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What You Need to Know About Home Insurance

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As a  new homeowner, you’ll likely have home insurance on your moving to-do list. Without home insurance, you risk footing the entire bill should any damage occur. Home insurance protects your investment and keeps long-term costs low. To determine the best home insurance for you, consider your home’s value, your location and your budget.

What is home insurance?

Home insurance covers losses and damage to private residences, whether the damage comes in the form of environmental incidents like hail and fire or human causes like vandalism and burglary.

Most insurance will cover four types of claims: interior damage, exterior damage, loss or damage to personal belongings and personal injury. You’ll pay a premium throughout the year, but the insurance company takes care of a portion of the costs when you need to file a claim. The remaining portion that you’ll have to pay to repair damage or loss is your deductible, and this amount is dependent on the type of insurance plan you have.

Most new homeowners will likely have insurance on their list of requirements because it’s usually required before you can obtain a mortgage. Your policy shows the lender that you have less risk of defaulting on your loan because the insurance company can help pay for expensive damages.

What does home insurance policy cover?

According to the latest aggregate data, the average home insurance cost is $1,192. Insurance companies offer a choice of the deductible amount, and most people choose a $500 or $1000 deductible, although higher deductibles are often available. Don’t choose a deductible higher than you can afford to pay out of pocket if you need to file a claim because you have to pay that amount before your insurance company steps in to pay the rest.

Standard house insurance policies cover a variety of dwelling damage such as:

  • Explosion
  • Fire
  • Hail
  • Smoke
  • Snow and ice
  • Theft
  • Vandalism
  • Water damage

In addition to dwelling damage, most policies will also include coverage for a few other things:

  • Additional structure damage (damage to a shed, garage or other owned structure outside of the home)
  • Lost, stolen or damaged personal property
  • Loss-of-use (coverage for a hotel and some living expenses if your home is being repaired from damage)
  • Personal liability coverage (the bills required if you’re liable for personal or property damage to someone else)
  • Medical payments if someone is injured on your property.

Depending on your policy, you’ll be covered based on the actual cash value of any damage (including depreciation), the replacement cost (not including depreciation) or the guaranteed replacement cost (covers exactly what you need for replacement or fixing damage regardless of whether it’s beyond your policy limit).

The amount of coverage you get in your insurance policy will vary depending on what you choose and any requirements from your lender.

Most policies have $100,000 of liability coverage. Additional living expenses are usually up to 20% of the insurance amount of your house, and policies generally cover 50-70% of the insurance coverage for your belongings. Some expensive items such as jewelry and art might need extra coverage to cover their full value. Although these are the standards, you can usually arrange to get more coverage in exchange for a higher premium. All of these things will influence your home insurance cost.

What doesn’t home insurance cover?

Most natural disasters aren’t covered by standard home insurance policies. The usual list of instances that aren’t covered includes the following:

  • Earthquakes
  • Flooding
  • Intentional loss
  • Mold and fungus
  • Mudslides
  • Nuclear hazard
  • Sinkholes
  • Some pest damage
  • War

Before you choose your policy, read through the covered events in your plan so you can understand if you’re minimizing the most risk.  For instance, many policies will cover water damage from leaking pipes or overflows, but they won’t cover full flooding. Many policies will also not cover specific natural disasters like earthquakes and hurricanes. If you live in an area where these situations are likely, you may need to add on specific insurance for that damage or seek a more comprehensive policy.

What are the different types of home insurance policies?

Some policies cover “named perils,” meaning you’re protected from certain disasters explicitly listed in the policy. Other, more robust policies cover your home on an “open-peril” basis. That means you’re protected from all incidents and disasters except those explicitly excluded from your policy.

Here are the different types of standard insurance forms and the perils they cover, according to the Insurance Information Institute.

Policy Type Covered Perils
HO-1 A limited coverage policy that only protects from the following 10 named perils:

  1. Fire or lightning
  2. Windstorm or hail
  3. Explosion
  4. Riot or civil commotion
  5. Damage caused by aircraft
  6. Damage caused by vehicles
  7. Smoke
  8. Vandalism
  9. Theft
  10. Volcanic eruption

Note: According to the International Risk Management Institute, HO-1 has been discontinued in almost all states because of its limited coverage. This type of policy does not include protection of personal property. 

HO-2  A basic insurance policy that pays for repairs for damage caused by the following 16 named perils:

  1. Fire or lightning
  2. Windstorm or hail
  3. Explosion
  4. Riot or civil commotion
  5. Damage caused by aircrafts
  6. Damage caused by vehicles
  7. Smoke
  8. Vandalism
  9. Theft
  10. Volcanic eruption
  11. Falling object
  12. Weight of ice, snow, or sleet
  13. Water damage caused by steam, heating, AC, sprinklers, or an appliance
  14. Sudden and accidental tearing apart, cracking, burning, or bulging (of a hot water heating system, AC, or sprinkler system)
  15. Freezing of plumbing, AC, sprinkler system, or appliance
  16. Damage caused by short-circuiting

Note: HO-2 policies usually include personal property and personal liability coverage.

HO-3  The most popular policy due to its broad coverage options. It covers the policyholder on an open-peril basis, protecting the structure from all disasters except those specifically excluded from the policy.
However, HO-3 policies cover personal belongings on a named-peril basis.
Note: HO-3 policies also include personal property and personal liability coverage.
HO-4 Known as “renters insurance,” this policy covers personal property in a rented apartment or home. HO-4 insures all of the tenant’s personal belongings, as well as anything the tenant installs in the property (i.e. appliances or cabinets).
HO-4 protects renters from the 16 named perils listed in HO-2.
Note: Ask your insurance agent if your HO-4 policy includes liability insurance, as many do not. Renters can (and should) add liability coverage to the policy at an extra cost. 
HO-5 Known as a comprehensive coverage policy, HO-5 covers both your home and your personal property on an open-peril basis. This means the structure of your home and your belongings are protected from all perils unless they are explicitly excluded from your policy.
Note: HO-5 policies also include personal liability coverage.
HO-6 This policy insures condo owners. HO-6 is often known as “walls-in” insurance, as it covers the inside of the unit and the policyholder’s personal belongings from the 16 named perils listed in HO-2. The condo association’s policy typically covers common areas and the exterior of the structure.
Note: Standard HO-6 policies also include personal liability coverage. 
HO-7 An HO-7 policy insures mobile or manufactured homes (i.e. trailers, single- and double-wide mobile homes, RVs). It covers the structure of the home on an open-peril basis, but protects the personal belongings inside the home from the 16 perils named in HO-2.
Note: HO-7 policies also include personal liability coverage.
HO-8 This policy is designed to protect older homes from the 10 named perils listed in HO-1. It’s a modified form of the bare-bones policy, best used for homes that are 40+ years old, are architecturally significant, or are registered landmarks — a good example: Victorian homes.
HO-8 is reserved for homes where the cost of repairing damages exceeds the value of the home. Because of this, policyholders are paid actual cash value should damage occur (meaning the payout is much less than the cost of repair).
The lower payout brings down the cost of the HO-8 premium, making it attractive to policyholders who cannot afford more robust coverage. Although the lower cost may entice homeowners, you should think twice before choosing an actual cash value policy.
Note: HO-8 policies also include personal liability coverage.

Note: Texas policies are similar, but not identical to the standard insurance forms listed above. 

Best homeowners insurance companies

We researched 10 of the top homeowners insurance companies to select the top five. Through our research, we considered average cost, discounts, plan customization, coverage options, customer service and overall reviews from reputable sources such as BBB, J.D. Power & Associates and AM Best. 

The companies below are represented due to their high ratings and notoriety for plans, discounts and coverage options:

  • Allstate
  • Amica Mutual
  • Farmers
  • Geico
  • Metlife

Allstate

Allstate offers some of the best discounts for new users and customizable plans to help make sure you’re only paying for what you need. New users who switch to Allstate with a recent claim on their record can get up to a 20% discount on their annual premium.

Amica Mutual

Amica Mutual provides some unique discounts to homeowners, helping keep overall costs low. These include discounts to remodeled homes and owners who haven’t filed a claim in at least three years. Furthermore, Amica has a great track record of customer service.

Farmers

Farmers is known for being one of the best insurance options if you’re looking for high coverage plans. If you have highly valuable belongings inside your home or a high-value home and property, Farmers’ plans will likely be the most appealing cost-wise.

Geico

Geico is most known for its excellent customer service and ease in filing claims. With Geico, you’re also able to choose some customization in your policy.

Metlife

Metlife is known for offering replacement coverage for most home insurance plans, which is a unique offering compared to most standard plans that may offer cash value with depreciation factored in.

The bottom line

Face it. Home insurance is something you buy and never ever want to use. Any amount you pay for such a product is going to seem like a burden you don’t want — until you want it.

Learn as much as you can, and get the best deal. That way you can live out the tried and true mantra: Hope for the best, prepare for the worst.

Frequently Asked Questions

How much is home insurance on a new home?

Home insurance costs vary depending on your location, property value, coverage needs, and more. Because the national average is around $1,200, you can expect an annual premium of around $600 to $3,000 depending on which add-on coverage options you choose, discounts you are eligible for and where you live.

Do you need home insurance on a new build?

You do not need home insurance on a new build until it is complete, though you may want to get insurance if you’re completing the build by yourself. The insurance would then protect you from injury and stolen materials.

How much can you save by combining home and auto insurance?

Most companies offer bundle discounts for combining home and auto insurance. Usually, you’ll save between 5% and 25% on your plans by choosing to stick with one company for both types of insurance.

Who has the cheapest home insurance? 

Allstate is known for offering some of the cheapest home insurance plans without skimping on value and customer service. With Allstate, you can enjoy additional discounts as well if you’re a new user or if you’re bundling your insurance with another policy. However, you should get quotes from several companies because some providers might offer discounts or deals for your location that another doesn’t.


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