Katie OrmsbyHome Insurance Expert

Katie enjoys helping readers make sense of Home Insurance options. She's previously written business and shopping features for The Seattle Times and Seattle Met magazine. She has a degree in journalism and political science from the University of Washington.

How Homeowners Insurance Works

There are as many types of homeowners insurance as there are types of dwellings, and it can be confusing when you’re trying to determine the best type of coverage for your situation. While it’s true that many banks require homeowners insurance before offering a mortgage, there are plenty of other good reasons to make sure you’re covered. Since you’re here, you’re already on your way to taking the mystery out of getting the best rates and learning how coverage works.

What Is Home Insurance?

When you think about what could happen, home insurance costs are a good investment. No matter what sort of dwelling you reside in, there’s a policy that can make sure you and your belongings are covered. In fact, there are policies that cover a lot more than just your possessions or your home. You never know what life will throw at you, so it’s best to be prepared.

Once you take a look at the guide we’ve put together, you’ll be able to pick the right homeowners insurance with confidence. Home insurance is a necessity for getting a mortgage, but making sure you have the best coverage for your living situation is equally as important. Knowing that you’re protected against fire, weather, or theft will certainly bring you peace of mind.

What Home Insurance Policy Forms Are Available?

While a single-family home may be the first type of property that comes to mind when you think about homeowners insurance, there are a total of eight home insurance policy forms. So, for example, if you live in a condo, mobile home, or rent, there’s a policy form that applies to your type of property.

We’ve outlined the eight types of home insurance policy forms in the table below:

Policy FormDetails
HO-1 InsuranceThe most bare-bones policy for single-family homeowners
HO-2 InsuranceA slightly more expansive policy than HO-1
HO-3 InsuranceThe most popular policy with broader coverage than HO-2
HO-4 InsuranceA policy for apartment, condo, and home renters
HO-5 InsuranceThe most comprehensive policy for single-family homeowners
HO-6 InsuranceA policy for condo owners
HO-7 InsuranceA policy for mobile and manufactured homeowners
HO-8 InsuranceA policy for certain older homes

Pros and Cons of Standard Home Insurance

Since HO-3 is the most common type of home insurance, we’ve summarized its pros and cons.

Pros
Cons
Covers repairs and replacement
Doesn’t cover specific events like floods
Extends liability to those on your property
Large gatherings may need extra coverage
Insures both the dwelling and contents
Contents are factored into premiums

Why Do You Need Homeowners Insurance?

You need a home insurance policy in place before you can get a mortgage, and you need it in case disaster strikes. After all, homeowners insurance can provide coverage beyond your home and its contents. The best home insurance companies offer policies that give you additional liability protection. Should someone become injured on your property, those losses and damages are also covered.

How Much Does Homeowners Insurance Cost?

Several factors affect the cost of home insurance, including your home’s value and where you live. Costs will vary from property to property, but you can expect things like your credit score and your other insurance policies to be taken into account. It’s always good to discuss your specific needs with an insurance representative.

Average Annual Premium by Home Value

The average annual premium of an HO-3 home insurance policy by home value:

Estimated Home Value
Average Annual Premium
$49,999 and under
$645
$50,000 to $74,999
$748
$75,000 to $99,999
$826
$100,000 to $124,999
$888
$125,000 to $149,999
$937
$150,000 to $174,999
$981
$175,000 to $199,999
$1,018
$200,000 to $299,999
$1,114
$300,000 to $399,999
$1,272
$400,000 to $499,999
$1,482
$500,000 and above
$2,148

Source: National Association of Insurance Commissioners

Average Annual Premium by State

The average annual premium of home insurance in the least and most expensive states:

5 Cheapest States
Average Annual Premium
5 Priciest States
Average Annual Premium
Hawaii
$376
Oklahoma
$3,519
Delaware
$680
Kansas
$2,694
Vermont
$686
Nebraska
$2,816
Oregon
$712
Arkansas
$2,142
New Hampshire
$724
Texas
$1,863

Source: Bankrate

How To Get Cheap Home Insurance

The location of your home and your home’s replacement value are big factors in determining the cost of your home insurance, but they’re not the only players in the game. Things like your credit history, your distance to water, and the other insurance policies you hold can also affect your rates. Following these tips will help you get the best homeowners insurance available.

1. Shop around every year.

Before renewing your policy, it’s a good idea to compare insurance rates. In addition to the larger insurance agencies, it’s a good idea to check with your smaller insurance companies, too. You never know what type of discounts either one of them will be able to offer.

2. Bundle your policies.

Most insurance companies are more than happy to combine your auto and your home insurance policies. When you bundle them, you’ll simplify your life by only having one payment, and you’ll likely be offered a discount for signing up.

3. Ask about hidden discounts.

There’s a good chance your home insurance provider has a few discounts that you don’t know about. A lot of companies offer discounts for having good credit, doing recent repairs, added security, and home renovations. As they say, you’ll never know unless you ask.

4. Strengthen your home’s security.

Between the money and time you’ve spent on your home, it’s a huge investment. Insurance companies often offer discounts for protecting your home by adding security features. From lighted walkways to security systems, there are many ways to increase your safety while saving money.

5. Consider raising your deductible.

When you raise your deductible, you’re likely to lower the cost of your premium. While it’s nice to have a little extra money, it’s also good to remember that making an insurance claim means that you’ll need to pay your deductible. So, be sure that you can cover whatever deductible you choose.

Important Homeowners Insurance Terms to Know

TermDefinition
DeductibleThe amount you agree to pay against any insurance claim
PremiumThe cost of your insurance coverage
ClaimA request for an insurance company to reimburse repairs or replacements
RiderAn amendment to a policy that extends coverage and limits
LiabilityCoverage for damages or injuries that occur on your property
DwellingThe building that makes up your home or garage including structures like foundations and cabinets
ContentsThe possessions inside your home. Furniture, appliances, toys, clothes, etc.

3 Things to Consider When Buying Home Insurance

1. Level of Coverage

Because home insurance policies vary, you’ll need to consider the level of coverage you need. The most popular insurance, HO-3, can be adjusted to cover your specific situation. The cheapest home insurance policy option might be tempting, but it’s good to see the bigger picture and make sure the policy does cover your needs.

2. Your Deductible

Your deductible is the amount of money you’ll be responsible for paying against an insurance claim. Insurance companies offer different levels of coverage that affect your deductible amount; however, your deductible will likely be assessed on a per-event basis.

3. Specific Event Coverage

Policies like flood insurance, vacant home insurance, and special events coverage can easily be added to your existing home insurance policy. Standard homeowners insurance covers a lot, but you may want to invest in additional protection.

Frequently Asked Questions

What’s umbrella insurance?

An umbrella insurance policy expands liability beyond your home or auto insurance policies. In the event that you exceed your policy limits, umbrella insurance gives you additional coverage.

How does the 80% rule work?

In order to be reimbursed for the full amount of damages to your home, many homeowners insurance companies require that you carry coverage that’s equal to 80% of your home’s replaceable value.

What’s an attractive nuisance?

An attractive nuisance can be anything that may attract a child to trespass on your property. It can include swimming pools, trampolines, and abandoned vehicles. In the event of an injury, covering it on your homeowner’s insurance gives you liability protection.

What does loss of use mean?

If you’re unfortunate enough to have to vacate your home under an insurance-covered event, loss of use helps pay for any alternative living expenses you may face.

How are home warranties different?

Home warranties and home insurance are different in one vital way: while insurance covers unexpected damages like fire and weather, warranties cover things that will naturally need to be replaced over time. Things like appliances and HVAC systems are generally covered under home warranties.

Too Long, Didn’t Read?

Home insurance coverage is one of the best things you can purchase to protect your investments. Even if you’re not the owner of a single-family dwelling, a good homeowners insurance policy can protect you and your possessions from theft, natural disaster, or other types of catastrophe. Getting good coverage is affordable, and there are many options for every situation.

You can make sure that you’re getting the most out of your policy by understanding it. Discounts are always available, but it’s up to you to decide which coverage works best for your home. No matter which type of homeowners insurance you choose, you’ll rest a little easier knowing that you’re covered.