Introduction
Buying a home can be one of the most important investments you can make. Some even consider it to be a part of the American dream. Not only does it help show financial stability, but it’s also the place where you raise your family, put your feet up after a long day, and make lifelong memories.
Many people take their home for granted, thinking nothing catastrophic can ever happen to it. In every state, however, natural disasters and freak accidents happen. It’s good to know that if one of these unfortunate events occur, your home—and everything of yours that’s in it—is covered. That’s where homeowners insurance comes in.
Why is Homeowners Insurance Necessary?
Just like insurance is required by most banks when you purchase a car, most mortgage lenders require that you have homeowners insurance. It pays for repairs or even replacement of your home and property if there’s a loss, so you don’t have to cover those costs out of pocket.
In addition, however, it also protects your personal belongings in the home. Your appliances, furniture, clothing, and much more can all be covered on your policy. Not everything can be replaced; your family photo albums, coin collection, or stash of old records may be gone forever in the event of a house fire, flood, or other catastrophe, but you could be reimbursed for their value.
What Are the Determinants of Homeowners Insurance Cost?
Homeowners insurance policies can vary widely in cost, and those costs are determined by a list of factors including, but not limited to:
- Types of Coverage
- Location of the home
- Condition and age of the home
- Credit Score
- Claim History
Types of Coverage
There are several types of homeowners insurance, and each of them covers a specific set of scenarios.
HO-1 Coverage
Under HO-1 coverage, the bare minimum is covered; fires, explosions, floods, hail, theft, vandalism, and volcanos. There are a few one-in-a-million scenarios covered too, such as an aircraft crashing into your home or damage from riots. Typically, however, your personal belongings won’t be covered unless you specifically add them to the policy.
HO-2 Coverage
This is a more expansive type of policy that covers everything from the HO-1 bracket plus ice/snow damage, freezing or flooding pipes, and electrical damage from wiring problems. It also covers your personal belongings.
HO-3 Coverage
HO-3 is the most common type of insurance for homeowners. It covers everything except whatever is specifically mentioned by your policy as an exclusion, including attached structures such as your garage, as well as liability coverage.
Other coverage types go all the way up to HO-8, but they typically handle specific things like mobile homes and condos.
Location of the Home
Home location can have a huge impact on the overall cost of your insurance coverage. High burglary rates in the neighborhood or increased chances of natural disasters can increase your premiums. Different regions can also have varied costs based on population density; rural settings may be cheaper than urban locations.
Condition and Age of the Home
Homes are made from all kinds of materials, and some are built stronger or weaker than others. Home value, surrounding property values, and how old the home is can all affect your premium amount.
Credit Score
Although homeowners insurance companies cannot decline coverage to homeowners solely because of low credit scores, they can still have an impact on the overall insurance cost. Typically, insurers will charge homeowners higher premiums if they see that their credit scores are too low. On the other hand, if someone were to have a higher credit score, insurers may offer them a discount.
Claim History
Insurers may assess applicants’ claims histories to determine whether they want to offer coverage and how much they will charge for premiums. Typically, the company will use a CLUE (Comprehensive Loss Underwriting Exchange) report to make this decision.
What Are Deductibles?
A deductible is paid when you file a claim, and its amount is set when a policy is purchased. There are two types of deductibles: cash value and percentage. In a cash value deductible, you’ll pay a fixed amount regardless of the amount of the claim. If your deductible is $1000 and you need to file a claim of $10,000 to repair major water damage after your pipes burst, you’ll pay the first $1000 of the repair bill.
If you have a percentage deductible, your home’s value would be used to determine your deductible; you may have a much higher deductible, resulting in much more paid out of pocket but a lower monthly premium.
The main reason for choosing one type of deductible or the other—and choosing how high a deductible you want—is keeping your monthly premium down. Before choosing a deductible type and amount, however, you’ll want to understand not just your personal financial situation, but also the other things that can affect how often you need to file a claim. In a hurricane-prone area, for instance, you may have to file an annual claim for damages to your home or property. In order to keep those annual costs down, you may wish to pay more each month instead.
Andy Kearns is a Content Analyst for LendEDU and works to produce personal finance content to help educate consumers across the globe. When he’s not writing, you can find Andy cheering on the Lakers, or somewhere on a beach.
