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Caiaimage/Paul Viant

Chances are, your house is your most valuable asset. Buying homeowners insurance goes beyond paying repair and replacement costs – it also protects your savings and investments. Although local and state governments do not require you to carry homeowners insurance, lenders that finance homes do. In fact, most lenders specify the amount of insurance a homeowner must carry, typically throughout the life of the loan. But mortgage companies only consider the amount of insurance needed to cover their investment.

On the other hand, your family and possessions hold a much higher value than the brick and mortar of your home. Purchasing homeowners insurance might seem daunting, leaving you with a mountain of questions. What types of coverage do I need? Which insurance company is best? How much homeowners insurance do I need? Luckily, finding the coverage you need is as easy as following a few simple guidelines.

Getting to Know Homeowners Insurance

The term “homeowners policy” typically refers to a set of policies that cover your house, its contents and other associated structures. You must determine the various policies you need, along with the coverage limits and deductibles required for each type of coverage.

Homeowners policies can include:

  • Dwelling coverage:Dwelling coverage is your primary homeowners policy. It covers your house and attached structures, like a garage or carport.
  • Other structures coverage: Other structures policies cover unattached structures on your property such as a detached garage, shed or fences.
  • Personal property coverage: A personal property policy covers the contents of your home, such as furniture and clothing.
  • Additional living expenses coverage: An additional living expenses policy can cover some or all your living expenses when displaced from your home following a qualifying catastrophe. For example, if a fire renders your home uninhabitable, your additional living expenses policy can pay to rent a temporary dwelling while your house is under repair.
  • Personal liability coverage: Personal liability policies help pay claims when someone sustains an injury in your house or on your property. For instance, if a child falls from a tree in your yard, your personal liability policy could help pay an award or legal fees following a lawsuit.
  • Medical payments coverage: If someone who does not live in your house sustains an injury in your home or on your property, your medical payments coverage can help pay medical expenses. Medical payments policies typically pay even when you are not at fault.
  • Flood insurance: Flood insurance pays for damages and losses caused by floods. Most homeowners policies do not include flood coverage and many insurance companies do not offer flood insurance. Many homeowners purchase flood insurance through the National Flood Insurance Program, administered by the Federal Emergency Management Agency.
  • Earthquake insurance: Most homeowners policies do not cover damages or losses caused by earthquakes. However, many insurance companies offer separate policies, or endorsements for dwellings policies that cover earthquake damage.
  • Umbrella insurance: Umbrella policies help pay liability claims after your personal liability insurance reaches its limit. For example, if a court awards an injured person $500,000 after sustaining an injury on your property and your personal liability policy has a $200,000 limit, your umbrella policy could pay the difference.

How Much Homeowners Insurance Do I Need?

Determining the amount of homeowners coverage you need requires careful calculation and consideration. According to The Zebra, an organization that studies the insurance industry, homeowners commonly carry:

Policy Type Coverage Amount
Dwelling Insurance Varies, depending on the cash and market value of the house
Other Structures Insurance 10% of the dwelling insurance coverage
Personal Property Insurance 50% of the dwelling insurance coverage
Additional Living Expenses Insurance 20% of the dwelling insurance coverage
Medical Payments Insurance Varies, depending on specific factors and use of the property
Personal Liability Insurance Varies, depending on specific factors and use of the property

To determine the amount and types of homeowners insurance you need, follow guidelines established by the Insurance Information Institute and National Association of Insurance Commissioners:

Calculate your home’s actual value and replacement cost

Different methods of calculating your house’s value can produce widely different results. A government property assessor might assign a lower value to your home than its market value. But you must look beyond your home’s sales value to decide how much dwelling insurance to purchase. For example, if you have an older home, with plaster walls and custom-made trim, you will need to hire expensive specialists to repair damage sustained by a fire. Likewise, if you equip your kitchen with expensive industrial appliances, a standard deductible probably will not cover replacement costs following a calamity.

Consider local building costs

You purchase homeowners insurance to prepare for damage or loss, so you must know how much repairing or replacing your house will cost. Research how much building supplies and labor will cost to restore your house to its current state or build an equivalent new home. Factors that impact the amount of coverage your house needs include the number of bathrooms it has, the materials used in its construction and its special features. For instance, if your living room features imported Italian tiling, you might need higher coverage levels and a lower deductible to replace it.

Find out if your house meets current building codes

Typically, building inspectors only inspect new homes and renovated houses. If you own an older house that sustains damage due to a storm or fire, your local building inspector might require unexpected building code upgrades during the repair process. For instance, a building inspector might require you to replace ungrounded electrical outlets with modern grounded outlets. Some insurance companies offer endorsements to dwelling policies that help pay expenses related to meeting current building codes.

Take an inventory of your home’s contents

Determine the value and replacement value of your belongings, including furniture, artwork, appliances and personal possessions such as clothing and jewelry. You can easily replace items such as modern sofas and coffee tables, but possessions such as paintings and family heirlooms are irreplaceable. Oftentimes, insurance companies set limits on the amount of money they pay for individual items such as computers and artwork. If you own a lot of valuable items, you might consider increasing your policy’s limits or purchasing additional coverage for specific possessions.

Consider how you use your house and who uses it

The location and use of your home can help you determine the amount of personal liability, medical payments and umbrella insurance you need. For example, a retired couple who rarely entertain guests might need less liability and medical coverage than a family that often hosts parties for school-aged kids. Certain property features can also play a role in the amount of liability and medical coverage you need. For instance, if your yard has many old oak trees, you might consider higher liability coverage in case one falls on your neighbor’s house.

Research rental rates in your area

If your home sustains major damage, you could spend weeks or months living in temporary housing while workers repair it. Find out how much it will cost for you and your family to rent a home or apartment in your area. Homeowners who live in expensive housing markets, such as San Francisco or New York City, need more additional living expenses coverage.

Shop around

You might be surprised how much homeowners policy rates can vary among companies. According to The Zebra, Farmers policyholders pay an average annual premium of $2,027 for homeowners coverage, while State Farm customers pay $1,501. Location also plays a role in the cost of homeowners insurance. While Delaware residents pay an average annual homeowners premium of $880, Mississippi homeowners pay more than $2,500. It pays to shop around to find the best insurance companies in your area.

Find out how you can reduce your homeowners insurance rates

If you already have a homeowners policy, you might qualify for discounts or programs that can reduce your premium. For example, Allstate offers home insurance discounts for installing a new roof, purchasing multiple Allstate policies and for homeowners who are retired.