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A Guide to Homeowner’s Insurance

Woman looking at homeowners insurance policy on laptop

Many people don’t fully understand homeowner’s insurance, including when they need it, how it works, or what it covers. Even if you’ve lived in your home for many years, getting smart about homeowner’s insurance today will help prevent disappointment later should you ever need to file a claim. 

What Is Homeowner’s Insurance? 

Homeowners insurance protects you financially if something happens to your home, other structures on the property, and almost everything in the house. It also pays for medical treatments if someone is injured on your property or if a family member or pet injures someone off your property.  

Is Homeowner’s Insurance Required? 

Most mortgage lenders require you to protect their investment in your property by purchasing homeowner’s insurance. This applies to both conventional mortgages and reverse mortgages.  

Homeowner’s insurance isn’t required if you own your home outright, but experts strongly recommend it. Challenges ranging from fire to theft to accidents happen to homes whether or not there’s a mortgage, so you’ll want to make sure you can rebuild or replace if necessary.  

What Is and Isn’t Covered? 

Most homeowner’s insurance policies cover: 

  • Physical structures on your home’s property—the house and any outbuildings  
  • Home furnishings 
  • Personal property such as clothing and computers 
  • Temporary living expenses (“loss of use”) if you have to move out during repairs or rebuilding 
  • Medical expenses for anyone injured on your property or for those injured by you, your family, or your pet off the property 

Most standard policies don’t cover damage caused by:  

  • Floods (your lender may require you to purchase flood insurance separately if the home is on a flood plain) 
  • Neglect 
  • Earthquakes and landslides 
  • Animal and insect infestation 
  • Power failures 

In addition, while there’s typically a ceiling on the amount covered for certain types of personal property such as jewelry, you can purchase extra coverage if necessary.  

Types of Coverage 

Insurers define eight coverage types known as homeowner’s insurance (HO) policy forms. The National Association of Insurance Commissioners reports that HO-3, the “special form,” is the most popular. HO-3 insurance covers weather and fire damage plus loss from theft. It doesn’t cover damage from floods and earthquakes.  

You can also classify insurance types according to how and how much you’re reimbursed. The three most common reimbursement forms are: 

  • Actual cash value, the least expensive of the three, reimburses you for the depreciated value of your home and belongings.  
  • Replacement cost covers the cost to rebuild your home without factoring in depreciation, up to the maximum amount stated in the policy.  
  • Guaranteed replacement cost/value, the most expensive type, reimburses you for actual costs to replace your home even if the amount is more than the estimated replacement cost in the policy.  

How Much Does It Cost? 

The cost of homeowner’s insurance is calculated according to:  

  • Protection level 
  • Deductible amounts 
  • Age of the home 
  • Type of home construction 
  • Additional factors 

According to a NerdWallet analysis, the average annual cost for homeowner’s insurance is about $1,585, with rates varying by state. Oklahoma has the highest average rate at $3,426, while Hawaii has the lowest, at $468. 

A higher deductible amount combined with less extensive coverage will usually yield lower monthly premiums, but whether that’s the best option depends on your situation. In general, experts say that you don’t want to skimp on homeowner’s protection.  

Shopping for Homeowner’s Insurance  

Because rates can vary by insurer and coverage, shop around before deciding. Your goal is to secure the coverage you need for your situation with a carrier you can trust to process any claims quickly and fairly.  

When getting homeowner’s insurance estimates, consider: 

  • The provider’s customer satisfaction rating and bundling your homeowner’s policy with auto and any other policies to get a volume discount from a single provider 
  • Talking to independent insurance agents who represent more than one company  
  • Avoiding a bare-boned policy to save money on premiums since you’ll have less protection if disaster strikes 

Finally, revisit your policy periodically, especially as circumstances change. Perhaps you’ve refinished the basement or paid off your mortgage. Your insurance agent will be able to make sure you have the coverage you need and want.  

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