Home Insurance. As a topic, not awesome. But winning home insurance? Totally awesome. Because home insurance is a game without rules, where risks aren’t rewards and rewards aren’t risky. But most players, deep down, don’t really want to play, and that’s why most players don’t win.
Here’s the thing: You can win home insurance. But you have to understand it. That’s where this guide comes in. We’ll skip all the mumbo-jumbo and such terms as betterment and binder and chattel and inland marine – which in the world of insurance has nothing to do with land or water—go figure. Instead, we’ll provide you easy-to-understand, interesting info on how to protect your home and your wallet.
Our mantra: Just because it’s serious business doesn’t mean it has to be boring business.
What is Home Insurance?
Home insurance protects you—and your lender—from certain problems relating to your house that could land you in physical and financial trouble. People in the business call them “perils.” Some have their roots in nature, others are manmade. Some are errors of commission, others are errors of omission. Some involved damage to your home, others involve physical damage—injuries to people who visit your home.
A home insurance policy generally covers more than you think – and less than you think. See why even veteran policyholders consider it confusing.
Covered Perils: What's WHARVES Got to Do With It?
Home insurance covers a lot of perils that could devastate your home and finances. But not all of them. So there’s an acronym – WHARVES – that serves as a mnemonic for some of what’s typically covered:
- Explosion (maybe, see Terrorism in the next section).
That’s the clever acronym. But much more is also covered. Important stuff, like damage from fire, the weight of ice and snow, and, in some cases, water – we’ll explain later. Theft? Vandalism? Volcanic eruptions? Meteorites? Covered, covered, covered, and covered, probably – the lawyers made us add that.
Payouts for Average Claims
The numbers tell the tale. So what better to talk about average claims than a chart, courtesy of the Insurance Information Institute:
What's Not Covered?
Of course there’s a flip side to what’s covered. For all that standard home insurance covers, it doesn’t help in four major instances, and might not for a fifth:
- Floods. Yes, floods are made of water, and above we say water damage is covered by standard home insurance. And some forms of water damage are covered: If your home gets soaked by firefighters putting out a blaze, you’re good. If a pipe bursts and damages floors and walls, you’re good. Where it falls apart is, as they say in the insurance business, “damage from rising waters” – from floods caused by torrential rains, overflowing levees, a hurricane storm surge and more. Spoiler alert: You can purchase flood insurance for these instances, and in certain places vulnerable to flooding, you’ll have to.
- Earthquakes. This is another natural disaster that’s not covered by a typical homeowners policy. Again, you can purchase supplemental coverage, but many homeowners—because of the high premiums and limited payouts—don’t. Ask your agent about this.
- Sinkholes. Again, this is excluded from coverage in most standard policies, though you can pay extra for it. Sinkholes can happen anywhere but are most prevalent in the following states:
- War. What is it good for? Absolutely nothing. And that goes for your home insurance policy if your place is damaged by an act of war. Which brings us to:
- Terrorism. This is a gray area. Providers often consider terrorism as an act of war—which means they don’t have to pay. But this stance is no sure thing. The courts haven’t definitively weighed in on it—yet.
One more thing typically not covered by home insurance: Sewer backups. However, when you buy a policy, your insurer likely will ask if you want this additional coverage.
Am I Required to Buy Home Insurance?
Great question. The answer: No, and yes.
Here’s why the answer is no: If you drive a car, your state (unless you live in New Hampshire) requires you to have auto insurance, and even New Hampshire requires you to demonstrate that you can take financial responsibility for a wreck you cause. Of course, this doesn’t necessarily mean that every driver actually has insurance—only that they’re breaking the law if they don’t. But when you’re buying a home, there’s no legal requirement to purchase home insurance.
Here’s why the answer is yes: While the state won’t require you to buy home insurance, your lender almost certainly will. That’s because it wants to protect its investment when it gives you a mortgage for your new home. Should any covered peril (there’s that term again) occur that damages your house, your lender wants to make sure it’s repaired so it can still be collateral for the loan.
Here’s where you have some flexibility: If you pay cash for your home – yeah, that’s apparently a thing for some people – or have paid off your mortgage, you don’t have to buy home insurance. You just have to be ready to repair or rebuild it on your own should something happen to your home. In other words, it’s a pretty big gamble.
Why the Name Doesn't Really Fit
It’s called home insurance, but standard policies actually protect much more than your home. Typically, policies come with six forms of coverage:
This is what you think of when you think about home insurance. It protects you from WHARVES and the other “covered perils” described above.
- Insider’s tip: You should buy enough dwelling coverage to rebuild your house from the ground up should it be destroyed by a “covered peril.” That’s not necessarily the same amount you paid for the house – you don’t have to buy the land or pay a premium for location.
It does just what you’d expect, protecting detached garages, sheds and other structures–including fences—on your property.
- Insider’s tip: Repairs or replacement to these structures can be made up to your policy limit for this type of coverage; typically, the limit is set at 10% of the amount of your dwelling coverage. For example, if you have dwelling coverage of $200,000, you likely have other structures coverage for up to $20,000.
This is for your stuff—your clothing, appliances, electronics, furniture, etc., inside your home. It is covered for the same “perils” as your home as well as for theft.
- Insider’s tip 1: Your coverage limit for this category typically is set as a percentage—typically between 50% and 70%–of your dwelling coverage limit. For that $200,000 home described above, the dwelling coverage limit would be $100,000-$140,000.
- Insider’s tip 2: This is very important. Insurance providers typically limit payouts for high-value items such as jewelry and artwork–unless you schedule an endorsement to cover these items at their full value. Tell your agent about any high-value items you own.
Loss of use
This helps with additional food and lodging expenses you incur if you’re forced out of your home while it’s being repaired or replaced due to, you guessed it, a “covered peril.”
- Insider’s tip: The coverage amount here typically is 20% of your dwelling coverage—or $40,000 for the $200,000 house we’ve been using as an example. However, this amount can vary by provider. This coverage also can be subject to time limits, so be sure to study your policy before you count on this feature of it.
This coverage helps in case a homeowner faces a lawsuit alleging that he or she caused an injury or property damage. It can help with legal expenses during the case and with any award made. A typical case: A dog bite or a slip-and-fall case on your property.
- Insider’s tip: Standard policies generally start coverage with a $100,000 limit, which might not be high enough. The good news: More coverage can be purchased fairly inexpensively.
This coverage can help with medical bills when someone is injured but doesn’t want to sue.
- Insider’s tip: Policies generally come with a $1,000 limit per person per incident for this type of protection. Again, however, more coverage can be purchased fairly inexpensively.
How Much Does it Cost?
You’re not going to like this answer: It depends. It depends on a number of factors, including but not limited to the following:
- Your home’s value
- Your home’s age
- Your insurance history
Location, or risks aren’t rewards
How much you pay for home insurance greatly depends on your risk of (1) filing a claim and (2) filing a large claim. Much of your risk of filing a claim is tied to where you live. Live along the East Coast, with the annual threat of hurricanes? You’ll pay more for coverage. Live in Tornado Alley in the Midwest? You’ll pay more. Live in Utah or Oregon, where the threats of natural disaster aren’t so great? Not so much.
Your home’s value, not its cost
Remember, you should insure your home for the amount it would take to rebuild from the ground up, so a house that costs more to rebuild will cost more to insure. One common method of determining this value is multiplying the square footage of the home by local building costs per square foot. This number can be very different from the real-estate value of the house because, repeating what we said earlier, you’re not buying the land, the view, proximity to schools and shopping, and so on because you already have those.
Ryan Scruggs, a Farmers Insurance agent in Phoenix, says everything starts with an appraisal of your home, to make sure you have the amount of coverage you buy right, including what’s inside the house. “Make sure it’s insured properly for personal property, clothing, jewelry, electronics, etc.,” Scruggs says. “Always overestimate on your personal property.”
Your home’s age, or older isn’t wiser
Older homes can fall into two categories (though this varies by provider): those that are more than 25 years old and those that are more than 100 years old.
Let’s take the younger older homes first. Some concerns can be allayed if certain components of the home have been replaced and/or upgraded. Chief among these is the roof – which becomes more
vulnerable by the year. Other problem spots—the electrical, plumbing and HVAC systems, which can pose fire and water hazards. All can drive your premium cost up.
The older older homes come with additional concerns. Sometimes materials needed to rebuild either aren’t available; if they are, it is at great cost. There can also be code and/or zoning issues. All these potential problems can force buyers to seek historic home coverage, which can drive up the cost.
Your insurance history, or have a CLUE about claims
When evaluating your risk of filing claims, home insurance providers also take a historical view, both of you and the home. Their thesis: People who have filed claims are more likely to file more claims. Fair? Not necessarily. But true nonetheless.
But wait! There’s more: Providers also will study the house’s history by getting a CLUE report. It stands for Comprehensive Loss Underwriting Exchange—it’s a database of every claim filed at an address during the past seven years. Again, it gives providers a, well, clue about the risk involved in insuring a particular dwelling. The good news: You can request a CLUE report when you’re considering making an offer on a house.
Be sure to take credit
One controversial factor in determining how much you’ll pay for home (and, for that matter, auto) insurance is your credit report. No, it’s not that insurers are investigating whether you’ll pay your bill on time—when it comes to insurance, you pay in advance for coverage.
Sonya Smith-Valentine, president of Maryland-based Financially Fierce LLC, which helps companies with financial wellness programs for employees, explains the reasoning the industry uses in looking to credit reports. “Insurance providers believe that irresponsible credit behavior is correlated with higher insurance risk,” Smith-Valentine says. “Not everyone agrees with this practice, however. Three states prohibit insurers from using credit to calculate homeowner’s insurance premiums: California, Massachusetts and Maryland.”
How big a factor is the credit report? Huge, Smith-Valentine notes: “People with poor credit pay at least twice as much as people with excellent credit in more than 30 states.”
All that sounds pretty daunting, we know. The actual numbers might not be quite as scary, though, particularly when you remember what’s at stake. The average annual home insurance premium in the U.S., according to the National Association of Insurance Commissioners, was $1,096 in 2013, the most recent year for which statistics are available. And premiums vary widely by state—ranging from a low of $561 in Idaho to a high of $2,115 in Florida.
Here’s an in-depth look at the average premium by state (and the District of Columbia):
Source: National Association of Insurance Commissioners
Money-Saving Hacks to Cut Premium Costs
We’ve told you the way things add up to determine how much you’ll pay for coverage. So now let’s explore some ways to keep your costs down. Another spoiler alert: Here’s where the rewards without risks come in – because none of the hacks will cut the quality of your coverage.
Shop around. This is really important. Providers use different algorithms to determine what they’ll charge, and they weigh different factors differently. This means putting legwork in BEFORE the time comes to close on your house. You’ll have to have home insurance in place to close, and the provider suggested by your lender or real-estate agent might not be the right choice for you.
Scruggs, the Farmers agent in Phoenix, cautions homebuyers to do their own research. “A lot of mortgage companies use in-house providers,” he says, warning that those providers might not be the best option. “It’s like shopping for the mortgage itself,” he says. “You want to find that middle ground between cost and value. Lower cost doesn’t always have the value.”
Save a bundle. Most home insurance providers also sell car insurance. In fact, most would rather sell car insurance—it’s generally more lucrative. Result: You’ll get a big price break—as much as 20 percent—for buying both policies from the same provider. You also can receive savings by purchasing other types of insurance—boat, motorcycle, etc.—from the same provider.
Increase your deductible. Your deductible is the amount you agree to pay toward a claim – think of it like a co-pay for health insurance. The larger your deductible, the lower your premium, all other factors being equal. The thinking behind this—a larger deductible will dissuade you from filing smaller claims (which is also to your benefit). Scruggs and others do warn that you have to be careful about raising your deductible, though. “Is it worth it io save $100 a year if you have to pay out $1,000 (for a claim) rather than $500?” Scruggs asks. “And not everyone has that amount of funds.”
Stay hydranted. This step comes way before closing. When you’re looking for a home, consider how close it is to the nearest fire hydrant and fire station. If the house is within 1,000 feet—about three football fields—from a fire hydrant, you’ll get a break on your premium, according to Travis Biggert, an insurance broker with HUB International Mid America in Tulsa, OK. Same if it’s within five miles of a fire station. Why? Remember that chart about common home insurance claims and their costs? The average fire insurance claim approaches $40,000. The closer the hydrant and fire station, the better chance that the fire can be doused quicker, with less damage.
Let us discount the ways. Home insurance providers frequently offer premium discounts as a way to encourage behavior that’s less risky. Some common ones include owning a home built within the past 10 years (20 percent), installing a monitored security system (up to 15 percent), and having smoke detectors (5 percent). Discounts vary by state and provider, so it’s important to ask your agent about them.
Take a bite out of premiums. The average dog bite claim payout in 2015 exceeded $37,000, according to the Insurance Information Institute. So insurance providers have a huge stake in avoiding these claims, and they’ve attacked the problem with the controversial tactic of refusing to insure dog breeds they consider “aggressive.” The list varies by provider but can include such breeds as Rottweilers, pit bulls, chows, Doberman Pinschers, Staffordshire terriers and wolf hybrids.
Go jump in a lake. Instead of a swimming pool, if the pool is on your property. Pools, trampolines and treehouses fall into the category of “attractive nuisances” that can lead to serious injuries to people who use them, including children who may trespass on your property to do it. That means a fence, with a self-locking gate, is a must. Even that’s not enough, says Elizabeth Jenkins of Source Capital Funding Inc., a real-estate lending expert based in San Diego and licensed in California, Arizona and Minnesota. “Most experts will suggest raising your coverage from $100,000 to $500,000 when the property has a pool. This increase comes with a higher monthly premium.”
Don’t let things fall into your lapse. Something very bad can happen if you fail to pay your home insurance premium. Your lender—the reason you had to get home insurance in the first place—can purchase coverage for you. It’s called force-placed insurance, and it costs four or more times as much as regular insurance. And it’s designed to protect your lender—not you. You likely won’t have personal property coverage (for your stuff) or liability protection. And you can be charged back premiums for the time your coverage lapsed. It can even force you into foreclosure.
Face it. Home insurance is a necessary evil, something you buy and never hope to use. Any amount you pay for such a product is going to seem like a burden you don’t want. Until you want it.