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A beginner's guide to buying home insurance

By Josephine Nesbit
Updated  April 27, 2021 4:56pm CDT
Personal Finance
Sponsored by Credible, which is majority owned by our parent, Fox Corporation. Credible is solely responsible for its services.
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Home insurance is one of the smartest investments every person who owns a piece of real estate should make. Here’s a homeowners insurance guide and what you should expect as a first-time homeowner. (iStock)

Homeowners insurance isn’t an option — it’s a necessity. Nearly all mortgage lenders require borrowers to purchase homeowners insurance before financing a residential real estate transaction.

Insurance can be complicated. Homeowners need to be prepared and make sure they are adequately insured. Here’s a buyer's guide for first-time homeowners on the basics of home insurance and finding the plan that offers the right insurance coverage for you.

If you’re shopping for home insurance, visit Credible to get more insurance tips and explore insurance rates and policies from their partners.

DOES YOUR HOMEOWNERS INSURANCE COVER EMERGENCIES?

What should I look for when buying homeowners insurance?

Buyers can adjust their insurance policy to fit their insurance coverage needs. When buying homeowners insurance, you should have enough coverage to:

  1. Rebuild your home
  2. Replace your personal belongings
  3. Cover injuries and damages that occur on your property
  4. Pay your living expenses if your house is uninhabitable

​If you’re shopping for home insurance or think you need additional coverage, you can compare homeowners policies and insurance quotes for free on Credible.

DOES HOME INSURANCE COVER NATURAL DISASTERS?

What does homeowners insurance cover?

Here are the different types of coverage from a standard home insurance policy:

1. Dwelling 

Dwelling coverage helps rebuild or repair the home’s structure if damaged by a covered event. Dwelling coverage should equal the cost to replace your home. This can be calculated by speaking with an insurance agent or an appraiser.

2. Personal property

This applies to everything in your home besides the structure itself if your personal belongings are destroyed, vandalized, or stolen.

You should have enough coverage to replace all of your belongings. This can be calculated by keeping a home inventory of everything you own and their actual cash value. More expensive items may also require additional coverage.

3. Liability

Liability coverage covers you against lawsuits for injury or property damage caused by you, family members, or pets to other people. Common liability claims include:

  • Dog bites
  • Intoxicated guests
  • Accidents
  • Falling trees
  • Injured domestic workers

No-fault medical coverage is also included. This covers the medical expenses of guests injured on your property.

HOW TO GET THE BEST HOMEOWNERS INSURANCE POLICY FOR YOUR NEEDS

4. Additional living expenses

If your home is uninhabitable, additional living expenses will cover your temporary displacement such as hotel bills and eating out. 

There are also different types of homeowners insurance for various property types and insurance coverage needs. This includes:

  1. HO-1: The most basic policy for single-family homes. It only covers the structure, appliances, and home features.
  2. HO-2: Covers your home and personal property.
  3. HO-3: This is the most common type of home insurance which covers all standard types of coverage.
  4. HO-4: This is standard renters insurance.
  5. HO-5: The most comprehensive type of homeowners insurance and recommended for individuals with high-value items.
  6. HO-6: For condo owners and covers everything inside the unit as well as liability coverage and additional living expenses.
  7. HO-7: This insurance policy is for mobile or manufactured homes such as trailers, RVs, sectional homes, and modular homes.
  8. HO-8: This is recommended for homeowners who have older homes or homes that would be difficult to replace such as a historic landmark.

Obtaining and comparing insurance quotes is important, but it can take time. With Credible's partners, ​you can eliminate the time-consuming part of your search​.

WHAT'S THE DIFFERENCE BETWEEN HOME WARRANTY AND HOMEOWNERS INSURANCE?

What is not covered by most homeowners insurance?

Homeowners insurance covers the structure of your home, the contents within it, and offers liability protection during unexpected events. However, it doesn’t cover everything.

These six things are not typically covered by homeowners insurance:

  1. Floods
  2. Damage from lack of maintenance
  3. Earthquakes, landslides, and sinkholes
  4. Sewer backups
  5. Canine attacks from breeds that aren’t covered
  6. Expensive jewelry

Make sure to review your insurance coverage and understand its limitations. If you think you need additional coverage, head over to Credible to review other homeowners insurance policies and get free quotes.

What is the 80% rule in home insurance?

The 80% rule in insurance means the insurer will only fully cover the cost of damages if the homeowner has purchased at least 80% of the house’s replacement value.

If it’s under this percentage, the amount paid by the insurance company will be relative to the amount of coverage purchased.

Improvements and inflation affect the value of the property and the 80% rule. It’s recommended that homeowners periodically review their home insurance policy and their home replacement value.

DO YOU NEED HOMEOWNERS INSURANCE?

Home insurance rates and ways to cut costs

The cost of homeowners insurance largely relies on your home, where you live, coverage amount, and your insurer. The average annual homeowners insurance premium is $1,211 with Louisiana having the highest at $1,967 and Oregon with the lowest at $659. 

There are several ways to lower the cost of your insurance premium:

  1. Shop around for insurance rates
  2. Raise your insurance deductible
  3. Skip small insurance claims
  4. Ask about discounts
  5. Bundle your auto and home insurance
  6. Improve home security and make your home disaster-resistant
  7. Maintain a good credit score
  8. Review your  insurance coverage limits and the value of your personal property at least once a year

Again, be sure to shop around and compare your options to find the best deal. To make sure you are not overpaying for homeowners insurance, ​it’s free to check online through Credible’s partners.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.