Home insurance protects your biggest investment — your home and everything in it. To find the best home insurance for you and your family, be aware of the types available, add-ons you might need and the many other nuances of this important coverage.
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A typical homeowners policy covers your house and personal belongings plus any garage or shed on the property. You’re also usually covered if someone is injured while on your property and if you need to stay in a hotel while your home is being repaired.
Though home insurance isn’t required unless you have a loan, it’s probably a good idea to consider for most homeowners. A homeowners insurance policy will safeguard your house in case of unforeseen events like fire, burglary or natural disaster.
Why do I need home insurance?
Thunderstorms, lightning, burst pipes, fallen trees, fire, ice — the list of things that could potentially damage or destroy your home is endless. Your home is likely your most valuable possession, and homeowners insurance protects it from the unexpected.
It also protects what’s in your home, so if your furniture is damaged in a kitchen fire or your television is stolen, your insurer can help you replace it. And if you don’t own your own home, renters insurance can still protect your belongings.
Think about all those hours you spent turning your house into a home. Perhaps you invested in creating a little veggie patch in the back garden or gave up your weekends to renovate the perfect kitchen. Maybe you had to fight off other buyers to come out on top in the property market.
Without homeowners insurance, one disaster might require you to dig into your savings to clean up the mess, or be left without a way to fix the damage if your savings can’t cover it. The dwelling coverage in your homeowners insurance policy makes sure it doesn’t come to that in a worst case scenario.
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What are the types of homeowners insurance?
Homeowners insurance policies are broken down into three main categories, with each policy covering damage caused by different types of events or disasters — referred to as “perils” in insurance-speak.
Homeowners 1 (HO-1)
This is the most basic policy and offers limited coverage; it usually doesn’t cover your personal items within the home. Because of its limited coverage, it is not available in most states. It provides coverage for only the perils that are named in the policy, which typically include:
Fire or lightning
Windstorm or hail
Explosion
Riot or civil commotion
Damage caused by aircraft
Smoke
Vandalism or malicious mischief
Theft
Volcanic eruption
Homeowners 2 (HO-2)
HO-2 is a step up from HO-1, offering more coverage, usually including your belongings and liability. But it is stilled a named-perils policy, meaning it only covers the perils specifically named in the policy. It includes all of the perils under HO-1, plus the addition of these:
Falling object
Weight of ice, snow or sleet
Water damage from burst pipes or similar event
Sudden, accidental cracking, burning or bulging of hot water or similar system
Freezing of plumbing or similar househeld system
Sudden, accidental damage from artificially generated electrical current
Homeowners 3 (HO-3)
Sometimes referred to as the “deluxe” policy by home insurance providers, HO-3 is an open-perils policy. An open-perils policy will include coverage for all perils except those specifically noted in the policy. Most mortgage providers require a minimum of HO-3 coverage.
Can I get insurance for an older or non-standard home?
In addition to the three main home insurance policies, you can also purchase a policy for non-standard home types.
What add-ons can I get for my home insurance policy?
Perils typically not covered in a homeowners insurance policy include: a flood, an earthquake, sewer backup, or normal wear and tear or maintenance to the home. However, additional coverage can be purchased to protect against these occurrences.
Additions to your home insurance policy are referred to as “floaters,” “riders” or “endorsements.” These can include flood insurance, earthquake insurance, floater policies for valuable items like furs and jewelry, and an umbrella liability policy. We’ll discuss endorsements in further detail later in the guide. Here is what is typically excluded from most standard policies:
How can I compare homeowners insurance?
Pick the right deductible. Typical deductibles range from $500 to $1,000. Raising your deductible will lower your premium; however, don’t sacrifice a lower premium at the risk of not being able to afford your deductible should an issue arise. Weigh the risk vs reward carefully.
Bundle your insurance policies. Purchasing your auto and home insurance from the same provider often results in a discount. But it’s not always cheapest, so get quotes from multiple companies with bundling and without.
Protect your home. Insurance companies offer discounts for taking extra precautions to secure your home. Security systems, smoke alarms, storm shutters, reinforced building materials and more can reduce your premiums.
Take an inventory of your home’s contents. Keep a running inventory of all the major possessions you own and how much they’re worth. This lets you get the coverage you need without paying too much whenever you renew your insurance. Did you pass on that expensive piece of jewelry to your niece? Cancel the endorsement you purchased to protect it in case of theft.
Maintain your property. This reduces the chances of you needing to make a claim and keeps your premiums low.
Shop around. Investigate all your options and find the one that best works with your budget. But don’t make the mistake of choosing a policy strictly on the basis of cost. Check the reputation of your provider. You’ll want good customer service when disaster strikes.
What’s the difference between actual cash value and replacement cost?
In addition to choosing what your policy covers and under which circumstances, you will also need to choose your level of coverage. It can greatly affect how much you will be paid to repair your home and replace items that may have been damaged.
Actual cash value
Covers damages minus any depreciation in value of your home or its possessions. For example, with actual cash value, if your computer is damaged by a covered peril, your insurance provider will pay for what your computer is worth today, not how much it would cost to purchase a brand new one.
Replacement cost
This type of policy covers damages caused by a covered peril without factoring in depreciation. Using the damaged laptop example, with replacement cost, your insurance provider will cover the cost to purchase a brand new computer.
Guaranteed or extended replacement cost
This policy offers the most protection because it will cover the costs of damages even if it exceeds your policy’s limit. Using the laptop example, you might agree to a value your laptop is worth. If it’s damaged, you’d be reimbursed for that full value regardless of hitting your coverage maximum.
Actual cash value vs replacement cost
Market value or actual cash value (ACV) is the default, what your payout will typically be unless you’ve selected replacement cost coverage. Actual cash value is the cost to replace it based on how much your car is worth today, which is its original purchase price minus any depreciation.
2 years ago
You buy a TV for $500
Currently
Your TV is worth $200 due to depreciation and newer models on the market
Today
Your TV catches fire and you lose the entire appliance
Actual cash value
Based on depreciation value, your insurer will pay for what the TV is worth today so you will be receiving only $100 for your appliance
Replacement cost
Since this policy won’t take depreciation into account, you will be receiving what you paid for your TV 2 years ago so you will receive a grand total of $500
How to decide on actual cost vs replacement cost
How much is your home worth? Keep in mind te real estate value of your home is not the same amount as what it would cost to rebuild your home. Don’t include the cost of your land when determining your coverage.
How much would it cost to rebuild your home with today’s standards? It might cost more today to rebuild or repair your home than when it was originally constructed. This is especially true after a natural disaster like a hurricane, when supplies and labor are in high demand.
How much would your house need to be updated? If building codes have been updated since your house was built, this may also cause the cost to reconstruct your home to be more expensive today.
How much is a home insurance deductible?
The deductible is how much you must pay toward repairing your home or replacing any belongings that are damaged. You will have to pay a deductible each time you file a claim. Deductibles can either be a set amount or a percentage, but are usually a predetermined amount. The average deductible is $500-$1,000.
The deductible for your policy is determined when you purchase your insurance policy. A higher deductible results in a lower premium. But make sure your deductible is low enough that you can afford to pay it if you need to repair damage to your home that is covered by your policy. Your mortgage company also might put a limit on how high your deductible can be.
Case study: Deductibles
When Jess purchased her home she wanted to get the least expensive home insurance she could find. So she opted for the highest deductible her mortgage company would allow, which was $1,500. Soon after moving into her home, a hail storm caused severe damage to her roof and needed to be completely replaced. She filed a claim with her insurance provider and got an estimate for the roof. The cost of a new roof would be $8,850. But because her deductible was $1,500, her insurance company cut her a check for $7,350. Jess had to cover $1,500 of the cost to replace her roof.
How can I prevent the most common home insurance claims?
Water, storm damage and theft are three of the most common insurance claims. Be proactive and minimize the risks to your home.
Water damage
It might come as a surprise to learn that most water damage is not caused by weather, but by burst pipes and other plumbing problems.
Regularly check pipes for leaks. Avoid flushing foreign objects down toilets and make sure you address any signs of a leak as soon as possible, because even a small leak can cause an exponentially growing amount of damage over time.
Keep an eye out for mildew and mold, and try to scrub it away as soon as possible. It can also be a sign of internal water damage. If mold keeps appearing in a well ventilated room, it could be a leak that is not visible. Ignoring these issues can count as a failure to adequately maintain the home, which can be used to reject insurance claims.
If you live in a colder climate, insulating your pipes will help to prevent them from bursting.
Wind and hail damage
An increasingly common cause of damage and source of insurance claims, it makes sense to take steps to ensure your home is protected from storm damage.
Check your roof for loose shingles and make any necessary repairs.
Protect your windows. If you live in an area that’s prone to storms, it might be worth investing in storm shutters and impact-resistant windows.
Durable siding and impact-resistant shingles will also help to protect your home from hail.
Theft
No one wants to think that this might happen to them, but unfortunately it is all too common. Take steps to prevent a break-in at your home.
Check all entry points to your home and make any necessary repairs, like loose hinges or faulty locks.
Installing a home security system will deter would-be thieves.
Although it’s convenient when you find yourself in a bind, don’t hide a spare key outside your house. Criminals are well aware of this practice. Instead, consider giving a trusted neighbor a key to your home.
Exterior lighting is a cost-effective deterrent to thieves.
Common questions about home insurance
No, you are not required to obtain insurance if you are renting. However, you can obtain renter’s insurance to protect your belongings. The structure itself can only be insured by the owner, or landlord.
Home insurance is not required by law. However, unless you are able to pay cash for your home, your mortgage provider will require home insurance. Home insurance is also advisable, as it will protect what is likely your largest asset.
Online calculators will give a quick, general estimate so you can plan for how much you might pay to insure your home.
When you make a claim, your premium will tend to increase. The amount it goes up depends on the value of the claim. The more you’re claiming, the more likely your premium will increase.
If it’s a permanent fixture, it’s part of the building. If it’s easily removable, it’s part of the contents. Carpets and blinds can be ambiguous, but this should be clarified in the insurance policy. When in doubt, ask the insurance company.
Yes. You can get insurance to cover the structure while it’s still under construction, as well as to protect yourself from liability issues.
Home insurance policies do not typically cover termite damage. Damage from vermin and insects is commonly excluded, and some insurers may decline to cover a home if there are signs of termite damage. Preventative pest control is a more effective way to protect your house from termites, and it can be a good idea to take this step prior to your home being assessed for insurance purposes.
No, according to the IRS you cannot deduct your home insurance.
Yes. Some insurance companies will only let you adjust your policy at renewal time, while others will let you do it at almost any time. Sometimes different policies from the same insurer will have different conditions under which you can adjust the policy. If you’re unsure, check with your insurance company.
A frequent complaint regarding insurance providers is that they will suddenly raise premiums. If your premium has suddenly increased without explanation, contact the insurance company to see if it’s a mistake. They must explain increases if asked. From there you are can either try to renegotiate a lower premium or take your business elsewhere.
Contact your insurance company as soon as you can to let them know you’re making a claim. You will usually be required to fill out a claim form, and in the event of large loss they will send someone to assess the situation. Be honest, and keep all the appropriate documents and evidence to support your claim, such as photographs, video, receipts, etc. Cooperate with your insurer and assessors however you can to make the claim go as smoothly as possible.
All policies will let you cancel rather than renew when the time comes. Only some, however, will let you cancel at any time. To do so, notify your insurance company.
Yes, although if you do so before the assessor arrives you should take photographs or video the damage first. Don’t throw away damaged items until the assessor has seen them, unless it’s a health hazard.
Roslyn McKenna is an insurance publisher for finder.com, where she's driven to help people get a great deal on car, life, home and other insurance to protect their families and finances. Roslyn earned a Bachelor of Arts in writing and communications from Maryville College and has written professionally for more than a decade on topics ranging from technology and pets to finance and insurance.
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