Your guide to homeowners insurance

Of all the complexities of buying a house, homeowners insurance options can be especially trying. If you would have told me just how complex it is in a city like New Orleans, LA, I probably would have convinced my husband to “talk about it six months from now because we’re so busy.”

A homeowners insurance policy covers many people’s largest asset. Not to mention most mortgage companies require homeowners insurance. And, smart homeowners maintain a policy even when they are free of the mortgage debt. Therefore, it’s a necessary evil that’s worth understanding.

You’ll face many choices and decisions when you choose homeowners insurance. Some of which include:

Will you purchase a cash value policy or full replacement coverage?
Which company is actually underwriting your policy
Do you really need disaster coverage?
How do you know what losses will be covered if you ever need to make a claim?

Here’s what to know when buying a policy:

1. What does homeowners insurance cover?

Let’s start with the basics. Homeowners insurance coverage is broken into various types that can include losses from disasters, theft, and accidents. Most homeowners insurance policies offer:

The dwelling/structure of your home
Structures of other building on your property (like a detached garage)
Your personal property (belongings)
Loss of use
Personal liability
Medical pay for each person

You can choose from several different types of policies. According to Esurance, HO-3 is the most common, which is what we have.

Coverage limits will be indicated in the policy, and are often negotiable (within reason.) For example, our lender required that the dwelling coverage be the full cost of the loan, which was not in the initial home insurance quote. I requested an increase, which was met.

Structure of your home

Your insurance policy will typically offer financial protection against fire, wind, hail, lightning, or other disasters that may damage your home.

In New Orleans, which would likely be the same for other coastal cities, it was common to get two quotes for coverage – one for basic homeowners insurance and then a separate policy for wind and hail. Because of New Orleans’ history with hurricanes, the wind and hail coverage was more than twice as much per year as the homeowner’s policy. For my husband and me, the cost of wind and hail and the lack of insurance company options were two of the most frustrating parts of our search. The many phone calls, agents, quotes, negotiations, price differences, and ultimately understanding the requirements for a VA loan and complexities related to Orleans parish was overwhelming.

Most insurers allow you to purchase coverage for either full replacement cost or actual home value coverage.

Replacement cost homeowners insurance pays the full amount of money required to replace your home in today’s market.

An actual cash value homeowners insurance policy set its payout value at your home’s current market value when you purchased the policy. The payout is typically the initial cost of your home and personal property, reduced for depreciation.

The maximum payout for a claim will be specified in your policy. For this reason, you should update your policy as market conditions change in your area or if you make improvements to the property. The cost to rebuild could be significantly higher today than it was when you bought or built your home.

Coverage for your personal belongings

Homeowners insurance will replace your personal belongings if a fire or other disaster destroys them, or if they are stolen.

Your policy will specify the total amount of coverage for your personal belongings.

Many people underestimate the value of their personal belongings. Needless to say, you’d spend a great deal of money to replace everything you own. One of the best ways to ensure that you are purchasing enough coverage is to conduct a home inventory. Make a detailed list and take pictures or videos. Save the receipts for high-value items in a fireproof safe.

Liability protection

Your homeowner’s policy will protect you from lawsuits, up to the limits stated in your policy. Your insurer will defend you in court and pay any award for bodily injury or property damage that occurs on your property.

Liability protection is especially important if you have a pet. Your homeowner’s insurance policy will pay for damages your pet causes to someone else’s property, or for medical bills if your pet hurts someone.

Additional living expenses (ALE)

Most homeowners insurance policies cover additional living expenses (up to an amount indicated in your policy) if you have to leave your home due to damage that is covered by a claim. This coverage pays the cost of living away from home while someone repairs or rebuilds the home. If you have to leave your home due to damage caused by a non-covered event, like a flood, ALE is not covered.

ALE covers lodging, food, and other expenses associated with being displaced. This coverage is usually limited to a certain number of days, and that limit will be noted in your policy.

Coverage limits and deductibles

Insurance policies don’t cover everything. Here is a list of items that your policy typically won’t cover. You can purchase an additional policy or rider to cover some of these perils.

Flood damage
Earthquake damage
Jewelry, furs, art, collectibles, silverware, and firearms over a certain amount
Electronics, like computers, over a certain amount
Routine wear and tear

All claims are subject to your deductible. The deductible is the amount you will have to pay out of pocket towards the cost of a claim. For most homeowners policies, the deductible applies to each claim (but it generally does not apply to liability). A high deductible may lower your monthly premiums; it is also a deterrent to filing excessive claims.

2. How important is choosing the right insurance company

A vital lesson I have learned while working in the insurance industry (other than the importance of term life insurance) is that insurance company ratings matter. They really, really matter.

Independent rating agencies give insurance company ratings based on their assessment of the insurer’s financial strength and claims-paying ability. These ratings help provide you, the policyholder, peace of mind that you’re choosing a quality insurer.

In most states, selecting a reputable insurer as the writer of your homeowner’s insurance policy is usually not difficult to come by.

For us in New Orleans, it’s a source of heartache. Due to the risk of hurricane damage, most major insurers will not underwrite a homeowners policy (or at least the wind and hail or flood portion of coverage) in Orleans parish or surrounding areas. While major insurance companies have a brand presence in states like Florida and Louisiana, the agents sell homeowner policies from smaller, lesser-known state companies. It’s a well-known concern in these areas.

Fortunately, from working in the insurance industry, I knew well enough to look for who was issuing the policy, which was not always well indicated by the many salespeople I spoke with for quotes. So make sure you’re reading the paperwork and asking questions about who is the issuer of the policy.

Unfortunately, there isn’t a good solution for us. My husband and I had to accept that this is a “risk” of living in New Orleans. That said, concerns about the stability of our homeowner’s insurance company and the “what if” of a hurricane led us to choose an under budget home just in case.

3. Is homeowners insurance required?

You are not required by law to maintain insurance on your home. That said, if you have a mortgage, your lender will require a policy to be in good standing. Lenders require insurance to protect the asset that they technically own until you pay off your mortgage. If you’re buying a home, you’ll need to choose and purchase a policy before your closing date.

Your lender may also require wind and hail, flood, or earthquake insurance if you live in an area that’s prone to natural disasters. Typically, these types of coverage are what really increase your bill, unfortunately.

If you own your home outright, homeowners insurance is optional. If you choose to go without, all of the financial risks fall on your shoulders. You will be solely responsible for paying for every repair and lost item, no matter how the loss occurred. You will also be responsible for paying any claims resulting from a judgment against you.

4. Do you need natural disaster insurance?

Natural disasters happen all the time. Whether you need this type of policy depends on the area where your home is, whether your lender requires it, and how much financial risk you are willing to take.

Here are a few of the most common natural disasters affecting homeowners.

Wind and hail

Wind and hail can cause extensive damage. And, it can be a frequent occurrence in hurricane or tornado-prone states. The states with the most hail damage each year on average are Texas, Minnesota, Oklahoma, Colorado and Illinois*. However, I can tell you from first-hand experience that the propensity for storms is very clearly reflected in homeowners premiums in coastal states like Florida and Louisiana also.

This type of coverage will likely be required by a lender if you’re in a susceptible state (which seems to be every single one.)

Flood insurance

Unless you purchase additional flood insurance, your home is not covered for flood damage, though, you will likely be covered for water damage by other causes, such as a broken pipe. Flood insurance usually is not required by mortgage lenders unless you’re in a high-risk area.

Michigan, Alabama, and Louisiana have the highest chance of flooding, based on 2014 data. Often times a spike in claims is related to a single storm— as was the case for New Orleans in August 2017.

While the price varies by location and type of home, the average cost of flood insurance is about $700 per year. You might need flood insurance even if you don’t live in a flood zone. Approximately 20% of flood insurance claims * are filed in low to moderate flood zone areas.

Foregoing flood insurance can be especially problematic for hurricane victims, who may see their claims denied because of flooding. The onus is on the homeowner to prove that wind or tornados (which standard policies cover) caused the damage to their homes during a hurricane, not flooding water.

Earthquake insurance

Homeowners insurance does not cover earthquakes. Earthquake insurance is available from many insurance companies, or you may be able to tap into public insurance pools such as the California Earthquake Authority (CEA) for coverage.

The cost of earthquake insurance varies based on many factors, including where you live, your proximity to a fault line, and the construction materials used in your home. Typically, earthquake insurance costs between $100 and $300 a year, according to USAA.

5. How much coverage do you need?

Your home should be insured for an amount that would cover the cost of rebuilding if your home is destroyed, as well as the cost to replace all of your belongings and living expenses if you have to relocate temporarily.

Insure your home for enough to rebuild it at the current market price. Your lender may recommend an amount of coverage that is close to your purchase price or the market value of your home but keep in mind that it may cost more rebuild your home should disaster strike. Consider inflation and the rise in the cost of building materials in your area over time.

Reassess your homeowner’s insurance policy from time to time and make sure that it will provide the full amount that you need to rebuild. Some insurers offer an inflation guard clause that automatically adjusts your coverage amount to today’s current prices periodically.

6. How much does homeowners insurance cost?

That average cost of homeowners insurance is $1,083 per year. To anyone who pays that, I say thank your lucky stars, or, nice job choosing where you decided to settle down. In New Orleans, we pay at least double.

Insurance premiums are based on things like cost of the house, location, crime statistics in your area, prior claims you’ve made, your credit attributes, fire protection systems in the home, whether your home is stand-alone or attached, and a host of other criteria.

Some of these criteria are out of your control. The ones you can control are mainly based on your total financial picture. Keep your credit profile healthy and avoid making claims against any insurance policy unless absolutely necessary. Also, only buy a house you can afford. The more expensive the house, the higher the insurance premiums.

Additionally, you can usually save money by bundling your auto and homeowners insurance together.

If you’re looking for a quick ballpark figure for your annual insurance premiums, try this homeowners insurance calculator. This was actually an accurate representation of what we pay for our house.

7. What you can learn from others about buying homeowners insurance

Sometimes, it’s easier to learn from others’ past experiences when it comes to choosing and buying an insurance policy. Here, some things homeowners wish they had known:

“We live in inland Connecticut and are on pretty high ground. Because of this, and based on what our neighbors told us, we didn’t choose flood insurance. But a few bad storms ended up causing our basement to become flooded, causing both personal property damage as well as structural damage that cost thousands to repair. I wish that we had just tacked on flood insurance, instead of relying on other people’s opinions.” Mary, 32, Granby, CT

“Be very clear about the roof policy! Our house had an old roof that seemed to be in good shape when we bought it. But about a year later, we got a letter saying it was just too old and we had 3 months to replace it or be dropped. Mad scramble ensued: I was a grad student with a new baby so wasn’t exactly flush with new roof cash. In the end, there was no appeal. We just had to replace the roof.” Rhiannon, Champaign, IL

“I wish I had known more about the claim process, and how to assess whether it’s best to pay for repairs ourselves or to go through the claims process. We were pretty naive in our twenties as new homeowners and ended up using homeowner’s insurance multiple times for minor issues in the course of a few years, which actually caused our policy to be canceled. It was a huge headache to find a new policy, and I would definitely advise people to go through a cost-benefit analysis before filing a claim.” Amy, Kansas City, MO

“We had researched policies and were about to purchase one, when we read the fine print, and realized that our chow mix may not be covered. We called an agent and talked through how our dog was friendly, had taken obedience classes, and had never bit anyone, but even just owning that breed meant we couldn’t purchase the policy. Eventually, we found a policy that worked with us and our pet, but I wish we had known as soon as we began searching that dogs could play a factor in whether or not a policy is the right fit.” Mark, Seattle, WA

Buying a home is overwhelming – there’s no way to sugar coat it. However, when shopping for homeowners insurance to protect this big purchase, you’ll rest easier if you have the knowledge that you picked the right company and coverage for you and your budget. And, remember to not let all the big decisions get in the way of the excitement that is choosing a special place for you and your loved ones to form lasting memories. Soak it in. These big moments are usually remembered fondly when you look back on the memories.

Brittney Burgett is the communications director at Haven Life. She lives in New Orleans with her husband and has a passion for making insurance a lot less hard to understand.

Hank Coleman is the founder and publisher of Money Q&A, a personal finance blog that focuses primarily on investing and retirement planning. Hank has a Masters in Finance from the University of Maryland and holds a Certificate of Personal Financial Planning from Kansas State University.

*Source: Insurance Information Institute, “Facts + Statistics: Hail”, and “Facts about Flood Insurance”, 2018

What I learned when shopping for homeowners insurance

1. What does homeowners insurance cover?