BY LOUISE O'BRYAN PUBLISHED MARCH 23, 2022 Making the well-trodden move from London to the idyllic Cotswolds four years ago, Guy Wengraf and his wife Kitty were soon welcoming a deluge of friends and family seeking a weekend escape to the country, so they decided to build a welcoming guest cottage in their garden. Interior designer Guy...
Buying a home involves a lot of moving parts. In addition to finding the right property and securing a mortgage, settling on a homeowners insurance policy is another critical part of the journey. It’s no small thing considering that 5.7 percent of insured homes filed an insurance claim at some point in 2018, according to the Insurance Information Institute.
This all begs one very important question — how much homeowners insurance do I need? The answer isn’t always so simple, especially since many different factors will determine your needs. Read on for a quick but thorough explainer for better understanding homeowners insurance coverage.
What Is Homeowners Insurance?
Let’s first clarify what homeowners insurance is. With this type of policy, you pay a premium in exchange for different types of coverage. (We’ll break these down in just a moment.) If you experience a covered event, you simply file a claim to reduce your financial responsibility. Just bear in mind that you’ll first have to meet your deductible, which is the amount you’ll pay in out-of-pocket costs before your benefits are applied. With homeowners insurance, the deductible typically resets with each new claim, although this isn’t always the case. If you live in Florida, for example, you’ll have one hurricane deductible that applies to the duration of each season.
While homeowners insurance isn’t legally required, most mortgage lenders bake it into their mandates. In other words, you could put your home loan at risk if you choose to overlook it. Lenders aside, having a solid homeowners insurance policy can also help protect your investment and shore up your financial health if the unexpected happens.
Different Types of Homeowners Insurance Coverage
Every homeowners insurance policy is different, which is why reading the fine print is so important. With that said, most policies do share some common types of coverage. This may include the following:
Dwelling Coverage and Replacement Costs
Most policies take into account your home’s size, market value, and replacement cost. The latter refers to how much it would cost to rebuild the home if it were destroyed in a catastrophic event. Plans generally specify a policy limit (i.e. a maximum amount they’ll pay to rebuild your home). If actual rebuilding costs exceed this amount, you’ll be on the hook for the difference. One workaround to avoid this would be looking into a guaranteed replacement cost policy.
Of course, there are situations where your home suffers property damage but does not need to be fully rebuilt. If that damage is caused by an insured event, you should be compensated after meeting your deductible. This includes water damage caused by, say, a pipe that bursts unexpectedly. Most insurers also cover damages that can be traced back to fires, lightning, hurricanes, hail and even burglaries.
However, it’s worth noting that damage caused by regular wear and tear is often excluded. Similarly, floods and earthquakes are almost always off the table, so you’ll most likely need to purchase separate policies to protect against these events. The same goes for water damage caused by a sewage or sump pump backup. If this type of incident wreaks havoc on your home or personal property, you won’t be covered unless you’ve previously purchased water sewer backup coverage. Fortunately, it’s a relatively inexpensive add-on that most insurers allow you to bundle into your homeowners insurance policy.
Personal Property Coverage
Most homeowners insurance policies also cover property that gets damaged during a covered event. This includes personal belongings such as clothing, electronics, furniture and more. In most cases, the insurer will kick in roughly 50 to 70 percent of the insurance that you have on the structure of the home, according to the Insurance Information Institute. What’s more, your plan may also cover some of the additional living expenses you may encounter if your home is being rebuilt. This could include everything from lodging to meals, depending on the policy.
One important side note is that you’ll likely encounter policy limits on expensive personal belongings — think jewelry, collectibles, fine art and the like. Purchasing additional coverage for these items at their appraised value before disaster strikes is one way to reduce your out-of-pocket costs down the road.
Homeowners insurance usually covers more than just your home and personal belongings. It isn’t uncommon for policies to cover medical costs and/or legal fees if someone gets hurt on your property. You may also be protected in the event that you or a family member (including a pet) cause property damage or bodily injury to someone else. Again, there will likely be policy limits here that cap the coverage amount, along with out-of-pocket costs related to your deductible. For these reasons, be sure to read your policy thoroughly before signing.
How Much Homeowners Insurance Do I Need?
While shopping around for a homeowners insurance policy, insurers will likely suggest a coverage limit for the structure of your home. The idea is to go with a limit that would be enough to rebuild your home if you had to. However, this is simply a recommendation, so you can opt to go higher if you like. The Insurance Information Institute says a good starting point is to multiply your total square footage by the per-square-foot building costs in your area. An insurance agency should be able to help you ballpark these construction costs. At Matic, we understand many of these nuances and may be able to point you in the right direction.
With regard to liability coverage and protecting your personal property, these things can vary greatly from homeowner to homeowner. Review the standard coverage amounts for your policy to see if they make sense when you weigh them against your personal assets. You may choose to pay a higher premium to increase your coverage. Your personal risk tolerance is another factor that may play a role.
In other words, there isn’t a one-size-fits-all homeowners insurance policy. Be that as it may, the National Association of Insurance Commissioners reports that the average homeowners insurance premium for a standard policy in 2017 was about $1,200. It’s important to remember, however, that premiums can vary significantly by state.
Understanding the complexities of homeowners insurance can be a lot to digest. At Matic, we’re all about making things easy. Get personalized quotes in a matter of seconds to begin saving now. It could be the best first step in finding the right homeowners insurance policy for you.