Assuming winter ever comes to an end, spring is the time when the housing market starts heating up. Just like the birds and the bees, “For Sale” signs begin to multiply, cropping up across the country, and sooner than later, the market is flooded.

Once you find your new home, you must start thinking about homeowners insurance – mandatory for taking out a mortgage and highly advisable considering your home is likely one of the biggest financial investments you’ll make in your lifetime.

Thing is, few homeowners do extensive research about the differences between homeowners insurance policies, let alone take the time to read the fine print. In fact, a mouth-dropping 52% of policyholders don’t have a full grasp on what’s covered (and what’s not) under their policy; basic things like flood coverage, sewage backup, and theft.

Deep Conversation

We’re here to pull back the curtain and explain in plain, transparent language the ins and outs of your standard homeowners insurance policy.

Here’s a breakdown of what we’ll be discussing:

Basic homeowners insurance definitions

What’s covered by homeowners insurance

What isn’t covered by home insurance

How much homeowners insurance costs

How much home insurance you need

Why home insurance is important

Back to the basics

We’ll start off with 5 important insurance definitions for you to master, so we’re on the same page:

Homeowners Insurance

Homeowners insurance is essentially a group of coverages. You pay your insurer a premium so if bad things happen (in insurance lingo, we call these “named perils”), they’ll have your back. The stuff your typical homeowners insurance company covers includes Personal Property, Personal Liability, Loss of Use, Medical Payments to Others, Dwelling, and Other Structures. Translation: If your stuff gets ruined, if you get sued, if your place becomes uninhabitable, if someone is injured at your place, if your place gets totaled, or if your garage burns to the ground, your insurance company will most likely take care of the bill.

All of these coverages are laid out in your homeowners insurance policy… aka the official, binding agreement between you and your insurance company.

Declaration Page

A homeowners insurance declaration page provides you with a snapshot of all of the stuff we discussed above, along with stating your personal info, info on your home, maximum coverage amounts, discounts, deductibles, endorsements and notices, and your premium. It’s like the TL;DR for your full homeowners policy.

Tip? Read this over and make sure everything is correct. One of the most common mistakes we see here at Lemonade HQ is one of the smallest – an incorrect home address!

Named Perils

We mentioned this term above: Named Perils apply to your personal property and refer to 16 situations that may cause damage to your home which are covered by your standard HO3 (insurance code for homeowners insurance) policy. They include the following:

named perils homeowners insurance

Just note that there are some weird exceptions and caveats to these perils (especially between states) so we suggest you carefully go through your policy in full.

Homeowners Insurance Deductible

An insurance deductible is the amount of money you choose when purchasing a policy that’ll be subtracted from any future claims payouts. Think of a deductible as your participation in the damage or loss. You’re saying, “I commit X dollars to any claim on future losses or damages, and my insurance company will cover the rest.” For example, choosing a $500 deductible means if you file a claim for $4,000 and it’s approved, your insurance company will pay you $3,500.

The typical homeowners deductible is between $250 and $5,000, and generally, the higher your deductible, the lower your monthly premium will be (and vice versa). Insurance companies also offer unique deductibles for specific things (i.e. windstorm deductibles which are a percentage of a specific limit) so make sure to double check for add-ons like this when your getting a policy.

Actual Cash Value vs. Replacement Cost

You can think of Replacement Cost as the “Amazon price,” whereas the Actual Cash Value, would be the price you would see it listed for used, or the “Ebay price.”  

Actual Cash Value refers to the cost of replacing damaged or destroyed property with comparable new property, minus depreciation and if it became obsolete. For example, a 10-year-old sofa will not be replaced at its purchase price because of a decade of depreciation. Replacement Cost is the cost of replacing property without a reduction for depreciation due to normal wear and tear, hence the Amazon vs. Ebay analogy.

What’s covered by homeowners insurance?

We mentioned five areas covered by your standard homeowners policy but here’s a closer look at what’s covered:

1. Your house, or in insurance lingo, Dwelling

Referred to as “Dwelling Coverage,” this protects you from damages to your place (your home and everything attached to it, such as a garage, chimney, in-ground pool, etc.)

2. Other structures on your property

Things like your driveway, fences, sheds, and other structures that live on your property are also covered by homeowners insurance.

3. Your personal property

Generally speaking, persona property refers to the stuff you own. Fun fact: Your home insurance has your back whether your stuff is at home, or anywhere else. So say your computer gets stolen from your car, or your shed burns down with a bunch of power tools inside – you’ll be covered. Take note: there are sub limits on certain valuable things like jewelry and artwork: check the Extra Coverage option when creating a policy to see if it applies to you.

4. Additional living expenses

Say one of those pesky perils happens and your place becomes uninhabitable due to one of the situations we described above. What then? Well, this situation is covered under something called “loss of use,” and your insurance company may help pay for a temporary place to stay and basic living expenses such as food, laundry, parking, etc.

5. Personal liability

Liability refers to things you’re responsible for. In the insurance arena, this means if for some reason you’re someone getting injured on your property and it’s your fault, or you/anyone named on your policy causes damage to someone else’s property or stuff, your insurance company should have you covered. Just to be 100% clear: we’re only talking about unintentional situations.

A small note on this one: homeowners insurance only covers personal injury to others, not yourself or others covered under your policy.

6. Medical fees

While personal liability kicks in when you get sued, medical payments kick in without being sued – they are a quick way to settle small injuries. No, home insurance doesn’t cover your own medical bills (that’s what health insurance is for!), but it does help out with covering injuries sustained by guests who may have gotten injured at your place, or people you may have accidentally hurt outside of your home as well.

What does homeowners insurance not cover?

There appears to be some gaps in our knowledge of homeowners insurance coverage.

Less pervasive, but still alarming, is that 29% think that they’re covered in the event of an earthquake, and similar percentages were reported for other types of land movement such as sinkholes, mudslides, and landslides. (III)

Let’s get this straight, earthquakes and flooding aren’t covered under your standard homeowners insurance policy. In fact, they are separate policies all together that homeowners are encouraged to purchase along with their home policy.

Other things your policy most likely doesn’t cover include: mold, sewer backups, infestations, pool accidents, wind damage in hurricane-prone states, wear and tear, construction work damage, jewelry and fine art above a certain amount (look into additional coverage for this), dangerous/aggressive dogs, stolen cash, nuclear hazards, and government action.

How much is homeowners insurance?

The cost of homeowners insurance will vary by state and depends on a lot of factors including house age, cost to rebuild, fire protection rating of your city, and building materials, among other things.

According to the National Association of Insurance Commissioners (NAIC), real estate values and construction costs tend to be higher in areas of greater population density. Therefore, as the amount of homeowners insurance needed is based on the value of your home, premiums are often higher in more heavily populated places.

A general rule of thumb is, as a homeowner, you can expect to pay around $35 per month for every $100,000 that your home is worth (i.e. if your home is valued at $500,000, you can expect to pay about $175 per month), though it really depends on your city, state, and all of the factors mentioned above.

Average Homeowners Insurance Cost by State

According to the III, the countrywide average homeowners insurance premium was $1,173 in 2015. Florida had the highest average homeowners insurance premium in 2015 ($1,993) and Oregon had the lowest ($643).

Silver lining? There are a bunch of things that can lower your homeowners insurance premium: burglar alarm systems, smoke detectors, fire extinguishers, sprinkler systems, deadbolt locks, wind protection, water or temperature alerts, central station reporting alarm, and more.

Here at Lemonade, we even have an automated feature, “Lower Your Price” that takes into account the above, helping you to get a discount when building your quote.

How much homeowners insurance do you need?

This is the million dollar question (maybe literally!). How much insurance do you need for your home? And is it just your home, or more? Hint: it’s much more.

When it comes to setting a dwelling coverage amount for your home, you don’t want to choose the purchase price or current market value. This amount should be the amount that it’d take to rebuild your home (as it was before it needed to be rebuilt – no upgrades!), known as “reconstruction costs.” This is, after all, what your insurance company will be reimbursing you in the worst case scenario that you have to rebuild. But that’s just your home. There are also all of the other coverages we previously mentioned to take into account as well.

To price out your personal property, most experts will say you should choose a limit between 50% – 75% of your dwelling coverage amount. If you think this isn’t enough to cover all of your stuff – say you have fine art, lots of expensive jewelry, a collection, or other valuable items – look into the Extra Coverage option with your insurer. Extra Coverage also provides additional coverage in general, so it’d definitely be something to look into.

Similarly to personal property, additional expenses, or loss of use, is also based off of dwelling coverage. Most advise to choose an amount that’s around 20-30% of your dwelling coverage. Also, take your lifestyle into consideration, as this covers what you’d usually spend on stuff like food, temporary storage of property, moving costs, etc. So let’s say you eat takeout everyday – breakfast, lunch, and dinner, you’ll most likely want to select an amount that’s more than someone who buys groceries and prepares their meals.

When you think personal liability, you may only think of the things we discussed above (injury to others, legal fees, etc.), but you should also take into account the total dollar amount of your financial assets, like your home, retirement accounts, investments, and anything else worth money. Your insurer’s liability protection is also working to cover these things as well. If you don’t think $500K is enough, you can purchase something called an umbrella policy which’ll add another $1M or more in coverage.

Let’s say a guest sprains her wrist after tripping on a rug in your living room – she has hospital bills to pay. This is where your medical expenses coverage may kick in. Generally between $1,000 – $5,000, this really depends on you. Try looking at how often you host and the safety of your home. You cannot really go wrong here.

Here’s a breakdown of some of the most common coverage amounts:

Homeowners Insurance Coverage Limits

*We mentioned earlier that insurance premiums vary state-to-state and the same goes for limits, so insurers may offer $1M in personal liability, for example, in some states but not others.

Aside from these amounts, when deciding how much homeowners insurance to buy, you’ll need to choose a few more things that’ll influence the price of your monthly premium such as the size of your homeowners deductible (typically $250 – $2,500), replacement cost or actual cash value for covered perils, and if you’d like any optional coverages to protect against things like water backup, identity theft, and lost, stolen, or damaged valuable items.

Is homeowners insurance required (and what are the benefits)?

All of this sounds like a lot, right? We don’t blame you if you’re asking “do you even have to have homeowners insurance?” Well, while your state may not require homeowners insurance by law, if you take out a mortgage to buy a home, your lender will almost always require coverage.

Upsides? There are more than a few. Beyond protecting one of the biggest investments most people make in a lifetime, consider scenarios where you owe money on your mortgage and your home is destroyed, or someone is seriously injured on your property –  even if you’re smacked with a personal injury lawsuit and ordered to pay a large sum of money to a third party, you’re insurer will most likely be able to help you out.

Homeowners insurance is financial defense against bad things that may happen in life, giving you much-needed peace of mind.

Pro tip: Review your coverage each year and check to see that your coverage amounts are still relevant in respect to your lifestyle and needs.

Now go forth and get insured. 🙌