Homeowners insurance is a topic that many people don't think about until they're in the process of buying their home. However, currently, at least 85% of homeowners in the US have homeowners insurance, and policies cost an average of $1,445 per year. This is quite different from car insurance.
Despite the high incidence of homeowners with insurance, many still aren’t sure if homeowners insurance is really worth it in 2021. And, that’s fair! Homeowners insurance has been one of those things that people look at as a hassle simply because it’s required; they don't ever want to think about or look into too much, especially after a long homebuying process.
As mentioned above, current homeowners insurance premiums average just under $1,500 per year. With prices that high, it definitely makes sense to question whether or not it’s worth it. Let’s break it down for you.
What is Homeowners Insurance?
Homeowners insurance is a type of property and casualty insurance that covers homeowners against losses from incidents like fire, hail damage, flooding, vandalism, and theft. Homeowners usually purchase their policy through an agent or company in order to have access to the best rates.
How does it work? A homeowner will pay a premium amount each month, which may be higher or lower depending on factors such as the location of their house. For example, if the home is near high-risk areas like wildfire zones, then the premiums will be higher than for someone living in a rural area without those risks.
In some cases you can also get discounts with good credit scores and certain types of preventative measures such as installing smoke detectors or home security systems.
What Does Homeowners Insurance Cover?
The answer to this depends on the policy that you have. Generally, though, homeowners insurance covers your entire physical property, including your house but also external structures such as a garage, shed, barn, fireplace, fences, and more. Definitely check to see if a swimming pool is included in your policy if that’s something you want to protect.
What’s not covered? In most standard homeowners insurance policies, things like jewelry and collectibles aren’t covered, which seems to be weird, right? If you’re paying that much in an annual premium, you want to ensure that everything inside and outside of your home is covered in the case of a massive fire or flood.
This is why it’s important to read the fine print when looking for a homeowners insurance premium. Likewise, there might be things that are included that you don’t necessarily need or care to cover.
What Are the Different Types of Homeowners Insurance?
When it comes down to it, there are typically two main types of homeowners insurance:
- Actual cash value policies
- Replacement cost policies
As it might sound, an actual cash value policy will reimburse you at a price that factors in inflation and depreciation. A replacement cost policy will reimburse you based on the current real value of what it might cost to replace something comparable on the market right now.
Understanding the differences between these two can help you make sense of the costs of this type of insurance while also helping you understand which one might be the best fit for you.
How to Decide if Homeowners Insurance is Right for You
It can be difficult to know if your current policy covers everything or what a new policy might cover (it’s pretty different from looking for cheap car insurance quotes online), so here are some basic questions to consider when deciding if homeowners insurance might be right for you:
- Is there a deductible?
- Are repairs covered by the company that insures your home?
- What natural events does the policy cover (floods, fires, earthquakes, etc.)?
- What discounts are available to you.
In general, when deciding whether or not homeowners insurance is really worth it, we’ll ask you to perform a quick cost-benefit analysis. While this is usually designed for making investing decisions, it’s helpful in this situation as well.
Basically, this requires that you:
- Calculate the total costs of having homeowners insurance.
- Calculate the potential loss of not having homeowners insurance in the case of a major accident or theft.
- Weigh the risk associated with not having insurance.
If, for example, you don’t live in an area where flooding or fires are very prominent, have never heard of anybody getting robbed in your neighborhood, and don’t own a lot of valuables you’d necessarily miss, homeowners insurance might not make sense for you given the high cost.
However, if you are financing your home then you might find that your lender will require you to purchase homeowners insurance. And, that’s not necessarily the end of the world. It can come in handy in many different situations.
To reduce your costs, ask about potential discounts you can receive to help lower your annual premium and then ensure that you’re insured where it matters.
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