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By Daniel Bortz
April 9, 2020
Arad Golan Coll for Money

If you’re like most homeowners, your home is your biggest asset. Protecting it should be a top priority.

Plus, nearly every mortgage lender requires borrowers to buy home insurance. Which makes sense: After all, your lender wants to get repaid even if your house burns to the ground.

According to the Insurance Information Institute’s latest data, the average annual premium of a homeowners insurance policy in the U.S. is $1,211. However, home insurance costs can vary widely depending on where you live, in large part because some states are considered high-risk areas for natural disasters and, thus, policyholders in those regions are more likely to file claims.

For example, Florida had the highest average homeowners insurance premium in 2017 ($1,951) and Utah had the lowest ($692). The sunshine state topped the list, because hurricanes that hit Florida account for more than 40% of all hurricanes nationwide every year, according to insurance company Clovered.

Yet no matter where you live, a typical homeowner’s insurance policy offers certain protections.

What homeowners insurance covers

A standard home insurance policy includes four types of coverage: coverage for the structure of your home, coverage for your personal belongings and other contents in your home, coverage for temporary living expenses if you’re displaced, and liability protection.

Most policies cover damage to your physical dwelling from a broad range of natural disasters, including tornados, hurricanes, lightning, snowstorms, or fires, says Angi Orbann, vice president of property for personal insurance at Travelers Insurance. They also cover damage to detached structures that are on your property, such as a shed, garage, fence, or gazebo—generally for about 10% of the amount of insurance you have on the structure of the house, says Janet Ruiz, director of strategic communications at the Insurance Information Institute.

If you have a mortgage, your lender will likely require your insurance policy to cover a “total loss” of your home, which is the cost to rebuild your house to the exact condition of when it was insured using materials of the same type and of the same quality as the existing ones. But even if your house is paid off, it’s a good idea to buy an insurance policy that covers the replacement cost of your home—not its fair market value, which factors in depreciation.

Home insurance policies also cover the contents of your home from damage or theft, usually between 50% and 70% of the amount of insurance you have on the structure of your home. But you may need to provide evidence of your belongings to your insurance provider if you file a claim. As a result, Orbann recommends taking photographs of your possessions and storing them on a cloud, “not on your computer, which could get damaged in a disaster.”

In addition, standard homeowners insurance provides liability protection that covers against lawsuits for bodily injury or property damage that you or family members cause to other people when they’re on your property. This protection pays for both the cost of defending you in court and any court awards, up to the limit of your policy. Liability limits generally start at about $100,000—however, “we recommend looking at your assets to determine how much coverage you need,” Ruiz says.If you have a $1 million home, you probably want $1 million of liability coverage.”

Temporary living expenses (also called “additional living expenses”) are covered under a typical home insurance policy as well. This coverage pays the temporary costs of living away from home, such as hotel bills, meals, and other select living expenses that are listed in your policy, while it’s being rebuilt after a disaster—though some policies place time limitations or reimbursement limits.

Also, if you rent out part of your home, most homeowners insurance plans will cover you for the rent that you would have collected from your tenant while your home is being rebuilt.

What homeowners insurance doesn’t cover

A standard home insurance policy does not cover damage to your dwelling or detached structures from a flood, earthquake, or regular wear and tear.

Your mortgage lender may require you to purchase flood insurance if your home is in a flood zone. Flood insurance is available from the federal government’s National Flood Insurance Program (NFIP) as well as some private insurers. It typically costs an average of about $700 per year, but premiums will depend on your property’s elevation and other flood risk factors. You can get price quotes at FloodSmart.gov.

Homeowners who don’t live in a flood zone should still consider buying flood insurance, Orbann says. “Just because your home is not in a designated flood area doesn’t mean it’s immune to a flood,” he explains. Your best approach: Talk to a local insurance agent who knows the level of flood risk in your area.

Expensive possessions such as jewelry, art, or collectibles are not covered under basic homeowner’s insurance—though some insurance companies provide limited coverage (usually up to $1,000 or $2,000) for these items under a basic home insurance policy. To insure these items to their full value, you’ll need to have them professionally appraised and purchased a special personal property endorsement or floater to your homeowners insurance policy. Rates can vary between providers, but expect to pay about 1% to 2% of the value of your item, according to Geico. For example, a $5,000 engagement ring would likely cost about $50 per year to insure.

Run a business out of your home? Consider attaching a business rider (also called a business endorsement) to your home insurance policy to protect business related items like office equipment or merchandise. A typical homeowners policy provides only $2,500 coverage for business equipment, but for as little as $25 you can raise the policy limits from $2,500 to $5,000, the Insurance Information Institute reports.

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