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What is homeowners insurance?

October 28, 2021

Homeowners insurance is a necessary part of buying a home and protects you in the event of a disaster or accident involving your home or personal belongings.

Understanding what you need in an insurance policy can be a little tricky. So, we compiled everything you need to know about homeowner insurance, policies, coverage, ways to save, and more right here.

Standard insurance coverage areas

Standard homeowners insurance policies include four essential areas of coverage:

Structure of the home
If your home is damaged or destroyed by a covered disaster—repairs or rebuilding is covered. Dwelling coverage includes any attached structures like a garage or porch. Any damage to structures on your property that are not attached to your home—detached garage, shed, fencing, guest house—may not be covered.

Personal property coverage
Personal property destroyed by a covered disaster, or stolen, will be replaced. There is usually a reimbursement limit for your belongings; however, many insurers offer personal property riders to insure items for the total of their appraised value.

Liability protection
Liability insurance protects you and your family members in the event of an accident that could result in a lawsuit for bodily injury or property damage. It also covers any damage or injury caused by household pets. It will cover the cost for legal defense and any monetary court awards up to the policy limit.

Additional living expenses
Your insurance policy will cover your living cost if your home becomes inhabitable from a covered disaster. Cost of living includes hotel bills, meals, and other expenses you incur. Coverage and limits will differ for this from company to company.

Know your coverage needs

When you get an insurance quote, it is an estimate of how much coverage you will need. You want to make sure that it is the correct amount to cover your home and possessions. Consider getting an assessment for the following:

Replacement cost of the structure
If your home is damaged in a covered disaster, the replacement cost is the amount needed to rebuild or repair your home without factoring in depreciation. The price you pay for your home may not reflect the cost to rebuild it. If your insurance limit reflects your mortgage total, it may not be adequate. Factors that can affect rebuilding costs:
  • Local construction costs
  • The square footage of the structure
  • If the building is up to code
  • If the building is older and has ornate features that are hard to replace
  • Cost of building materials


      • Value of your personal belongings
      You will need enough personal property coverage to replace your possessions like jewelry, furniture, electronics, and appliances. Take a home inventory: this allows you to assess how much insurance you need and will serve as a record of your belongings.

      Value of your assets
      In the event of an accident that leads to a lawsuit, you want to have enough liability insurance to cover the entirety of your net worth.

      Types of insurance policies

      In the U.S. there are eight types of insurance policies, HO-1 through HO-8, which offer different levels of protection to the policyholder depending on their needs and the type of property insured.

      Below is information on each insurance form and what is and is not covered. The most popular policies are the HO-3 or HO-5, which account for over 90% of single-family home policies (NAIC, 2020).

      HO-1: Basic Form
      Basic form policies are the most limited, only covering the home and personal belongings at their actual cash value, and only protects against ten perils:
      • Fire or lightning
      • Windstorm or hail
      • Explosion
      • Riot or civil commotion
      • Aircraft
      • Vehicles
      • Smoke
      • Vandalism
      • Theft
      • Falling object


      HO-2: Broad Form
      Broad form policies cover the home at its replacement cost, personal property at its actual cash value, and protects against the previous ten perils plus six additional:
      • Weight of ice, snow, or sleet
      • Accidental discharge or overflow of water or steam
      • Accidental tearing apart, cracking, burning, or bulging of a built-in appliance
      • Freezing
      • Damage from an artificially generated electrical current
      • Volcanic eruption


      HO-3: Special Form
      HO-3 is the most common type of insurance policy used for coverage on single-family homes. HO-3 covers your home against open perils at its replacement cost. Damage to your home, or other structures, resulting from any peril, except damage from perils excluded from the policy is covered. Common exclusions are:
      • Earthquake
      • Flood
      • Landslide/mudslide
      • Nuclear accident
      • Sinkhole
      • Neglect
      • War or government action
      • Intentional loss

      Your possessions are insured from named perils at their actual cash value. A named peril means that your possessions will only be covered if the damage resulted from a peril specifically listed in the policy.

      HO-4: Contents Broad Form
      HO-4, more commonly known as renters insurance, covers your personal property at its replacement cost, living expenses if the property you rent becomes inhabitable, and in some cases liability. Renters insurance covers the same 16 named perils previously mentioned.

      HO-5: Comprehensive Form
      Comprehensive form insurance is very similar to HO-3 insurance with some notable differences:
      • The home and personal property are insured at the replacement cost
      • Provides all-risks coverage for both your home and personal belongings
      • Include higher coverage limits for higher-cost property items that have strict coverage limits e.g., jewelry, fine furs, and electronics

      HO-5 is the most common type of insurance after the HO-3 policy.

      HO-6: Unit-owners Form
      The HO-6 is known as condo insurance and protects people who own a condo or co-op. The coverage needed will vary based on what the HOA insurance covers. HOA insurance policies differ drastically for each association.
      Typically, HOA insurance will cover the condo building and certain shared areas. Your policy should cover anything the HOA does not cover.

      HO-7: Mobile Home Form
      Mobile home insurance is essentially the same as an HO-3 policy for mobile homes. Most mobile home policies do not cover your structure when in transit.
      HO-7 policies commonly cover these structures:
      • Sectional homes
      • Modular homes
      • Park model homes
      • Trailers, travel trailers, fifth-wheel trailers
      • Single- and double-wide manufactured homes
      • Single- and double-wide mobile homes


      HO-8: Modified Coverage Form
      If a home is at high risk for loss or damage, or the replacement cost is higher than the actual cash value, it may need an HO-8 policy.

      Often, this policy is used for older homes that need significant updates such as wiring, roofing, or plumbing. If you cannot afford to do the upgrades, this policy ensures your home is still covered. Additionally, if a home is a historic landmark and upgrades would ruin the historic integrity, an HO-8 would be an option for insurance coverage.

      HO-8s only provide coverage against the ten named perils. If your home is damaged, you will receive reimbursement for actual cash value, not replacement cost.

      Riders and additional coverage
      You have the option to add an insurance rider (also known as a floater or endorsement) to your policy. A rider is an amendment to standard coverage and offers you added insurance aspects. By purchasing a rider, you can increase your coverage limits, extend coverage for property, and extend protection to cover additional perils.

      Flood insurance, water or sewer backup damage coverage, earthquake coverage, and other structure coverage are all examples of riders. Many additional options may be available as needed.

      Tips to help you choose a company

      With the number of insurance companies available choosing the right one can seem overwhelming. You can complete some easy steps to narrow your options and ensure the company you pick is reputable and the right fit for you.

      Compare insurers and costs
      You should visit the Department of Insurance website for your state, which provides ratings and any complaints lodged against a company. You should also find information on the average cost of insurances for different counties or cities.

      Check the financial health
      You can assess the financial strength of an insurance company via their ratings on the websites of independent credit agencies such as Standard and Poor’s, A.M. Best, Moody’s, and J.D. Power. Sometimes these agencies disagree on a rating, so it is prudent to consider ratings from two or more agencies before deciding.

      Look past the price point
      You might be inclined to go with whatever company quotes you the lowest premium, but that does not mean it is the best policy. You need to compare coverages and limits as well as the total cost. Spend some time going over the fine print of each quote and make sure you understand what you are paying for and if it is the right policy for your needs.

      Check current customer satisfaction
      Inquire about the retention rate: what number of policyholders renew their policy each year? If a company does not retain a high level of its customers, this may be a red flag. Check online reviews, testimonials and seek the opinions of people you trust who may have experience with an insurer.

      Get multiple quotes
      It is always good to shop around when making a financial decision. With homeowners insurance, it is necessary because coverage needs differ so much. Comparing quotes from different companies will allow you to make the most informed decision.

      Make sure you also request a quote from the insurance companies you already work with. Many companies work hard to satisfy their existing customers and may offer you a better rate because of this. Inquire about discounts for having more than one policy with the same company.

      Here are some questions you should ask when getting quotes:
      • If I submit a claim, how will it affect my premium upon renewal of my policy?
      • How does credit affect my premium?
      • What does the policy cover, what is not covered, what are the limits to the coverages?
      • Do I need flood insurance or earthquake coverage?
      • What water damage is not covered?
      • Do I qualify for any discounts?


      Factors that affect your policy price

      Average home insurance rates vary based on multiple factors. Certain types of houses and houses in certain areas create a higher risk that the company will have to pay out a claim. Your home’s specific characteristics will impact how much you pay for your insurance policy.

      Year the home was built
      Some things that give an old house all its character can cause your premium to go up. Repairs or replacement of features like custom molding, wood floors, etc., to their original craftsmanship, could require a specialist, which would make the home more expensive to insure.

      The roof type (gable, flat, hip) and materials
      Different roof types are more susceptible to damage and therefore cost more to insure. Roofing materials that are more resistant to damage could lower your premium, and materials that are more expensive to repair or replace may increase your premium.

      The heating type (gas, electric, oil)
      The type of fuel used to heat your home can increase the frequency and severity of a claim.

      If the home has a pool or trampoline
      If your home has recreational features it may increase your premium because the risk of an accident is higher.

      Risks related to weather
      Standard homeowners insurance policies do not cover flood damage, earthquake damage, and other acts of God. You may have to add a rider to your policy if your home is in a flood area or an area that frequently experiences weather-related disasters.

      Risk of fire
      The proximity of your home to a fire station and fire hydrants is a factor because rapid emergency response often minimizes damage.

      History of claims
      Insurance companies look at how many claims you’ve filed in the past and if the property is an area with a high claim rate.

      Ways to lower your policy price

      You always want your property and belongings to be adequately insured, even if it seems expensive. However, there are some steps you can take to reduce your insurance premiums without lowering your coverage.

      Maintain a security system
      A monitored alarm system or a system tied directly to your local police station could lower your premium. The amount you can save varies from company to company but could be 5% or more. Smoke alarms, CO detectors, dead-bolts, and sprinkler systems may also provide a discount.

      Raise your deductible
      A deductible is an amount you are responsible for when you file an insurance claim. The amount of your deductible directly impacts the cost of your insurance premium. If you choose a higher deductible, it will lower the cost of your premium, and a lower deductible will increase your premium.

      It is wise to consider your deductible amount carefully. If you must file a claim, you want it to be an amount you are comfortable paying and can afford.

      Bundle your insurance
      Many companies offer a discount of 10% or more if a customer insures other property under the same company. If you can switch your auto or health insurance to the same company as your homeowners insurance, consider obtaining a quote to see what you could end up saving.

      Review your policy regularly and comparison shop
      You should make sure to spend some time before renewal each year to review your insurance policy. If anything has changed in your home that is not reflected in your policy, inform your insurance provider.

      It’s also a good idea to get some quotes from other companies before renewing. Even if you received a quote from a company in the past, they could come back with a more competitive offer to encourage you to switch your business to them.

      Final steps

      Once you complete all your research, compare quotes, and pick a company, it is time to choose your policy.

      Customize coverage
      You have compiled all the information you need to choose the best coverage and limits for your home. After you build your policy with your insurance agent, you can check with your loan officer to ensure the policy meets the lender requirements.

      Determine payment
      Typically, if the insurance premium is paid through an escrow account, the total for the policy year will be included in the closing costs. If you are handling your insurance independently, it is common for the lender to require proof of the policy period paid in full.

      Pick a policy start date
      Your policy needs to be active when you close on your home. Your loan officer and an insurance agent will work with you to pick the appropriate date to begin your policy.

      When you have settled on your policy, your lender can confirm it is sufficient coverage. Now you are ready to continue to the next step in your homebuying journey!

      If you need additional information or have any questions, contact us!

      Categories: helpful tips