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What is Homeowners Insurance?

Homeowners Insurance

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Catherine Hiles
Updated November 2, 2022
6 Min Read

Homeowners insurance (HOI) is insurance for your property that covers damages, losses, and some liability. In its most basic form, it covers damage to the structure of your home caused by incidents like a fire or storm damage. It can also cover detached structures like sheds, your personal property, and offer protection if someone is injured while in your home.

While homeowners insurance is not required by law, many lenders require you to have it in order to give you a mortgage loan. 

How does homeowners insurance work?

Homeowners insurance provides a safety net for your investment by paying for repairs needed to bring your home back to its former state following a perilous event such as a storm. There are several types of coverage within a homeowners insurance policy: Dwelling coverage, other structures coverage, personal property coverage, liability coverage, and loss of use coverage.

Dwelling coverage

Dwelling coverage protects the actual structure of your house, as well as its built-in appliances and its wall-to-wall carpet. It may also cover any structures that are attached to your house, such as a deck or a garage. Covered appliances include things like your furnace, water heater, and air conditioner, and your built-in cabinets are also covered.

Other structures coverage

While structures that are attached to your house are covered by dwelling insurance, detached structures like sheds or stand-alone garages require other structures coverage in order to be repaired or replaced by your insurance after a covered event.

Personal property coverage

While dwelling coverage takes care of your home itself, your belongings are not covered by that type of insurance. You’ll need to opt for personal property coverage in order to get replacements for your personal items covered by your insurance.

Liability coverage

If someone is injured while inside your home, liability coverage can help pay for their medical bills and other expenses if they choose to pursue charges against you.

Loss of use coverage

If your home is deemed unlivable after it’s been damaged by a storm or other covered event, loss of use coverage can help pay your way. It covers things like hotel or rental fees, meals out if you’re unable to cook where you’re staying, and similar expenses that you would be facing if you needed to move out of your home while it’s being repaired.

Consider extended replacement cost 

When you purchase home insurance, you’ll need to determine a replacement cost for your home. That takes into account how much it would cost to rebuild your home to its current specifications if it were destroyed. Once you know the replacement cost of your home, you’ll have to determine what percentage of the cost you want to pay for in your insurance coverage. Many insurers advise, or even require, that you insure your home for at least 80% of the replacement cost.

You can also opt to insure your home over 100% of its replacement cost. That is called extended replacement cost, and you can generally opt to cover your home at 125-150% of its estimated replacement cost. This can come in handy if the cost of materials rises dramatically after a natural disaster, pushing up the cost to rebuild your home. If you’re only insured at 80-100% replacement cost you may need to pay out of pocket to repair your home, or settle for a smaller home.

What does homeowners insurance cover?

Homeowners insurance is designed to cover damage to your property and its belongings, and injury to anyone in your house who does not live there. If your home is damaged, your homeowners insurance policy will pay to repair your home — or, if necessary, replace or rebuild it. 

For example, your policy will cover damage caused by fire, hail, lightning, wind, theft, and vandalism. If a tree falls on your house during a storm, or your roof is damaged by heavy hail, the repairs should be covered by your insurance

What is not covered by homeowners insurance?

Although homeowners insurance covers a lot of things that could happen to your home, there are also several things it will not cover. That includes damage from events like a flood or an earthquake. Generally, you’ll need to take out additional coverage in order to make a claim for flood or earthquake damage, and it can be quite expensive if you live in an area that’s prone to either.

Similarly, if you live in an area prone to wildfires, your insurance might not pay out unless you take out additional coverage. Insurance companies lose money when you make a claim, and when you live in an area where your home is likely to be damaged by a natural disaster, the chances of you (and your neighbors) making frequent claims increases.

How much does homeowners insurance cost?

The cost of homeowners insurance depends on where you live and how large your house is. The following table shows the average cost of homeowners insurance by state in 2021, as reported by Quadrant Information Services.

StateAverage annual premiumAverage monthly premium
State
Alabama
Average annual premium
$1,624
Average monthly premium
$135
State
Alaska
Average annual premium
$1,040
Average monthly premium
$87
State
Arizona
Average annual premium
$1,189
Average monthly premium
$99
State
Arkansas
Average annual premium
$2,142
Average monthly premium
$179
State
California
Average annual premium
$1,014
Average monthly premium
$85
State
Colorado
Average annual premium
$1,659
Average monthly premium
$138
State
Connecticut
Average annual premium
$1,184
Average monthly premium
$99
State
Delaware
Average annual premium
$680
Average monthly premium
$57
State
Florida
Average annual premium
$1,353
Average monthly premium
$113
State
Georgia
Average annual premium
$1,376
Average monthly premium
$115
State
Hawaii
Average annual premium
$376
Average monthly premium
$31
State
Idaho
Average annual premium
$835
Average monthly premium
$70
State
Illinois
Average annual premium
$1,322
Average monthly premium
$110
State
Indiana
Average annual premium
$1,150
Average monthly premium
$96
State
Iowa
Average annual premium
$1,289
Average monthly premium
$107
State
Kansas
Average annual premium
$2,694
Average monthly premium
$255
State
Kentucky
Average annual premium
$1,839
Average monthly premium
$153
State
Louisiana
Average annual premium
$1,813
Average monthly premium
$151
State
Maine
Average annual premium
$956
Average monthly premium
$80
State
Maryland
Average annual premium
$1,124
Average monthly premium
$94
State
Massachusetts
Average annual premium
$1,307
Average monthly premium
$109
State
Michigan
Average annual premium
$1,120
Average monthly premium
$93
State
Minnesota
Average annual premium
$1,785
Average monthly premium
$149
State
Mississippi
Average annual premium
$1,773
Average monthly premium
$148
State
Missouri
Average annual premium
$1,558
Average monthly premium
$130
State
Montana
Average annual premium
$1,826
Average monthly premium
$152
State
Nebraska
Average annual premium
$2,816
Average monthly premium
$235
State
Nevada
Average annual premium
$822
Average monthly premium
$69
State
New Hampshire
Average annual premium
$724
Average monthly premium
$60
State
New Jersey
Average annual premium
$751
Average monthly premium
$63
State
New Mexico
Average annual premium
$2,024
Average monthly premium
$169
State
New York
Average annual premium
$987
Average monthly premium
$82
State
North Carolina
Average annual premium
$1,295
Average monthly premium
$108
State
North Dakota
Average annual premium
$1,841
Average monthly premium
$153
State
Ohio
Average annual premium
$1,111
Average monthly premium
$93
State
Oklahoma
Average annual premium
$3,519
Average monthly premium
$293
State
Oregon
Average annual premium
$712
Average monthly premium
$59
State
Pennsylvania
Average annual premium
$730
Average monthly premium
$61
State
Rhode Island
Average annual premium
$1,193
Average monthly premium
$99
State
South Carolina
Average annual premium
$1,142
Average monthly premium
$95
State
South Dakota
Average annual premium
$1,917
Average monthly premium
$160
State
Tennessee
Average annual premium
$1,625
Average monthly premium
$135
State
Texas
Average annual premium
$1,863
Average monthly premium
$155
State
Utah
Average annual premium
$647
Average monthly premium
$54
State
Vermont
Average annual premium
$686
Average monthly premium
$57
State
Virginia
Average annual premium
$1,013
Average monthly premium
$84
State
Washington
Average annual premium
$863
Average monthly premium
$72
State
Washington, D.C.
Average annual premium
$902
Average monthly premium
$75
State
West Virginia
Average annual premium
$1,124
Average monthly premium
$94
State
Wisconsin
Average annual premium
$986
Average monthly premium
$82
State
Wyoming
Average annual premium
$805
Average monthly premium
$67

Factors that affect the cost of homeowners insurance

There are several factors that affect how much your homeowners insurance will cost.

First, your geographical location will determine how high or low your premiums are. That’s because the cost of housing is higher in certain areas, such as the city or the suburbs. Therefore, your house costs more to purchase and will cost more to repair or replace.

Second, if you live in an area prone to natural disasters, your home will cost more to insure. That means if you live in a coastal area, an area prone to hurricanes, or somewhere that has frequent wildfires, you’ll pay more for insurance. 

Insurance companies keep track of how many disasters have been declared in your area and use that information to determine how likely it is that a similar disaster will strike again.

Frequently asked questions

What types of coverage do common policies provide?

Most homeowners insurance policies cover your home for damage caused by events like a fire, storm damage, theft, and vandalism. But there are additional coverages you can opt for, as well. For example, you could take out coverage for an unattached structure (like a garage) or for your personal belongings inside your home.

You can also take out liability coverage to help pay for damages if someone gets injured inside your home as a result of negligence. That won’t pay for injuries to anyone who resides in your home full time, but can help if someone accidentally hurts themselves while visiting because of an unfixed issue like a broken step.

Is homeowners insurance required?

Homeowners insurance is not required by any law. However, mortgage lenders tend to require a borrower to have an active homeowners insurance policy in order to offer them a loan. If you choose not to purchase insurance, you’ll have a very hard time finding a reputable lender to give you a mortgage.

Even if you’re lucky enough not to need a mortgage, it’s still a smart idea to have a homeowners insurance policy. After all, a home is one of the most expensive purchases you will ever make, and if anything were to happen to it you could stand to lose a lot of money. Paying an insurance premium each month isn’t enjoyable, but it’s the smart thing to do so you can make sure your home can be rebuilt after major damage without having to dip into your savings.

How much homeowners insurance do I need?

The answer to this question depends on a couple of things: your budget and your home replacement cost. If you’re on a budget and can’t find many affordable insurance options, you may need to opt for the minimum replacement cost coverage (typically insurance companies won’t let you insure your home for less than 80% of its replacement cost). 

But if your home is sizable and budget isn’t a concern, it’s a good idea to cover your home for more than 100% of its replacement cost to account for increases in building materials if they become scarce.

The best way to figure out how much homeowners insurance you need is to speak with an insurance broker about your needs so they can help you find a policy that fits your budget and won’t leave you high and dry if your rebuild cost is higher than you expected it to be.

What should I look for in a homeowners insurance policy?

When shopping for homeowners insurance, you need to look for a policy that provides the coverage you need and fits your budget. Like other types of insurance, it’s a good idea to shop around for different quotes so you can choose the best one for you.

You should make sure you have enough coverage to help pay to repair or rebuild your home after significant damage. If a tree falls on your house or you’re the victim of an accidental house fire, chances are you’ll have to spend a bunch of money to restore your home to its former glory. And if you don’t have enough coverage, a portion of that money will have to come from your pocket.

You also need to make sure that everything that you want to be covered is. For example, if you have a barn or shed that’s not attached to your home, it won’t be covered if damaged unless you purchase coverage specifically for that structure. And if you have valuable personal belongings in your house, you should get coverage for those items as well. If your home is destroyed and you haven’t taken out personal property coverage for those items, you will have to pay out of pocket to replace them.

Summary

Homeowners insurance helps protect your largest asset — your home — from damages that occur because of natural disasters, vandalism, and more. Many mortgage lenders will require you to have homeowners insurance in order to give you a loan, but even if they don’t it’s a smart idea to purchase coverage anyway. Lack of coverage will mean you’ll be reaching into your own pocket to pay for repairs, which can be costly and could even lead to bankruptcy.

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