Homeowners insurance is a bit of a mystery to many people. Most of us know we need it to stay protected from life’s unpredictable unfortunate events but are unclear about the details beyond that. You may be wondering how much a homeowners insurance policy costs, how that cost is calculated, and how your specific home and location affect it.
As you plan out the steps to buying a home, understanding how home insurance will be involved is essential. Set yourself up for success by learning about the average home insurance cost, how to calculate your own insurance expense, how much coverage you need, the process of comparing home insurance rates, and what to do to save money on home insurance coverage.
Here, we will cover all the ins and outs of home insurance to get you informed. Once you understand the numbers and how they relate to your specific situation, you will be able to make sound decisions on the best home insurance for you and your family.
Top Reasons Why You Need Home Insurance
For starters, you often don't have a choice. If you have a mortgage, homeowners insurance is required. Lenders require this because they need to know the cost of rebuilding your home will be covered in case of a storm, fire, or another devastating event. Lenders see your home as an investment , so they need to know it is being protected.
Even if you aren't required to have home insurance, it’s still a good idea to consider it. Life happens, as they say, and you don’t want to be unprepared and on the hook for the cost of rebuilding your house if something devastating occurs.
Spending your hard-earned money on other home costs, like a fabulous new kitchen or a pool in the backyard, is undoubtedly more fun. But consider how you will feel if a storm comes through your neighborhood and that new kitchen and screened-in porch are torn apart. Suddenly the need for homeowners insurance becomes crystal clear.
A side point to consider is that new builds and existing homes require home insurance, so even if you are still debating building vs. buying a house, obtaining insurance needs to be part of the plan.
Home insurance cost is certainly not the most exciting expense when it comes to homeownership, but it’s necessary.
What Does Homeowners Insurance Cost?
So, now that you have a clearer understanding of why you need homeowners insurance, the next logical question is, “what will it cost?” First, let’s look at average costs around the country, and then we will dive into what the actual cost to you might be.
According to statistics from Quadrant Information Services, the average cost of homeowners insurance nationally is $1,312 per year. This represents a monthly rate of about $109 for a $250,000 policy that offers dwelling coverage (the part of a policy that covers your home's structure). This is just an average across the country, though, and the price depends on several factors (more on that later).
As you probably know, many areas of our country are more likely to have natural disasters than others. In addition, some states have higher local building costs and a higher cost to rebuild than others. Let’s take a look at the average homeowner costs by state to give you a sense of what you might pay depending on where you live (or want to live).
Homeowners Insurance Cost By State
Using a $250,000 policy with dwelling coverage for comparison purposes, here is the average homeowners insurance cost by state according to the previous sources.
Average annual premium
Average monthly premium
Percent of median household income spent
Homeowners Insurance Cost By Insurance Company
Not all insurance companies are the same when it comes to home insurance. Much like auto insurance, different companies charge different prices for various types of coverage. Each insurance agent you talk to will quote you different rates. This is because each company sets its rates based on its own system. Here is a breakdown of the average homeowners insurance rates for a few popular home insurance companies.
Home insurance company
Average annual premium for $250K dwelling coverage
Average monthly premium
Home Insurance Breakdown
The most fundamental part of homeowners insurance is dwelling protection. This covers the structure of the house you live in, including the foundation, walls, and roof. The foundation is covered no matter what type it is (basement, slab crawl space, etc.) and is a critical part of the insurance because it’s what keeps the rest of your house standing.
Other structures attached to the house, like a garage, porch, or deck, are also covered by dwelling insurance. Your dwelling coverage limit will depend on the value of your house. This is why calculating your replacement cost (more on that later) is so important. If you don't, you might not end up with enough dwelling coverage to cover the replacement costs of your home.
Other Structures Protection
If you have a garage, porch, deck, or other structure that is not attached to your home, it won’t be covered by dwelling protection. These structures need to be covered by “other structures protection.”
This protection can go beyond just other buildings on your property. A fence, for example, can be covered by this type of protection.
Personal Property Protection
Many people think homeowners insurance only applies to their house, but personal property can be covered as well. Personal belongings that you keep in the home damaged in a fire or other natural disaster can be protected. For example, if someone steals your television from your home, or a flood damages your furniture, both of these might be protected by your homeowners’ insurance.
Personal property protection can help replace or repair your belongings if damaged or destroyed by a risk covered by your insurance. Most insurance companies offer extended coverage for individual items as well. For example, if you want to insure your wedding rings, there is usually a form of extended coverage for that type of valuable personal property.
You may have heard that if someone injured themselves while visiting your home that you are liable. Well, liability protection has got you covered if this happens. This is a typical feature of most insurance policies and helps pay for medical expenses and other damages if someone who doesn't live at your home gets injured while they are on your property.
For example, let’s say your aunt comes over for Thanksgiving, trips on a broken floorboard in your house, and breaks her leg. If it’s found to be your fault for not repairing the floorboard, bodily injury liability may cover any legal or medical bills that follow. Personal liability insurance can usually be expanded as well. This is called a personal umbrella policy, and it will cover liability claims beyond the normal limits that your liability coverage provides.
Coverage Limits And Deductibles
Remember that all home insurance coverages have limits (the maximum amount your policy would pay toward a covered loss). That said, you may be able to adjust your limits based on the value of your home and belongings.
For example, if your home has a high value compared to other homes or costly personal belongings in it, you can make your coverage limits higher to accommodate the increased damage or replacement costs you would incur.
When considering the cost of home insurance, remember that most policies will have deductibles. This is the amount you pay out of pocket when you make a claim covered by your policy. Many factors determine what amount your deductible will be for each type of coverage, so be sure to have your insurance agent explain this in detail.
What Is Covered In Homeowners Insurance?
When tragedies happen to your home, your insurance kicks in to make things right. Sometimes that means giving you the actual cash value to replace your entire home due to irreparable property damage from any number of natural disasters. Other times, it may mean covering repair costs or the replacement value for just one part of your home.
There are limits, of course, to what is covered by your plan. This can vary greatly depending on the type of coverage you have, but let’s look at some of the travesties covered by most standard home insurance policies:
What Is Not Covered In This Type Of Insurance?
As previously mentioned, all coverages have their limits. Knowing what is covered and what is not for your specific policy is critical because you don't want to be left with a huge bill when you mistakenly thought your insurance considered something a covered claim. Here are a few common home mishaps that are not covered by most standard policies:
How Do I Calculate My Homeowners Insurance?
Now that you know the average cost of home insurance, the components of most standard policies, and what events are covered, you are probably wondering how to calculate your specific home insurance costs.
The Variables That Affect Home Insurance Cost
Let’s start by looking at the different factors that will make your home insurance more or less expensive.
Determining Your Replacement Costs
Beyond the variables mentioned above, the most critical calculation you need to do when estimating what you will pay for home insurance, is your replacement costs.
Start by researching the average cost per square foot to build a home in the area you live. Then, multiply that by your home’s square footage. The cost to build a house will be very different depending on your state, city, and even neighborhood, so be sure to use the most local statistics you can find.
Next, think about the most significant components that make up your home, like roofing, exterior walls, flooring, cabinets, and other interior fixtures. Find out the material and labor costs to replace these by reaching out to local tradespeople who work on each specific component.
Repeat this exercise for your personal property and any other additional insurance coverages you may need. Researching the costs of all these components of your home and property can be time-consuming, but in the end, it will be worth it when you have an accurate calculation of your home insurance costs.
When it comes time to choose your specific standard home insurance policy, you will have three different options to choose from. They are actual cash value (ACV), replacement cost value (RCV), and guaranteed or extended replacement cost (GRC or ERC). Let’s take an in-depth look at each.
Actual Cash Value (ACV)
This is the total cost to rebuild your home with depreciation taken out of the equation. For example, if your furnace cost you $5,000 ten years ago and it broke down, your insurance company would pay you the amount it would cost to purchase a ten-year-old furnace just like the one you had. If the value had depreciated by 50 percent, you would get $2,500. Whether it’s a furnace or your entire home, you would need to pay the difference between the depreciated value and the replacement costs. It is a relatively inexpensive policy since this coverage is limited in what it will pay if something goes wrong.
Replacement Cost Value (RCV)
This refers to the cost of replacing your home at the time your insurance policy starts. This is more expensive than ACV because it doesn’t reduce the amount you get paid in relation to depreciation. However, it doesn’t account for labor and material prices increasing after the start of your policy.
Guaranteed Or Extended Replacement Cost (GRC or ERC)
This type of extra protection, which of course, comes at an additional price, covers you if building or repair costs are temporarily increased due to a regional disaster. For example, if an earthquake in a specific area caused a labor and material shortage due to high demand, prices for getting your home replaced or repaired would go up. GRC coverage would account for that and pay you the extra money you need.
Knowing The Numbers Will Help You Navigate The Confusing World Of Home Insurance
The world of homeowners insurance can be complicated and confusing, but it’s a world you need to become familiar with if you are buying a home. Using the tips you’ve found here, do your homework to calculate how much homeowners insurance you need and then shop around for the best rates. You will be glad you did if anything happens to your home!