For many Americans, their home is their most valuable asset. It’s a critical way for families to accrue equity and build wealth. To protect that substantial investment, it’s critical to have the right insurance. Home insurance protects your house and your belongings in the event of fire, a natural disaster, vandalism, or other expensive catastrophe.
Read on to answer all the questions about how to buy the best home insurance policy.
What is home insurance?
Home insurance — also called homeowners insurance — is a financial product to protect your home and your personal property from loss or damage due to events such as fires, windstorms, tornados, theft, and the like.
How does home insurance work?
Your homeowners insurance policy has a few components: The policy will spell out the “covered perils” — ie. the unfortunate events that can lead to property damage or destruction — as well as the maximum limits of your coverage. You will need to choose those coverage levels, as well as the amount of the deductible you will need to meet if you do file a claim. Many insurance companies will let you choose between paying your premium on a monthly or annual basis.
Who needs home insurance?
Most mortgage lenders mandate that you have a current home insurance policy for as long as the term of your mortgage. But retaining home insurance even after you have paid off the mortgage is a wise idea to protect the equity you have built up in your home.
In addition, if you live in a development, complex, or community that’s governed by a homeowners association, check to see if it requires you to keep home insurance on your property.
A few types of living situations call for a different kind of home insurance policy:
If you have a tenant
If your home includes an apartment or separate dwelling space that you rent out, discuss your options with your insurance company or a knowledgeable independent insurance agent. You want to make sure your liability coverage includes coverage for renting the unit. Otherwise, liability for that exposure might not be covered.
If you are a tenant
Renters don’t need homeowners insurance, but it is a good idea to get renter’s insurance, since your landlord’s policy won’t cover reimbursement for or replacement of your personal property if it is damaged or destroyed.
The landlord’s liability insurance should cover medical expenses in the event you or your guests are hurt in your rented home.
If you rent out your entire home
A landlord policy will cover you against physical damage to your home caused by fire, lightning, wind, hail, ice, snow or other covered perils. It also provides coverage for any personal property left in the home for maintenance or tenant use, like appliances, lawnmowers, and leaf blowers.
Landlord insurance also includes liability coverage in the event a tenant or one of their guests gets hurt on the property; it would cover legal fees and medical expenses. You’re also typically made whole on lost rental income should a covered loss, such as a fire, require repairs or rebuilding that prevents the property being rented. This coverage is generally provided only for a specific period of time.
If you own a condo
If the home you own is a condominium, there are condo-specific insurance products, which cover the dwelling structure inclusive of the interior walls.
What Does Home Insurance Cover?
Standard homeowners insurance coverage generally will pay for damage that occurs as the result of a covered event to the physical structure of your home, major components such as your furnace and water heater, and damage to or destruction of personal property in the home. Covered catastrophes can include power outages.
In addition to dwelling coverage, a policy might also include coverage to repair or replace outbuildings like a detached garage or shed, or other structures like a fence. (If it doesn’t, you might be able to obtain coverage via an insurance rider.) Your policy may also include coverage for additional living expenses if you have to move out of your home while the damage is being repaired or the home is being rebuilt.
Home insurance also includes personal liability protection, and coverage of medical payments or legal expenses you could face if someone who doesn’t live with you is injured on your property. For instance, if someone slips on your icy front steps and breaks their ankle, or if your Chihuahua gets out and bites someone’s ankle, your home insurance policy will kick in.
Be mindful, though, of the damage that is and isn’t covered by standard home insurance in the event of weather-related disasters such as hurricanes or tornadoes. Your policy should protect you from one of the biggest risks, wind damage. Water should be covered too, unless the insurance company decides damage is covered by flooding, which requires a separate policy.
Types of home insurance
There are two primary types of coverage: Cash value coverage and replacement cost coverage. There are some significant differences between these two categories regarding the amount of coverage they provide. Here’s what you need to know.
Cash value insurance
A cash value policy will reimburse you based on the actual cash value of items with depreciation taken into account. For instance, if you have a 10-year-old TV destroyed, you’ll get the cash value of a 10-year-old TV, not a new TV.
Replacement cost insurance
A replacement cost policy will reimburse you at a rate based on what it would cost you to repair or replace what was ruined. This is higher than the cash value rate, so you could actually replace that 10-year-old TV in the example above with a new TV. (Of note: Repair or replacement of some items, such as roofs and fences, are typically reimbursed at a cash value rate only.)
If you live in an area with rapidly rising home prices or high building costs, or if you live in a new home with high-end finishes and fixtures, you might want to look into extended or guaranteed replacement cost coverage, which will insure that you can rebuild your home even if doing so costs more than the policy limit.
How to get home insurance
Getting started is as simple as providing your insurance company with your personal information along with the address of the property you want to insure.
You can work with an independent agent, seek home insurance quotes online from sites that aggregate quotes from different home insurance companies, or look at the National Association of Insurance Commissioners’ nationwide directory.
When choosing an insurance company, the best homeowners insurance companies are ones that provide coverage where you live and are financially stable. (The Insurance Information Institute has a tutorial about determining a company’s financial health here.) Finally, recommendations from friends and family, or customer service rankings like J.D. Power can help you find a company with a good reputation.
When should you start thinking about home insurance?
Ideally, you should begin considering home insurance while you’re in the process of shopping for a home, especially if you’re a first-time homebuyer. Numerous factors can affect your premium, so you want to have time to educate yourself and shop around for the best insurance rates.
For instance, if you live in an area prone to wildfire hazards, your dream of a remote home on a wooded piece of property could be prohibitively expensive to insure — insurers are reluctant to cover homes that are difficult or impossible for fire departments to reach, or that don’t have ready access to fire hydrants. Or, if your prospective home has a pool in the backyard, you need to factor that into your home insurance budget. Homes in neighborhoods with high crime rates also can be more expensive to insure.
Generally, home buyers need to provide proof of insurance at the closing for the new home. Even though it’s common to be able to obtain home insurance within a couple of days, you’ll want to start early so you have time to compare insurance quotes, understand what coverage you need and get a policy that’s right for you.
How much does home insurance cost?
Figuring out how much homeowners insurance you need takes more than just knowing the market value of your home. Take the square footage of your property and your area’s approximate per-foot construction costs and multiply them to come up with a value for your home. You also need an inventory of your personal property; the more expensive that is, the more property insurance coverage you’ll want.
When estimating the value of your personal belongings to figure out what level of personal property coverage you need, don’t forget electronics, outdoor-use items like barbecue grills and bicycles, china, silverware and hobby-related items like an aquarium or an accordion. The Insurance Information Institute recommends taking photos of your possessions and storing that inventory list somewhere not in your home so you can access it after a catastrophe.
Of note: If you have really expensive stuff — fine art, antiques, fine jewelry, professional-grade appliances and so on — your standard home insurance coverage limits might not be enough. If you have valuables you want to insure, ask your insurance agent about attaching an endorsement or rider to your policy to obtain that additional coverage. Your homeowners insurance cost will go up, but your valuables will be covered.
Things to keep in mind when buying home insurance
Like real estate itself, a key axiom when buying homeowners insurance is location, location, location. Homes that are in the Midwest’s “Tornado Alley,” in flood-prone coastal areas and in California and other Western states where wildfires are pervasive can expect their costs to be higher.
You can often get a discount by bundling your home insurance with other types of insurance, such as your auto insurance. Your insurance company also might offer you a discount if you have a burglar alarm, home security system or smart home technology like a digital deadbolt or leak detector.
Home insurance customers who file multiple insurance claims within a few years might find themselves facing higher premiums on renewal — that is, if they can find an insurer willing to cover them at all. Just like having multiple at-fault accidents can make your car insurance more expensive, filing frequent claims makes you a less-attractive customer in the eyes of an insurance company.
Insurance pros recommend choosing a higher deductible — say, $2,000 instead of $500 or $1,000 — then banking the difference in the insurance premium you would pay with a low versus a high deductible for a year or two. This is especially relevant for people who live in older homes, which might not have the advantage of modern materials and techniques that can better withstand natural disasters.
Home Insurance Key Caveats
One of the biggest limitations in homeowners insurance has to do with flood coverage. Broadly speaking, standard homeowners policies don’t cover flood damage. Many homeowners learn the hard way that a flood is not a covered event among the natural disasters included in a typical policy.
If you live in a flood plain, you might already know this because your mortgage lender likely requires you to have separate flood insurance through the National Flood Insurance Program or the nascent private-sector flood insurance industry. (You might want to get coverage against flooding, even if you aren’t required to do so.) Homeowners insurance policies — generally speaking — cover water damage if the water in question is rain, but damage from flood waters is likely not included. Flood insurance policies are issued by either the National Flood Insurance Program or by a growing number of private flood insurers.
Earthquake coverage is also not standard in home insurance policies. You might be able to get earthquake coverage as a rider on your home policy or as a separate policy from private insurers. California homeowners can get earthquake insurance coverage through the California Earthquake Authority.