What is homeowners insurance and how does it work?
Key takeaways
- Homeowners insurance offers financial protection if your property is damaged by a covered peril.
- Home insurance usually covers your home's physical structure, other structures on your property and your personal belongings and includes a layer of liability insurance.
- On average, homeowners insurance in the U.S. costs $2,150 a year, or $179 per month. However, premiums vary widely based on your home’s characteristics, along with your location, coverage needs and more.
Purchasing homeowners insurance is a way to share the financial risk of owning a home. An insurance policy is a contract where the homeowner and insurance company agree that in exchange for a premium payment, the insurance company will provide compensation for the repairs or replacement of the home if it is damaged by a covered peril. The policy contract states the limits of various coverage types, the deductible amount, policy exclusions and other information. Understanding how home insurance works and what you are financially responsible for before a loss occurs can help you feel more confident when you need to file a claim.
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What is homeowners insurance?
Homeowners insurance is financial protection that you purchase from an insurance provider. A homeowners insurance policy can help pay for the expenses that most people typically could not afford on their own — for instance, if a hail storm damages your roof and you need a new one, or if someone is injured on your property and sues you for their medical expenses. Home insurance is not required by law; however, your mortgage lender may require it as a term of your loan.
What a standard home insurance policy covers depends on the type of coverage a policyholder selects, but generally, it covers the following:
- Home’s structure and belongings: Home insurance offers financial protection for the structure of a home, as well as attached and detached structures and any personal belongings in the home in the case of a covered event.
- Additional living expenses: Homeowners insurance generally covers additional living expenses you incur while repairs are being done up to a certain period of time or coverage limit. That means, should you need to stay in a hotel or pay to have your clothes laundered, your policy might help cover it.
- Liability protection: A standard homeowners insurance policy comes with liability protection, as well. If someone gets hurt while on your property or your negligence causes bodily harm or damage to someone else’s property, your liability coverage could help pay for their expenses.
There are many types of homeowners insurance. An HO-3 policy is the most common. Typically, coverage includes:
- Dwelling coverage
- Other structures coverage
- Personal property coverage
- Personal liability coverage
- Medical payments
- Additional living expenses
Each policy type comes with different coverage levels based on a percentage of the dwelling coverage. These percentages vary slightly between carriers, and policyholders can usually purchase additional coverage if needed. Understanding what perils — such as fire, water damage and burglary — your policy is designed to cover is an important step in your financial planning. Policies that offer more robust coverage will generally cost more but will also provide you with financial protection from a greater number of circumstances.
What is the difference between homeowners insurance and mortgage insurance?
Homeowners who put down less than 20 percent on a home at the time of purchase may have to purchase home and mortgage insurance. Just like home insurance protects your financial interest, mortgage insurance protects the financial interest of the mortgage company. The type of loan you have can dictate the kind of mortgage insurance that is required. Additionally, the cost of mortgage insurance will depend on factors like the loan amount, your credit history and the loan term. Usually, mortgage insurance costs between $30 to $70 per month for each $100,000 borrowed.
How does homeowners insurance work?
Your homeowners insurance journey can be broken down into several steps, each with its own specific set of considerations. Understanding each step could help you understand how your policy works.
Obtaining home insurance quotes
Homeowners insurance is typically not difficult to obtain; however, it can be challenging in certain circumstances. If you have a home that needs severe renovations or live in an area prone to extreme weather, securing home coverage might be more difficult. Here are some things you should know as you evaluate companies.
First, you may want to research several homeowners insurance companies to determine which carriers best fit your needs. As you evaluate each provider, you may want to think about how the company’s discounts and coverage fit your situation. To review customer service, you can look to J.D. Power’s numerous studies, and AM Best can help you evaluate an insurance provider’s financial strength. Once you have chosen several companies that could suit your needs, you can contact each for a quote. You can often do this online, by phone or by visiting a local agency.
During the quoting process, ask about each company’s discounts. Taking advantage of home insurance discounts — which often include savings for installing home alarm systems, bundling policies and remaining claim-free — is one of the easiest ways to lower your premium.
Learn more: Affordable home insurance companies
Purchasing a home insurance policy
Once you have chosen the company you feel is best for you, your family and your home, you can purchase your policy. You may need to sign an application and make a payment before it is set in place.
Most providers offer different payment options, such as paying annually or quarterly. If you have a mortgage on your home, you may not need to make a payment. Your premium might be included in your monthly mortgage payment, held in your escrow account and disbursed to your insurance company at each renewal.
If you are buying a house, most times, your homeowners insurance policy has to be in effect by the date of your closing. Often, your first year’s premium will be included in your closing costs, and your escrow will pay your insurance premium going forward.
If you have a current policy and are switching to a new company, you should let your mortgage servicer know about the change. Your new insurance company will likely send documentation to the mortgage company, but advising your loan servicer about the change ahead of time allows them to add a note to your file and prepare to receive documents and an invoice from a new insurance company.
Maintaining a home insurance policy
Once you have a policy in place, maintaining it is relatively simple. You will need to make premium payments, or if your coverage is paid from your escrow account, make sure that the premium gets paid by your mortgage company. If you make any changes to your home or lifestyle — like updating your roof, renovating a room or getting a dog — you should notify your insurance carrier to make sure that your policy still properly covers you.
Filing a home insurance claim
If your home sustains damage, you may need to file a claim. You can typically file claims online, through a mobile app or with an agent in person or over the phone. You can expect questions regarding some general information like what kind of damage you have, where the damage is and when it occurred. Before sending any payout, your insurer may request that you submit pictures of your home’s damaged portions or allow a claims adjuster to inspect the damage. Once you initiate the claims process, your insurance provider will determine the next steps.
Homeowners insurance protects your home from financial loss, but it shouldn't be your first line of defense. Insurance is a backup plan for when the damage to your home is too financially burdensome for you to handle out of pocket. Avoiding small and unnecessary claims can help keep your policy rate more affordable.— Shannon Martin, Bankrate Insurance Analyst
Is homeowners insurance required?
Home insurance is not legally required in any state. However, it is generally a good idea to have coverage in place to protect against the risk of financial loss. And, if you have a mortgage on your home, the lender will require you to have insurance to cover the amount of the loan until it is paid off. This protects your lender from the possibility that you are unable to pay off your loan if your home is destroyed.
Without home insurance, you could be faced with the costly task of repairing or replacing your home and belongings on your own should the unthinkable happen. What that means is that homeowners insurance is typically a good idea, even if you do not have a mortgage.
How much does a home insurance policy cost?
The average cost of homeowners insurance in the United States is $2,150 per year for $300,000 in dwelling coverage. However, there are multiple variables that influence the cost of homeowners insurance, so your premium could differ from the national average. Some of these factors include:
- Your state and ZIP code: One of the biggest factors when it comes to how much you pay for home insurance is where you live. Each state, and possibly ZIP code, has a unique profile regarding the likelihood of certain claims, which can impact your premium.
- Construction of home: How your house is constructed can affect your premium in a few ways. Some construction types are more resistant to certain types of damage, like wind or fire, which can lower your premium. However, some types of building materials are more expensive to repair, which could increase your premium.
- Age of home: Newer homes are generally less likely to experience damage from a variety of causes, such as weather or plumbing issues. Additionally, the building materials used in older homes may not conform to modern building standards, meaning additional work may be needed to repair or replace them. Expenses to update materials could drive costs up.
- Distance to nearest fire station: The closer you are to a fire station, the faster authorities are likely to get to you in an emergency, which could minimize damage.
- Deductible: Your deductible is the amount you agree to pay out of pocket if you file a claim. Choosing a higher deductible means the insurance company will pay less if you file a claim (because you agree to pay more), so your premium is generally lowered accordingly.
- Coverage options levels: In general, the higher your coverage levels, the more you will pay for insurance. Similarly, the more optional coverage types you add to your policy, the more you will likely pay.
- Credit history: In many states, your credit affects your home insurance premium, as homeowners with lower credit are statistically more likely to file a claim than homeowners with higher credit scores. However, not all states allow credit to be used as a rating factor.
- Claim history: If you have filed a homeowners claim within the last three to five years, on average, your premiums may be higher. Even if you change insurance companies, your new carrier can see your past claims and may charge you accordingly.
Another factor that influences the cost of homeowners insurance is which company you choose. Insurance companies weigh each pricing variable differently. One company may weigh your claim history more heavily than another, for example. Shopping around and getting quotes from several carriers might help you find the coverage you need at a competitive price.
Read more: Is homeowners insurance tax deductible?
Frequently asked questions
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The homeowners insurance coverage level you need will likely depend on your personal situation. Your dwelling coverage is based on the cost of replacing your home, which means that if your home is more expensive, you will need more coverage. Other types of coverage, like detached structures, personal property and loss of use coverage, will typically be percentages of your dwelling coverage. And, your personal liability coverage will also be based on your personal circumstances. Many insurance agents recommend that you consider higher levels of this type of coverage if you have a trampoline or pool or regularly host guests. That said, it can be beneficial to work with a licensed agent to find the appropriate coverage levels for you.
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There is no single answer to this question, as claims are generally settled on a case-by-case basis. However, J.D. Power reports that the average home insurance claims cycle timeline is 23.9 days, while catastrophic claims can take 34.2 days. The timeline for when you can expect payment will depend on several factors, including the laws in your state, your insurance company’s internal procedures and the volume of homeowners claim requests being processed at that particular time. Generally, you can expect a claim to be paid anywhere from within a few days to within a few weeks after it is accepted by your insurance company. If the claim involves significant damage, catastrophic losses or injuries, your payout may take longer to process.
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Each type of home insurance policy covers different perils, but there are some things that standard policies do not cover. Damage caused by flooding is typically excluded and can be obtained by purchasing a flood insurance policy, although a few companies may offer flood coverage as an endorsement (however, it is rare). Similarly, earthquake damage is also typically excluded, but it can commonly be added as an endorsement unless you live in a high-risk area. In that case, you may need a separate policy.
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Renters insurance and home insurance are fairly similar, except that renters insurance does not cover the dwelling or other structure on the property. The landlord’s insurance would cover losses to permanent structures. Renters insurance will cover your personal property, personal liability and additional living expenses up to the policy’s limits, minus your deductible.
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In most cases, the lender cannot buy home insurance for you — nor would it be a good idea. You should select the coverage types and limits that protect your financial interest best, whereas the lender would be unlikely to share the same goals. If at some point you decide to stop paying for home insurance while you still have a mortgage, your lender can impose a forced-placed insurance policy, though. These policies can be more expensive than standard insurance and may not offer additional financial protection to the homeowner, such as personal liability or personal property coverage.
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