If you’re buying a home, it’s important to have homeowners insurance. The reason is simple; if something happens to your house and you need help, the insurance company needs to help. When shopping for homeowners insurance, there are many factors that need to be considered before deciding what you need.
What is homeowners insurance?
Homeowners insurance is a type of insurance that protects you and your family against losses in the event of a covered loss, such as:
- Fire or other casualty damage to your home
- Loss of rental income due to a covered loss
- Personal injuries that occur in or around your home
Homeowners’ policies usually cover more than just fire and theft — you can add additional coverage for specific types of losses. For example, you might want to include coverage for earthquakes and floods.
The homeowner’s insurance policy is one of the most important investments that you can make.
It protects your home from any damage due to natural disasters such as storms, floods, tornadoes, and earthquakes. It also protects your belongings from theft and fire.
Homeowners insurance will cover any loss or damage to your home caused by an accident or incident that you cause yourself, your family, and visitors. This includes fires that start in your house, trees falling on your roof, or smoke detectors going off during power outages.
You should have home insurance if:
- Your home is located in a high-risk area – this includes areas prone to flooding or hurricanes
- You own any property while living in the same location
- You own another home outside of the state where you live as well as a car, boat or recreational vehicle
- You have more than one story in your home (including the basement).
What does homeowners insurance cover?
Homeowners insurance provides coverage for your home and its contents in the event of a loss or damage. The type of coverage you have will depend on the level of protection you want from your homeowner’s insurance policy.
- Personal property. Your home is covered by insurance if there’s damage to your personal belongings, such as jewelry, electronics, clothing, furniture, and artwork.
- Structures. Basic structure coverage provides coverage for your house and any attached garage or detached garage. The amount of coverage depends on the value of your home and its structure-type coverage options (e.g., dwelling fire).
- Additional living expenses. Additional living expense coverages provide additional living expenses in case of an unexpected loss to your home or its contents during an insured event, such as fire or hail storms or water damage caused by storm surges from hurricanes or tropical storms (tropical cyclones).
Homeowners’ insurance will cover most of the expenses associated with repairing or replacing a damaged item.
For example, if your roof leaks and damages your furniture, homeowners insurance will usually pay for a replacement sofa or dining room table. Your policy will also cover repairs to the structural parts of your house — such as foundation walls — and even the purchase of any new furniture that needs to be replaced because it has been damaged.
How much does homeowners insurance cost?
The cost of your homeowner’s insurance policy depends on the type of coverage you have and where you live. Homeowners with fire and wind coverage typically pay less than those with flood or earthquake coverage.
For example, if you live in a single-family home with a 30-year mortgage, your homeowner’s policy will likely be priced at $1,500 per year. If you own an investment property, such as a duplex or triplex, your policy will likely be between $2,000 and $3,500 per year.
The amount you pay for your home insurance coverage is based on several factors. These include:
- Age of the home: The older your home is, the more likely you are to pay more in premiums. This is because older homes have more potential for damage from natural disasters such as storms and earthquakes.
- Location: The location of your home also plays a role in how much you will end up paying for homeowners insurance. You may get a lower premium if you live in an area that is prone to hurricanes and tornadoes, but this could also mean higher deductibles if an event occurs there.
- Your personal information: Homeowner’s insurance companies use data from credit bureaus to determine how much they will charge for coverage. Some insurers may ask for certain personal information before approving you for coverage, which could increase your bill.
Examine the policy wording to see if there are any hidden costs that could reduce the value of your coverage. For example, if a claim requires the replacement of windows or doors, ask about an add-on clause that would reimburse you for those costs if they’re damaged during a fire or hurricane event.
Understanding your home’s ACV and RCV
ACV is the amount of coverage you have for your home’s contents. Homeowners’ insurance policies vary by state, but generally, you need enough coverage to pay for the replacement of your belongings in the event of a covered loss.
The amount of coverage you buy depends on how much it would cost to replace your belongings and whether they’re insurable by their own merit or as part of a larger property.
RCV is the replacement cost value, which refers to what it would cost to replace everything inside your home with similar items. For example, if all your furniture was destroyed during a fire and you needed new furniture, then each piece would be considered its own loss and would need separate coverage from ACV.
The ACV is the number of your home's contents that would be covered by insurance if it were completely destroyed.
The RCV is the number of your home's contents that would be covered by insurance if it were destroyed by fire.
If you have a $100,000 home and $100,000 in contents, your home’s ACV would be $100,000 and its RCV would be $0. If you had a $50,000 home and $50,000 in contents, your home’s ACV would be $50,000 and its RCV would also be $50,000.
The ACV is calculated using the square footage of your home multiplied by the replacement cost value of each item. The replacement cost value is based on what you could reasonably expect to pay for an identical item or service after an insured loss.
The RCV is calculated using the replacement cost value multiplied by the square footage of your home minus one-third (1/3). This means if you have an ACV of $200K but only have one-third of that space occupied (e.g., living room), then your replacement cost value is only $100K.
How to lower your homeowner’s insurance premium
There are many things you can do to lower your homeowners’ insurance premium. Some of these things may not be practical for every homeowner, but some are simple fixes that could save you money.
One of the best ways to lower your premium is by keeping a low profile on the Internet. The more information people have about you, the more likely they are to report you as a risk. If they know nothing about you, they’ll think less of you as a potential risk and will be less likely to want to report an incident involving you.
Another way to lower your premium is by making sure that all of your personal information is correct and up-to-date in the system. If someone does find out about an incident involving you, it helps if their information matches what’s in their database.
To keep premiums low, it’s also important for homeowners to maintain good credit scores and pay off any outstanding debts or other obligations before applying for coverage with their homeowners’ insurance company.