Everything you need to know about homeowners insurance — from comparing providers to purchasing a policy
Your home is likely the most important investment you’ll ever make, so it makes sense you’ll want to protect it with homeowners insurance.
Of course, you’ll do the necessary maintenance and keep up with the chores, but what would happen if disaster struck? Would you be able to recover should the unthinkable happen?
Home insurance is available to help you do exactly that. From problems big and small, your insurance provider will help ease the financial burden of repairs, recovery, and restoration. That is if you have an adequate policy from a reputable company.
Pro Tip: Homeowners insurance is required by most lenders to secure a mortgage, but don’t view it as another box to check in the litany of tasks involved in buying a house. Careful consideration needs to be made in order to establish comprehensive protections.1
So how do you know if your policy offers ample protection? How do you know if your provider is worth their salt? How can you demystify home insurance and sleep easy knowing your home will be protected through thick and thin? Well, reading this in-depth guide is a great starting point!
If you’re pretty sure you know what you’re looking for, you can jump right to the chase by checking out some of our favorite providers of 2022, but if you just want a lay of the land, keep reading. By the end of this article, you’ll know exactly what to look for when shopping around.
Simply put, this type of insurance protects your home and belongings in the event unforeseeable damage occurs. This means if there’s a fire, a major storm, or someone breaks into your house and steals your television, your policy should help you get back to baseline by providing the funds necessary for repairs and replacements.
Pro Tip: Most homeowners insurance policies will only reimburse you for the depreciated value of items that are damaged or stolen. That means if your computer is five years old, you won’t get enough money to replace it with a new one. There are separate, add-on protections you can purchase, though, that will compel your provider to replace items rather than reimburse you. More on that later.
That said, there are events that homeowners insurance will not cover, so it’s important to understand the limitations of your specific policy. And if you feel your standard policy is a little lacking, there’s always the opportunity to purchase add-on coverages to make sure you’re protected comprehensively.
But before we start talking about all the ins and outs of home coverage, it might be helpful to answer why you need it in the first place.
We get it. You’re a pretty responsible person. You’re not setting off fireworks in your living room or building a dirt bike track in the backyard. Why would you need to spend money covering something that’s not in any real danger to begin with?
Well, there are two primary reasons you need home insurance:
Now, once you own your home outright — meaning you’ve paid off your mortgage in full — you’re no longer obligated to carry homeowners insurance. But I’d again refer you back to reason number one. Your home is a huge investment. It just makes sense to protect it.
Generally speaking, it depends on your lender to determine what the minimum acceptable coverage will be for your loan. Sometimes you’ll only be required to carry enough insurance to cover the balance of your mortgage. If you’re looking for rock-bottom rates, consider reading our AAA homeowners insurance review. They offer decent protections for budget-minded folks.
That said, if you’re only going with bare minimum coverage, you might end up in a really bad spot financially if the worst happens. Sure, you’ll be able to pay off the remainder of your loan, but if your house was flattened by a tornado, you’re going to be free and clear … and homeless. Even if you think it will never happen to you, it’s important to carry enough insurance that you’ll be protected in the event of a major catastrophe.
What does that mean, though? Brass tacks, we recommend securing a policy that will cover the total rebuild cost of your home. This is not the purchase price, either. You’ll want to do some research and see roughly how much it is to build a home per square foot in your area. Take that number and multiply it by your own square footage, and that will give you a rough estimate of how much coverage you’ll need.
Pro Tip: Many lenders will require you to name them as a loss payee on your policy. This ensures that any payout you get from a claim will be used to make those specific repairs instead of using it for other purposes. Simply put, this prevents insurance fraud.2
Now that you understand what homeowners insurance is, why you need it, and how much of it you need, we’re ready to dig into the specifics.
There are eight to be exact. Each type serves a specific purpose, and some are more popular than others. Here’s a quick breakdown:
As you can see, if you’re shopping for a policy for a standard, single-family home, you’re most likely going to be dealing with HO-3 or HO-5 policies. What’s the difference between the two?
The short answer is the extent of the coverage. HO-3 policies cost and cover less, while HO-5 policies cost a little more and are more comprehensive. For example, HO-5 policies insure dwelling and personal property replacement as default, as opposed to the reimbursement HO-3 policies typically offer. HO-5 policies also typically include higher coverage limits to protect expensive items like jewelry, electronics, and collectibles.
Pro Tip: If you need a customized policy that covers everything you need, check out our review of Travelers insurance. Travelers does a great job providing customers the protections they need and nothing they don’t.
Which type of policy do you need? That all depends. Most folks are just fine with HO-3 insurance policies. In fact, the National Association of Insurance Commissioners estimates that about three-quarters of single-family home policies are HO-3. However, if you need to protect your extensive collection of fine furs or make sure you’re covered should a pipe burst in your wine cellar, you might need an HO-5 policy.
So now that we’ve zeroed in on the type of policy you’re likely looking for, let’s take it a step further and discuss what a typical HO-3 policy will — and won’t — cover.
You might think that your homeowner insurance protects exactly that — your home. You’d only be partially right. Even the most standard policies protect beyond your four walls. Here’s what standard plans include:
Your dwelling: This is what most people think of when they hear “homeowners insurance.” The dwelling portion of your policy covers the structure of your home.
Other structures on your property: If you have a fence surrounding your property, a swimming pool, or a detached garage, this section of your policy will protect them. Generally speaking these structures will be covered by 10 percent of your total dwelling coverage. This means if you have a $300,000 dwelling limit, your other structures will be covered up to $30,000.
Your personal property: This section covers everything inside your home, including your furniture, your electronics, your clothing, and other personal items. Similar to your other structures coverage, your personal property coverage is generally a percentage of your dwelling limit.
Liability: Your liability protection covers you if someone is injured on your property. Generally speaking, if you’re found to be at fault, your liability coverage will help pay a portion of the victim’s legal and medical bills. The amount your provider will pay out, though, depends entirely on the limits you select.
Now your specific policy might dice things up a little differently — for example, like what we saw in our USAA analysis, your policy might break that last category out into legal and medical costs. But generally, the four categories above are what standard homeowners insurance policies will cover. This is certainly good to know, but perhaps what’s more important is understanding what your policy won’t cover.
Just as important as understanding what your policy covers is what it won’t. There’s nothing worse than being knee-deep in floodwater and hearing that your insurance provider can’t do anything for you. So here’s what a standard policy usually won’t cover.
Anything above your limit: Let’s say someone is badly injured on your property and sues you for $1 million. If the court rules against you, you’re on the hook for that amount. And if you only have $500,000 worth of liability coverage, you’ll have to come up with the other half yourself.
Earth movements: Generally speaking, earthquakes, sinkholes, mudslides, and other movements of the earth are not covered by standard homeowners insurance policies.
Pro Tip: Most major insurance providers offer earthquake insurance as a relatively inexpensive add-on protection. If you live in an earthquake-prone area, certain providers might be better than others. Check out our Geico review if you’re worried about the ground shaking under your feet.
Maintenance issues: Most of the time, general wear and tear will not be covered by your homeowners insurance policy, nor will any damage caused by neglect. If you flush a towel down the toilet and your pipes burst — sorry — that’s probably on you.
Pests and infestations: Similarly to maintenance issues, any damage caused by pests are unlikely to be covered by your homeowners insurance. That means you really should quit putting off that termite treatment.
Mold and rot: Got a damp basement? Probably better to invest in a dehumidifier than bank on your homeowners insurance covering the repairs when your floor starts to sag. Most policies won’t protect you here.
Floods: Standard homeowners insurance will not protect you if your home is damaged due to a flood. You’ll need to purchase a separate policy if you’re at risk. (Keep in mind a flood is different from a pipe bursting in your home and the ensuing water damage that occurs.)
Car break-ins: If someone smashes your window and steals your briefcase out of your car while it’s sitting in your driveway, it’s unlikely that your homeowners insurance policy will cover it under your personal property protections. You’re going to need an auto insurance policy that covers theft to protect you there.
With this in mind, you can rest easy knowing that most every policy can be custom-built to serve your needs. There are plenty of add-on coverages offered by providers to make sure you’re protected from all angles.
If you want protection from a specific threat, odds are you can find it. I’m not kidding, either. If you want to be protected from werewolf attack, there are insurers out there that’ll sell you a policy.3 That said, there are some more standard add-ons that a lot of folks include with their policies. These might include:
Flood damage: Generally speaking, water damage is only covered by your homeowners insurance if there was a malfunction in your pipes that you had nothing to do with. If the creek in your backyard rises and intrudes into your domicile, you’re not going to be covered. If you’re at risk, you may need to purchase flood insurance on top of your policy.
Replacement costs: Again — generally speaking — most homeowners insurance policies will only reimburse you for the depreciated costs of your belongings if they are stolen or damaged in a covered event. That means if your six-year-old laptop is taken during a burglary, your provider will only cut a check for what it’s worth on the open market (not much!). If you want them to replace lost or damaged items, you’re probably looking at an addendum to your standard policy.
Pro Tip: If you’re familiar with the insurance industry, it’s likely that you’ve seen the terms RCV and ACV tossed around. Those stand for Replacement Cost Value and Actual Cost Value. ACV will pay you for the fair market price of your lost or damaged item, where RCV will pay to replace it. Since RCV policies require the insurer to pay out more, expect your premiums to be higher.
Sewer and drain back-up: Similar to flood insurance, if a municipal water main backs up, it’s unlikely to be covered by your standard policy. A back-up endorsement, however, will make sure you’re protected.
Umbrella insurance: Say you own a modest home but have a collection of fine antique jewelry you want to protect — your limits might be a little too low to make sure your possessions are covered. Umbrella insurance, though, will raise those limits so that you’ll be able to recover in the event of a catastrophe. If you’re interested in this type of coverage, we found in our review of Allstate that they offer pretty decent coverage in this regard.
There are quite a few other insurance add-ons that you can explore, but these are among the most common. Obviously your specific situation will dictate what you need to add to your standard policy, but there are a few key practices to keep in mind when you’re shopping around for your perfect policy.
First, understand that there is no one-size-fits-all approach to homeowners insurance. Every property is unique, and every property owner will require specific protections. It’s important to shop around and compare providers on more criteria than the price of their premium alone.
Second, you want to make sure that your policy is going to cover your needs. As mentioned, minimum coverage might be easier on your wallet in the short term, but if the worst happens, you’re going to be left scrambling. It’s best to understand how much it would cost to rebuild your home from the ground up and carry insurance that would cover that price.
Third, make sure your provider has a good track record in regard to customer service. The Better Business Bureau is a great resource, as is the National Association of Insurance Commissioners. If the provider you’re considering has a ton of complaints, you might end up having a similar negative experience when you need help the most.
FYI: The National Association of Insurance Commissioners keeps track of official complaints lodged against insurance providers. Their index can help you gain insight into whether or not your provider has a good customer service track record.
With all of these considerations in mind, it might be helpful to take a look at the chart that helps our experts determine which providers are better than others. Here’s a quick example:
|Available in All 50 States||No||Yes||No||Yes||Yes|
|AM Best Rating||A++||A++||A||A+||A++|
|Home Security System Discount||Yes||Yes||Yes||Yes||Yes|
|BBB Rating||Not Accredited||A+||A+||Not Accredited||Not Accredited|
All things considered, it’s important to comparison shop when you’re looking to secure homeowners insurance. The good news is that task doesn’t have to be too time-consuming or a big headache. Most major insurance providers offer online quote tools that make shopping around pretty simple.
Most homeowners insurance providers offer online quote tools to make comparison shopping easy. Generally speaking, these online quotes don’t require much legwork from the purchaser, and they’re detailed enough to give you a clear understanding of what you’re covering and what it’ll cost.
Different providers require different pieces of information to secure a quote, but it’s likely stuff you’ll know off the top of your head. How many rooms does your house have? What is it built out of? What year was it constructed? Have there been any major renovations or repairs? You’re likely to encounter these types of questions when seeking a quote.
FYI: We found in our breakdown of Nationwide that they have a really pain-free online quote process. If you’re shopping around, they’re a great option to consider.
Once that quote comes back, though, make sure you’re evaluating it on more than price alone. Check to see what your limits are, what’s going to be covered, and recommendations they offer for additional coverage.
Here’s an example of the information you’re likely going to receive from your online quote. This was from our review of Farmers, and the really good policy described below cost $307 per month:
|Protection||Value of Home|
|All Peril||1 Percent of Dwelling Coverage|
|Wind and hail||5 Percent of Dwelling Coverage|
|Dwelling||100 Percent of Dwelling Coverage|
|Extended Replacement Cost||10 Percent of Dwelling Coverage|
|Separate Structures||10 Percent of Dwelling Coverage|
|Personal Property||55 Percent of Dwelling Coverage|
|Home Contents Coverage||Yes|
|Loss of Use||20 Percent of Dwelling Coverage or 12 Months|
|Building Ordinance or Law Coverage||10 Percent of Dwelling Coverage|
|Roof Payments||Replacement Cost Value|
|Marring to Metal Roof Material||No|
|Type of Liability||Limits/Deductibles|
|Medical Payments to Others||$1,000|
Your coverages will certainly inform your decision, but the bottom line is definitely a consideration here. Understanding that, it’s reasonable to ask how much all of this is going to set you back.
Asking how much a policy will cost is a bit like asking “how much does a new car cost?” Sure, you can get a vague idea, but it really depends on the quality of the automobile. A Mercedes is obviously going to cost more than a Kia.
Understanding that, it’s helpful to know the average homeowners insurance policy in America costs about $1,300 annually or $108 dollars per month. That is based on a home that costs about $250,000 and does not take into account additional coverages or unique situations. Your premium will fluctuate based on how valuable the property you want to insure is, where it’s located, and other considerations unique to your situation.
With that in mind, though, there are some ways to bring that premium price down.
Each insurance provider is different and, as such, the discounts they offer won’t be universal. However, there are a few things you can do to make sure you’re getting the best price possible on your premium.
No claims: Insurers want to provide service to folks who pose low risk, so if you can show that you haven’t made a claim against your policy, you’re likely to receive a discount.
Security systems: Since homeowners insurance covers your personal property, it makes sense that providers would incentivize those who take measures to prevent theft. Installing a reliable home security system will sometimes entitle you to home insurance premium savings.
Fire alarms: Similar to discounts realized from installing a home security system, installing atmospheric sensors like fire alarms and flood alerts will usually entitle you to a discount on your premium.
Fire alarms: Similar to discounts realized from installing a home security system, installing atmospheric sensors like fire alarms and flood alerts will usually entitle you to a discount on your premium.
Bundling: One of the best ways to save on your homeowners insurance policy is by bundling it with your other insurance needs. If you check out our review of Farmers, for instance, you’ll see that they offer a ton of options with compounding savings when you purchase multiple policies.
Now that you understand the function of homeowners insurance, what to look for when selecting a policy, and how much it’s likely to cost, it’s time to consider which provider is right for you. There are a few best practices to keep in mind when shopping around.
The three main things to keep in mind when shopping for homeowners insurance are:
1) Each situation is different. You need to have a policy that is tailor-fit for your situation and needs.
2) Make sure your policy is comprehensive. The aftermath of a disaster is the worst time to discover your coverage was inadequate.
3) Your premium is going to depend on a number of factors. It’s important to speak with a representative from the insurer you’re considering and provide them with as much detail as possible.
We recommend securing at least five quotes from well-established insurance providers before making your decision on which policy to purchase. Be sure to compare the coverages, the limits, and the deductibles against what your final premium will be. Remember, short-term savings can often yield long-term problems.
Ultimately your decision is going to come down to what you value. Affordable protections might be a little slim when it comes to coverage, and expensive providers might be offering protections you won’t really need.
It’s best to take your time, do your research, and secure a policy that makes you the most comfortable.
Good luck, and stay safe out there.
You might think your homeowners insurance should be based on the purchase price of your home, but under that framework you might be left in a lurch if disaster strikes. You should always purchase homeowners insurance based on the price of rebuilding your home from the ground up.
It’s difficult to nail down an “average” price of a homeowners insurance policy; the cost of the premium depends on too many factors unique to your home and your financial circumstances. That said, you should expect to pay between $100 and $200 per month for a decent policy from a reputable provider.
There are several ways to save money on homeowners insurance, but discounts are specific to individual providers. Generally speaking, though, you can save by installing preventative sensors like smoke detectors and burglar alarms.
Most homeowners insurance providers offer discounts to customers who rarely make claims, so it’s usually better in the long run to pay for minor repairs out of pocket. Talk to your provider for guidance on your specific situation.
It’s difficult to say because each homeowners’ needs are unique. However, in our extensive research we’ve found Lemonade, State Farm, and Nationwide to excel in this industry.
Office of the Insurance Commissioner, Washington State. (2022). Who needs homeowner insurance/why should I buy it?
Coverage. (2020, Jul 23). How much homeowners insurance is required by mortgage lenders?
Risk Averse Insurance. (2019, Oct 21). Ghost Insurance: Protection from the Paranormal.