Homeowners insurance: what it covers and how much it costs


Homeownership might be the American Dream, but so much can — and often do — go wrong when you own a home.  

A tree falls through the roof during a heavy storm, your neighbor’s teen drives their family car through your fence, a burglar steals everything but the kitchen sink while you’re on vacation—what now?  

That’s where homeowners insurance comes in. It can be the difference between giving you peace of mind in an emergency or having to cough up your entire rainy day fund. Here’s what a typical policy covers, what it doesn’t, and how much it costs. 

What is homeowners insurance? 

Homeowners insurance protects you financially if your property or belongings are damaged by certain perils. Insurance policies define “perils” as an event that causes damage to your property or belongings. It is considered a “covered event” if it’s listed in your policy. 

After a fire, leak, or other unexpected disaster, filing a claim with your insurance company can help you pay for repairs or to replace your stuff. A homeowners policy will also pay for living expenses if your house becomes temporarily unlivable. 

But what qualifies for reimbursement depends on the type of coverage you get and how much you have. In general, there are two types of homeowners insurance policies—named perils coverage (HO-2) and open perils coverage (HO-5)—and then there’s a third: a hybrid policy (HO-3). 

A broad policy (HO-2) covers losses to your home or belongings caused by a list of named perils, including: 

  • Fire 
  • Lightning 
  • Windstorms 
  • Hail 
  • Riots 
  • Aircraft 
  • Cars 
  • Smoke 
  • Vandalism 
  • Explosion 
  • Theft 
  • Volcanic eruption 
  • Falling objects 
  • Weight of snow, ice, or sleet 
  • Water overflow or discharge from air conditioning, appliances, or plumping 
  • Damage from a sudden power surge 

A special policy (HO-3) covers damage to your personal belongings caused by the named perils. But it broadens the scope for structure damage so that all perils, except any that are specifically excluded in your policy, are covered (more on exclusions later). 

A comprehensive policy (HO-5) uses open perils coverage for all structures and belongings on your property. This is the most generous form of coverage—and the priciest—but it still has some exclusions. 

There are different policies for homes that are at least 40 years old or deemed a historic landmark (HO-8), and policies for renters (HO-4) and condo owners (HO-6). 

What does homeowners insurance cover? 

Most people who live in single-family homes have an HO-3 policy. It covers damage to the following: 

  • The home’s interior and exterior 
  • Detached buildings on the property, such as a garage or shed 
  • Personal belongings like electronics and appliances 

An HO-3 also offers loss-of-use coverage, which pays for additional living expenses if you have to move out of your house while repairs are being made due to damage from a covered peril. It provides personal liability and medical payments for injuries sustained by a visitor, too. For instance, if your dog bites a friend at your dinner party, the insurance company may help pay for their doctor bill. 

Like most other types of insurance, you have to pay your share of the loss for physical and personal property damage before the insurance company steps in. Most deductibles on homeowners policies are relatively low, ranging from $500 to $2,000.  

The home itself is typically insured at the replacement cost value. This is often higher than your purchase price and will likely keep going up over time, says Angi Orbann, a vice president at insurance company Travelers. “You could have purchased a home for $300,000, but to rebuild it, it could cost $500,000.” 

She suggests working with an insurance agent annually to review and update your dwelling coverage, which informs other coverage limits in your policy. Personal property coverage is typically 50% of dwelling coverage. For example, if your home is insured for $500,000, your belongings would be covered for $250,000 (limits reset annually).  

You can raise the coverage amount if that’s not enough, but you should expect a higher monthly premium payment. Loss of use and detached buildings are usually each covered at 10% to 20% of dwelling coverage.  

Personal liability coverage has separate limits not related to property coverage, usually between $100,000 and $500,000. Medical payments coverage can be as high as $5,000.  

What doesn’t homeowners insurance cover? 

A homeowners insurance policy isn’t a catch-all for calamity. “Let’s say your roof starts letting in water, but there was no wind or hail event around—that could be excluded, depending on the situation,” Orbann says. “Or if your refrigerator stops keeping things cold, that’s wear and tear.” Pest infestations, such as termites and mice, are commonly excluded perils, as is damage that was intentionally inflicted on the property by the homeowner or their immediate family. 

And despite much of the U.S. increasingly suffering from seasonal storms and hurricanes, flooding from weather-related events isn’t a covered peril—and neither are earthquakes.

“If that’s a concern in an area, there are separate policies that can be either endorsed onto the homeowner’s policy or a total separate policy that homeowners should secure for those types of risks,” Orbann says. 

Some types of personal property are excluded from homeowners policies or have specific limitations, even when damage is caused by a covered peril. For example, jewelry is covered up to your policy limit for perils such as fire or weather-related damage, but theft has lower limits.  

Most insurers will pay only up to $1,500 for stolen jewelry. Similarly, theft of a firearm is usually covered up to $2,500. To get full coverage for these, experts recommend getting a separate personal articles insurance policy. In some cases, you may want to add supplemental insurance for high-value jewelry items like an engagement ring or luxury watch.

If you use your home as your business, your homeowners insurance may not be enough to protect your business assets. In this instance it might be best to consider adding a business insurance policy.

Lastly, items that are insured by another policy, such as cars, boats, or motorcycles aren’t covered by a homeowners policy.  

Is homeowners insurance required? 

Homeowners insurance isn’t a state mandate in the same way that auto insurance is, but it’s often required by a lender if you have a mortgage, Orbann says. “That’s basically to make sure that their interests are looked out for in the case of a loss,” she says.  

It’s a smart way for homeowners to protect their finances, too. According to the Insurance Information Institute (III), the average homeowners insurance claim is nearly $14,000. The most common claims are for wind and hail damage, averaging about $11,700 per incident. Fire and lightning are the most expensive property damage claims, averaging more than $77,000. 

How much does a homeowners policy cost? 

Homeowners insurance premiums have increased sharply in the last decade. Severe weather events, more expensive building materials, and labor shortages are largely to blame. In 2019, the average U.S. homeowner paid $1,272 a year for property insurance, according to the latest data from the National Association of Insurance Commissioners. That’s a nearly 40% increase from 2010. In some states like Texas, the cost of homeowners insurance can reach above $4,000 annually.

How much you pay for a policy depends on the characteristics of your house and your homeowners insurance history, says Orbann. “We always say in homeowners insurance, there’s no VIN number like auto insurance, where you have a number and you know almost everything about the house,” she says. Insurers depend on homeowners to divulge their past claims and then fill in any gaps using third-party data sources. 

As with everything real estate, the location of your home is paramount. Property insurance companies use a by-peril rating system, which helps them price insurance policies based on geographic exposure to certain risks, namely weather. 

“If you’re in California, you’re going to have higher rates for wildfires,” Orbann adds. “If you’re on the East Coast, you’ll probably have higher rates for hurricanes. In the Midwest, it’s wind, hail, tornadoes.” 

Here are the main factors for pricing homeowners insurance premiums:  

  • Location: Your home’s ZIP code can tell insurers a lot about the risk level in your area, such as the frequency of theft or weather disasters. Location also helps insurers factor in local labor and building material costs to estimate what it would cost to rebuild the home after a total loss. 
  • Home value: Pricier homes tend to be more expensive to insure. 
  • Characteristics of the house: The unique features of the house, from bedroom and bathroom count to roofing material to whether you have a swimming pool, are considered. The age of your home is also crucial, as newer homes tend to have fewer hazards. 
  • Insurance claims history: The nature and frequency of your past insurance claims as a homeowner help the insurer assess your risk level. 
  • Homeowner marital status: Married couples tend to file fewer claims than non-married people, a factor that insurance companies perceive as less risky. 
  • Coverage amount: Most HO-3 policies have replacement cost coverage on dwellings and actual cash value coverage on personal property. If you want your policy to replace your lost belongings, rather than pay an amount that’s been reduced for depreciation, it’ll cost more.  
  • Deductible: A higher deductible can lead to a lower premium.  

Considering all the individual factors that go into pricing a homeowners insurance policy, here’s where it’s most and least expensive, according to 2019 data from the National Association of Insurance Commissioners. 

Here are the most and least expensive states for homeowners insurance:

Most of the factors used to set premiums are out of your hands. However, you can take steps to qualify for discounts. Adding smart systems to your home, such as a security camera or smoke detector that alerts your phone if you’re away, can lead to a lower premium. Installing a new roof can make a big difference, too.  

In general, buying two or more insurance policies from the same company, known as bundling, can result in a cheaper monthly payment. 

Homeownership is dynamic, and the insurance you buy to protect what’s likely your largest asset isn’t a set-it-and-forget-it activity, especially in an era of high inflation. “The cost of everything is going up,” Orbann says. Checking in with your insurance provider once a year to adjust your home’s replacement cost and account for new discounts, she says, is “especially important right now.” 

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