insurance.
Home insurance can’t protect against business or auto risks.
Average Homeowners Insurance Claim Amounts
Most homeowners insurance claims come in well below policy limits, but keeping full coverage is essential because there’s no way to predict if or when you’ll have a total loss.
Additionally, home insurers typically require that you insure your home for at least 80% of its rebuild value. Policies with coverage limits below this threshold may see only partial coverage for losses. Insurers refer to this clause as coinsurance.
Here are some average home insurance claim amounts for common risks:
- Fire or lightning: $78,838
- Water damage or freezing: $11,098
- Wind and hail: $10,801
- Theft: $4,328
- Bodily injury and property damage: $29,752
The average claim approaches $14,000. But some types of claims, like liability or fire claims, often reach much higher numbers.
Statistics also show that there is about a 5% chance of having a claim in any given year. That may not seem like much, but in my immediate neighborhood of about 20 homes, I know of 2 major claims and several small claims.
Many households can survive a small loss financially, but the possibility and unpredictability of larger losses illustrate the importance of carrying home insurance.
How Much Does Homeowners Insurance Cost?
According to the NAIC, the average home insurance premium is $1,249. But the rebuild value of your home plays a significant role in home insurance costs.
Here are the average HO-3 home insurance costs for homes by insured value:
- $200,000 to $299,999: $1,114
- $300,000 to $399,999: $1,272
- $400,000 to $499,999: $1,482
- $500,000 and up: $2,148
It’s important to note that the rebuild value of your home may not match the market value of your home. Markets go up and down. Instead, rebuild value considers how much it costs to rebuild your home at the current cost of materials and labor.
Where you live plays a role in insurance costs as well. For example, Florida, a state that experiences more coastal storms than average, has an average HO-3 homeowners insurance cost of $1,960 annually, nearly $700 higher than the national average.
Factors That Can Affect Homeowners Insurance Cost
In my housing development, we have several models of homes, but most are fairly close in regard to square footage and should have similar rebuild values. However, I might be paying a different amount for coverage than my neighbors, even those with the same model of home.
Insurers look at many factors when setting premiums, some of which may surprise you:
- Insured value or rebuild value: Your insurer can help you calculate the rebuild cost of your home so you can choose an insured coverage amount. Homes with higher insured value may cost more to insure.
- The age of your home: Newer homes can be less expensive to insure. Older homes may have older wiring and other factors that can contribute to risk or rebuild cost.
- Safety features of your home: Deadlocks, security alarms, smoke alarms and other safety features can reduce the cost of coverage.
- Home insurance deductibles: The deductible is the part of the claim you pay. A higher deductible can reduce premium costs. A lower deductible can reduce out-of-pocket expenses if you have a loss.
- The type of dog you own: Certain breeds of dogs can add to the cost of insurance or even affect eligibility. Insurers vary in which breeds make the list, but pit bulls, dobermans, rottweilers, and other powerful breeds often appear.
- Claims history: If you’ve had a recent claim, your home insurance rates may be higher. Insurers typically look back 5 to 7 years on claim history, so a claim won’t affect rates forever.
- Marital status: Married couples often pay less for home insurance, assuming all other rating factors are equal.
- Your credit history: Claim statistics point to correlation between credit history and the likelihood of placing a claim. Not all states allow the practice, but where allowed your credit history can affect the cost of insurance coverage.
- Your chosen coverage limits: If you purchase more coverage, expect to pay a bit more for home insurance. For example, higher liability limits can cause premiums to creep higher. However, you can often reduce the overall cost of coverage without cutting coverage by shopping around or by taking advantage of discounts.
- Proximity to water: Homes near lakes, rivers, creeks, or coastlines can cost more to insure.
- Weather and natural risks: Geography can play a role as well. Areas more susceptible to storms or even wildfires can cost more to insure.
- Crime rates: Because home insurance covers theft and vandalism, crime rates in your area can play a role in insurance rates.
- Distance from a fire hydrant or fire station: Fires top the list for home damage loss amounts. Homes close to a fire hydrant or fire station may see lower rates than homes in more remote locations.
- Attractive nuisances: Things that look like fun to kids but may be dangerous are known as attractive nuisances. If you have a pool or a trampoline, you may pay more for your coverage.
- Options and add-ons: In addition to your base policy, many insurers offer optional coverage, such as scheduled coverage to insure valuables to full value or protection for drain backups. These are called endorsements or riders and can change the details of your coverage as well as the cost.
When I worked in insurance agencies, homeowners often asked how to reduce their premiums. Many asked if reducing coverage would cut their costs.
However, cutting coverage amounts and options can also reduce the protection your policy provides.
Instead, consider getting quotes through Policygenius. With Policygenius, you can easily compare rates and coverage options from top providers. Often, you can save money simply by choosing a provider that offers a better rate for your specific needs.
Most insurers also offer an extra discount if you bundle your home insurance with your auto insurance from the same provider.
Do I Need Home Insurance if My Home is Paid Off?
Lenders typically require borrowers to carry home insurance because the house (or condo) acts as collateral for the loan. There’s no requirement to carry homeowners insurance if your home is paid off, but home insurance offers an affordable way to protect your investment.
The median sales price for home in the US just reached $375,000, according to Federal Reserve data. Most home insurance claims are 4 or 5-figure losses, but the possibility of a total loss is real.
Even if you own your home outright, homeowners insurance protects your home and its contents, making your policy a sound investment.
In addition, your homeowners insurance provides personal liability coverage that can pay for accidental injuries to others and accidental damage to the property of others.
At an average cost of about $100 per month nationally, homeowners insurance makes good financial sense even if your house is paid off.
If you’re on a retirement income or just want to see how much you can save, compare home insurance rates with Policygenius. Each insurer rates risks differently, and often you can save money by just switching providers. Policygenius makes it easy to compare home insurance quotes from top providers.
Homeowners Insurance Protects Your Investment
Although lenders require home insurance, there aren’t any state laws mandating homeowners insurance. But the real reason to purchase home insurance is to protect your family financially.
Your homeowners insurance protects your home against weather risks as well as fires, burst pipes, and many other common risks. Your policy also protects your belongings, both at home and away from home.
But just as importantly, your home insurance policy provides personal liability coverage not available with any other policy. This coverage pays for accidental injuries to others and accidental damage to the property of others.
Life has patterns we learn from, but it isn’t always predictable. Your home insurance policy helps you prepare for the unexpected.
The great news is that homeowners insurance can be customized to address your unique risks and match your budget.
If you already have coverage but are paying more than you’d like. Consider shopping around. If you don’t have coverage yet or are considering a change, let Policygenius do the work.
Just provide some basic information about your home and Policygenius lets you easily compare insurance rates from leading providers. You can also combine your coverage with auto or life insurance, possibly saving even more.