What is homeowners insurance and how does it work?
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Homeowners insurance is essential, protecting homeowners from financial damage or devastation if their property is damaged or destroyed. In exchange for a regular premium payment, the property insurance company agrees to offset the expense of covered perils for the policyholder, if damages should occur.
Understanding your home insurance policy before anything goes wrong can help you be financially prepared for the unexpected. You are also likely to feel more confident about your coverage when filing a claim if you understand the inner workings of your policy upfront.
- Homeowners insurance is property insurance coverage you can purchase to help cover costs if your home is damaged or destroyed from a covered event.
- Property insurance has different policy forms that offer varying coverage levels.
- On average, homeowners insurance costs $1,428 a year. However, costs vary widely based on your home's characteristics, location and coverage needs.
What is homeowners insurance?
Homeowners insurance is financial protection that you purchase from an insurance provider. It helps pay for damages if a covered disaster or other damaging event affects your home.
A standard insurance policy protects you in a variety of ways:
- Home’s structure and belongings: Home insurance offers financial protection for the structure of a home as well as any 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 — meaning should you need to stay in a hotel and dine out, your policy might cover those additional expenses.
- Liability protection: A standard homeowners insurance policy comes with liability protection. If someone gets hurt while on your property or you are found at fault for damage to someone else’s property, your liability coverage might help pay for their expenses.
There are many types of homeowners insurance. If you have a mortgage or other home loan, you will likely have to carry a property insurance policy. An HO-3 policy is the most standard policy type for homeowners insurance coverage. On average, policy coverage includes:
- Dwelling coverage
- Other structures coverage
- Personal property coverage
- Medical payments
- Additional living expenses
Each policy type comes with different covered perils, or differs with how perils are covered in a claim. 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.
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.
Homeowners insurance is not difficult to obtain, but there are some things you should know as you evaluate companies.
First, you may want to research several homeowners insurance companies to find which carriers best fit your needs. As you evaluate each provider, you may want to think about how the company’s discounts and coverages fit with 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 fit your needs, you can contact each one to get home insurance quotes. You can often do this online, by phone or by visiting a local agency.
During the quote process, ask about each company’s discounts. Taking advantage of home insurance discounts, which often include savings for home alarm systems, bundling policies and being claims-free, is one of the easiest ways to lower your premium.
Learn more: Affordable home insurance companies
Purchasing a 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 may 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 each time your homeowners insurance policy renews. 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 note your file and prepare for receiving documents and an invoice from a new insurance company.
Maintaining a 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 claim
If the unexpected happens and 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 where the damage is, what kind of damage you have and when it occurred. Before sending any payout, a request to submit pictures of your home’s damaged portions or to allow a claims adjuster to inspect the damage is generally standard. Once you initiate the claims process, your insurance provider will determine the next steps.
Is homeowners insurance required?
Home insurance is not legally required in any state. However, it is 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 starting over from scratch if your home and everything in it is destroyed. What that means is that homeowners insurance is typically a good idea, even if you do not have a mortgage. That way, if your home is suddenly damaged or destroyed by a covered peril, your home insurance can help pay for the cost to repair or rebuild. Otherwise, you would have to shoulder those costs out of pocket.
How much does a home insurance policy cost?
The average cost of homeowners insurance in the United States is $1,428 per year for $250,000 in dwelling coverage. However, there are multiple variables that influence the cost of homeowners insurance, which means that 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 you in an emergency. This means that the emergency responders are likely to be able to put a fire out faster than if you live farther away, 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 coverages you add to your policy, the more you will likely pay.
- Credit score: In many states, your credit score 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.
Frequently asked questions
The homeowners insurance coverage level you need will likely depend on your personal situation. Your dwelling coverage is based on what the value is to replace 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, a pool, or regularly host guests. That said, it may be beneficial to work with a licensed agent to find the appropriate coverage levels for you.
There is no single answer to this question, as claims are generally settled on a case-by-case basis. 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 from when it is accepted by your insurance company. If the claim involves significant damage, catastrophic losses, or injuries, your payout may take longer to process.
Working with a national or local insurance provider is a personal preference. To help make a decision, compare each company’s coverage options, available discounts, policy features, customer reviews and accessibility. From there, request quotes from the companies that seem like they would be the best fit for you and your home. If a company’s online tools or hometown presence are of particular importance to you, keep in mind that these may vary greatly from one carrier to the next.
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, but 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.