Homeowners insurance is one of those parts of owning a home that can be easy to overlook until you need it. But the right policy can help protect your home, belongings, and finances when unexpected damage or losses occur.
If you're buying a home, renewing your policy, or simply wondering whether your current coverage still makes sense, it's worth taking a closer look.
Homeowners insurance can cover the structure of your home, personal belongings, liability, and certain additional expenses depending on the policy. Most mortgage lenders also require homeowners insurance while you have a mortgage.
Here are some of the most important things homeowners should know.
What Does Homeowners Insurance Cover?
A homeowners insurance policy can provide several types of protection. The exact coverage and limits depend on your policy, but common areas include:
Your Home
Dwelling coverage is designed to help pay for covered damage to the physical structure of your home.
It's important to understand that the amount needed to rebuild your home isn't necessarily the same as its market value. Market value includes factors such as the land and local real estate market, while replacement cost focuses on what it could take to rebuild the home.
Your Personal Belongings
Homeowners insurance can also provide coverage for personal property, such as furniture, clothing, electronics, and other belongings, subject to the terms and limits of your policy.
Creating a home inventory can make it easier to keep track of what you own and can be especially helpful if you ever need to document your belongings after a loss.
Liability Protection
Homeowners insurance can include personal liability coverage if someone is injured on your property or you are responsible for certain damage to someone else's property.
The amount of liability coverage you choose is another important part of reviewing your policy.
Additional Living Expenses
Some policies can help cover additional living expenses if a covered loss makes your home temporarily unlivable. The specific expenses covered and limits will depend on your policy.
What Doesn't Homeowners Insurance Cover?
One of the most important things to understand about homeowners insurance is that not everything is automatically covered.
Policies generally spell out which risks, or “perils,” are covered and which are excluded. Flood and earthquake damage, for example, are generally not covered by a standard homeowners policy and may require separate coverage.
Depending on where you live, you may also have additional considerations for risks such as windstorms or other weather-related events.
That's why reading your policy matters. Don't wait until you have a claim to find out what your policy does or doesn't cover.
What Determines the Cost of Homeowners Insurance?
There isn't one standard price for homeowners insurance. Your premium can depend on a variety of factors, including the home itself, the coverage you choose, your deductible, claims history, and other characteristics considered by the insurer.
Some factors that may affect your premium include:
- The cost to rebuild your home
- The age and condition of the home
- Your location
- Your coverage limits
- Your deductible
- Your claims history
- Certain features of the property
- Available discounts
- Whether you bundle policies with the same insurer
Because insurers can weigh these factors differently, the cost of similar coverage can vary from one company to another.
What Is a Homeowners Insurance Deductible?
Your deductible is the amount you are responsible for paying toward a covered claim before your insurance coverage applies.
Generally, a higher deductible can mean a lower premium, while a lower deductible can mean a higher premium.
But don't choose a deductible based on the premium alone.
Think about what you could realistically afford to pay out of pocket if you needed to file a claim. A lower premium may not be helpful if the deductible would be difficult for you to cover.
Replacement Cost vs. Actual Cash Value
When comparing policies, you may come across the terms replacement cost and actual cash value.
They are not the same.
Replacement cost generally refers to the amount needed to repair or replace covered property with materials of similar kind and quality without subtracting depreciation.
Actual cash value takes depreciation into account when determining the value of damaged property.
The difference can become particularly important when you have a significant claim, so make sure you understand how your policy would handle covered losses.
How Can You Find the Right Homeowners Insurance?
Shopping for homeowners insurance isn't just about finding the lowest premium. The goal is to find coverage that fits your home, your needs, and your budget.
Compare Multiple Quotes
Insurance premiums can vary between companies, so getting multiple quotes can help you understand your options. The NAIC recommends comparing policies based on both price and coverage rather than simply choosing the cheapest option.
When comparing quotes, make sure you're looking at similar coverage limits and deductibles. A lower price doesn't necessarily mean you're getting the same protection.
Ask About Discounts
Insurance companies may offer discounts based on factors such as security features, home improvements, bundling policies, or other circumstances.
Ask the insurer or agent what discounts may be available for your particular situation.
Consider the Deductible
A higher deductible may reduce your premium, but you'll have more out-of-pocket responsibility if you file a covered claim.
Choose a deductible that makes sense for your financial situation rather than simply choosing the highest deductible available.
Review Your Coverage Every Year
Your homeowners insurance shouldn't necessarily be a “set it and forget it” purchase.
The NAIC recommends reviewing your coverage annually, particularly after changes such as remodeling, purchasing new belongings, or making other improvements to your home.
A renovation, addition, or major purchase could change the amount or type of coverage you need.
What Should Homeowners Ask About Their Policy?
If you're reviewing your homeowners insurance, here are a few questions worth asking your insurance agent:
- Is my dwelling coverage still appropriate?
- How would my policy pay for a covered loss?
- Do I have replacement cost or actual cash value coverage?
- What is my deductible?
- Are there separate deductibles for certain types of damage?
- Are there exclusions I should know about?
- Do I need additional coverage for risks that aren't included in my standard policy?
- Am I receiving all of the discounts I may qualify for?
- Have any recent improvements or purchases changed my insurance needs?
These questions can help you understand what you're paying for and whether your coverage still reflects your home and your life today.
Homeowners Insurance Is Worth Reviewing
Homeowners insurance is an important part of protecting your investment, but choosing a policy isn't simply about finding the lowest price.
The right policy should provide coverage you understand, limits that make sense for your home, and a deductible you could reasonably manage if you needed to file a claim.
Whether you're a longtime homeowner or getting ready to purchase your first home, taking time to understand your insurance can help you feel more confident about one of the most important parts of owning a home.
Buying or Refinancing? Don't Forget About Insurance
Homeowners insurance is also an important part of the mortgage process. If you're buying a home or refinancing your current mortgage, your lender may require proof of homeowners insurance.
Connect with an Embrace Home Loans loan officer to learn more about the mortgage process and what you'll need to prepare for your next step.
Disclaimer: This article is for educational purposes only and is not insurance, financial, legal, or tax advice. Homeowners insurance coverage, costs, exclusions, and requirements vary by insurer, location, property, and individual circumstances. Speak with a qualified insurance professional about your specific coverage needs.
