Homeowners Insurance 101: What you need to know

The excitement of purchasing a new homeshouldn’t be cut short by unforeseen problems that can put you in a financial crisis because you didn’t have the right insurance policy. Homeowners insurance gives you peace of mind, covering damage to your property, risk of liability, and protecting you against any legal claims.

It’s essential for any homeowner, but not all policies are created equal. We went to the experts to answer all your questions about homeowners insurance.

Which type of policy is best?

Like any other insurance, you have different policy options when it comes to homeowners. An actual cash value policy covers what the house might be worth, but not what it would cost to rebuild it. Say you wanted to sell your home tomorrow, and it’s worth $85,000. But if it burns to the ground and the cost to rebuild is $150,000, you risk not having enough coverage.

Instead, most homeowners should get replacement cost coverage, says Sarah Haun, P & C specialist at Advanced Insurance Designs, Inc. Replacement coverage covers repair and rebuilding costs, even if they exceed the market value of your home, and it takes care of things like removal of debris and basement repairs. Although most buyers opt for basic policies, some mortgage companies require that you have replacement cost coverage.

Stacey Giulianti, chief legal officer at Florida Peninsula Insurance, says there are two main types of coverage homeowners should be familiar with. A named peril policy is less expensive and covers only what is listed. So if the policy doesn’t explicitly state that it covers tornados, you won’t be covered if your home is damaged by a tornado. (many policies are named perils, but even those aren't all equal - talk to your agent about different levels of coverage in named perils)

An all risk policy takes the opposite approach than the named peril policy; it covers any loss to your home unless the policy specifically excludes it. A typical exclusion from an all risk policy is earthquakes, says Giulianti.

How much does homeowners insurance cost?

It’s difficult to offer a general cost for homeowners insurance because it depends on the replacement cost, condition, and location of the home, says Haun. Your credit score and past claims history will also factor in. For example, in Ohio, a homeowner with a good credit score, no prior property claims, and a home in good condition can expect to pay around $700 a year for a $150,000 house, she says.

Giulianti illustrates the impact geography has on cost with a few examples: In Florida, the average homeowner's insurance is about $2,000 a year, while in Idaho it’s around $550 a year. Georgia you are looking at closer to $900 or $950 a year; Oregon $600 a year, and in some places, like Texas, it’s closer to $1,700 or $1,800 a year, he adds. Homeowners should keep in mind that extra coverage like replacement cost, water backup, and identity theft will increase the cost of your policy.

Homeowners insurance typically does not cover earthquakes or sinkholes.

How can you save?

The number one way to save on your rates is having your home and auto coverage with the same insurance company. Depending on the insurance company, you can expect to save up to 25 percent, says Haun. Maintaining good exterior housekeeping and staying up to code with things like roofing, electrical, and plumbing can also help reduce insurance cost and save you cash.

It’s important to know that most insurance carriers inspect the exterior of the property whenever they issue new policies and every few years after that. If you are a budget conscious homeowner, keeping your property well-manicured helps reduce this cost.

What does it cover?

A basic homeowner’s policy provides coverage for the dwelling, outbuildings (like garages, sheds, and gazebos), and your personal property (including furniture and clothes) in case of fire, theft, wind, or hail. Liability coverage includes any lawsuits filed against you, says Haun, meaning that if someone falls and breaks their arm on your property, you’d have liability protection through your home policy.

Your home policy also covers something called the loss of use. If you’ve experienced a fire and can no longer occupy your home, your loss of use coverage would pay for things like hotel costs and unexpected food costs while your home undergoes repairs. (side note: not all policies will cover loss of use, so check your policy to ensure it does)

What doesn’t it cover?

A common coverage exclusions is the movement of the earth, says Giulianti. This include earthquakes, sinkholes, and mud flow; these would typically not be covered by almost any policy. However, there may be specialty coverage you could buy for earthquakes.

Mold is another policy exclusion most homeowners don’t consider. Say for instance a pipe bursts, and you clean up the water. But you are unaware that water is in the walls or under the flooring, and it later causes mold. This oversight could end up costing you $100,000 or more to clean up because you didn’t factor in things like repairing the wall and flooring.

Under a basic insurance policy, luxury items like high-priced jewelry or an art collection would not cover anything above a certain amount. For instance, say you’ve inherited, a $10,000 diamond ring, but you only have $2,000 in coverage. If the ring is stolen, you would incur an $8,000 loss, without that additional coverage. (additional coverage for jewelry of fine items can often be purchased - just ask your agent)

Identity theft coverage is typically not part of a homeowners policy, but it’s something Giulianti suggests homeowners consider buying. A lot of these extras are not that expensive, and first-time homeowners should look into coverage that offsets these exclusion gaps. For example, at Florida Peninsula Insurance, they offer an identity theft policy or endorsement to your policy for around $25 a year.

What happens if you don’t have it?

All mortgage companies require that you have homeowners insurance. If you don’t have insurance at the time of the closing, the bank or mortgage company will force place insurance through a carrier of their choice, says Haun. The policy covers only the structure of the home, and you can "expect to pay double, triple, or even quadruple the price of a private market policy," he says.

Conversely, homebuyers who pay cash for their homes often don’t need to purchase a home policy, but Giulianti believes it’s a poor business decision not to. For a few hundred dollars a year, you are protecting your investment.