The Average Cost of Homeowners Insurance

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This article has been reviewed and deemed factual by our content auditor with 8 years of banking experience.

Article Approved By Banking Expert

This article has been reviewed and deemed factual by our content auditor with 8 years of banking experience.

For many people all around the world, homeownership is one of the most significant of all life achievements. Finding that perfect place to call your own, and possibly to raise a family, brings us great joy, and we’re willing to make tremendous sacrifices to get to that point.

However, for as exciting as owning a home can be, there is quite a bit more responsibility involved. For example, updates, repairs, and maintenance will all be on your dime, and when something goes wrong, such as a leaky pipe, a fire, or a pest infestation, there’s no landlord or property manager you can call to come and fix it

Some of this stuff is impossible to protect against. Mother Nature will have her way when she chooses. However, you can protect yourself by purchasing a quality, comprehensive insurance policy.

Because of this, choosing the right homeowner’s insurance is almost as important as choosing the home itself. In fact, most banks and other lenders require you to have insurance before they will even give you a loan.

To help you choose the right policy for you, we’re going to break down how much you should be paying. Then, when you begin shopping around for the right plan, you will be able to know if you are getting the best possible deal.

Homeowners Insurance at a Glance

Before diving into how the cost of homeowner’s insurance is determined, here are some of the highlights:

As you can see, despite the average rate being just a bit more than $1,200, what you pay can vary considerably based on a whole host of factors.

A Typical Homeowners Insurance Policy in the United States

Below we will go into all the details of what goes into your insurance policy, but first, here’s a snapshot of what a typical policy, which costs on average $1,200/year, looks like:

Of course, there are many different variations of this, but this type of policy is the most common. Now, let’s look a little closer at the many different ways you can customize coverage and price.

What is Homeowners Insurance?

On the surface, we all know what homeowner’s insurance is: it’s protection against damage to your home. However, it’s better to think of homeowner’s insurance as a package of different types of coverage that are all related to your home. Generally, homeowner’s insurance covers the following things:

  • The dwelling – This refers to any damage that is inflicted upon the structure of your home. It does not include normal wear and tear – you can’t file a claim for a broken faucet or scratched walls – and you typically need to buy flood and earthquake coverage separately.
  • Other structures – If you have a garage, a shed, or any other building on your property, your homeowner’s insurance should cover these structures, but coverage is typically limited to 10 percent of the value of your home.
  • Personal property – In addition to your home and other structures on the property, your homeowner’s insurance also covers the things you own. So, if there is a fire, a storm, or a burglary, you may be able to get money to replace your belongings. However, to do this, you will need to first create a detailed inventory of the stuff in your home and submit it to your insurance company. They won’t pay for things you can’t prove you own. Furthermore, depending on your policy, there may be limits on how much you can claim for certain expensive items. Overall coverage is typically capped at 50 percent of the value of your home.
  • Loss of use – In the event something happens and you can’t use your home, you can get coverage for things such as rental expenses, hotels, and, depending on your policy, restaurant expenses. If you rent your property, you can claim this money if an emergency means your tenants must move out and you lose money. Coverage limits are usually around 20 percent of total home value.
  • Liability – Should something happen to someone else while they are on your property due to negligence and they decide to sue you, then your homeowner’s insurance should cover any settlements and legal expenses you incur.
  • Medical Payments to Others: Should the person who got hurt not take you to court, then your insurance can be used to help pay for their medical bills. However, it’s important to remember that liability insurance does not cover the homeowner or any of the registered household members.

Factors That Determine the Cost of Homeowners Insurance

There are many different things that insurance companies account for when offering you a rate. Many of them are outside your control, but some of them depend on your choices. All policies will include some type of coverage for the things mentioned above, but the exact level of coverage will depend on several factors, such as:

Below you’ll find a summary of each one of these factors so that you can better understand how your premium was determined.

Type of Coverage: Actual/Cash Value Replacement

One important distinction between policies that will affect the price of your insurance is whether or not you choose actual or cash value replacement.

For actual cash value policies, you will be reimbursed for your home and belongings based on what they were worth at the moment they were damaged or destroyed. This means depreciation will be taken into account. So, it’s possible that you will receive little or no money for some of the items in your home, especially if they are old and have no value in today’s market.

Actual value refers to the amount you paid, meaning you will get back the original value of each of your belongings. Naturally, these policies are more expensive.

You can also opt for extended value coverage, which will reimburse you for up to 20-30 percent more than the value of your home and your belongings. Naturally, this is the most expensive type of coverage.

Type of Policy

One of the most significant factors in determining the cost of your insurance is the type of policy you have. As you might expect, there are several different options, and each one offers you different coverage at different price points. Here is a breakdown of the different options:

HO1 – Basic Homeowner Policy

This is the most basic policy you can get. It covers you from damage caused by:

  • Fire/lighting
  • Windstorms
  • Hail
  • Vandalism/malicious mischief/riots
  • Vehicles
  • Aircraft
  • Explosions
  • Smoke (from a fire)
  • Volcanic eruptions

With HO1 coverage, you will not be covered for floods or earthquakes, and most insurance companies will cap liability coverage at $100,000.

If something happens and your home needs to be replaced, then it will be rebuilt using materials of the same or similar quality.

One variation of HO1 coverage is HOA coverage. It is essentially the same except it provides cash value replacement instead of actual, making it a slightly cheaper option.

This type of insurance policy is denoted as a named perils policy, which means it only covers you for the perils listed. If something happens to your home that is not on your policy, then you will not be covered.

HO2 – Broad Form Insurance

Also, a named perils policy, HO2 insurance covers you for the same things as an HO1 policy plus:

  • Falling objects
  • Weight of ice, snow, and sleet
  • Accidental discharge of water/steam
  • Tearing apart, cracking, burning, or bulging of materials
  • Freezing
  • Power surges

Because it provides more coverage, an HO2 policy will obviously be more expensive than HO1/HOA insurance. With most companies, you will have a choice between an actual or cash value replacement policy, which will affect the price.

HO3 – Special Form Insurance

This type of insurance differs from the previous policies we’ve discussed in that it is a mix between an open perils and a named perils policy. Essentially, you are covered for everything that can happen to your home except for a few specific things which will be listed in your policy. These exceptions typically include:

  • Earth movement
  • Law
  • Water damage
  • Power failure
  • Neglect
  • War
  • Nuclear Hazard
  • Intentional loss
  • Government action
  • Collapse
  • Theft to a dwelling under construction
  • Theft or vandalism after the property has been vacant for more than 60 days
  • Mold, Fungus, or Wet Rot
  • Wear and tear/deterioration
  • Mechanical breakdown
  • Smog, rust, and corrosion
  • Smoke from agricultural smudging and industrial operations
  • Discharge, dispersal, and seepage of pollutants
  • Settling, shrinking, bulging, or expanding
  • Birds, vermin, rodents, insects
  • Animals owned by the insured, i.e. pets

However, it should be noted that in an HO3 policy, your belongings are not covered from the same things. Instead, they are covered on a named perils basis, meaning they will only be protected from damage caused by the following:

  • Fire/lighting
  • Windstorms
  • Hail
  • Vandalism/malicious mischief/riots
  • Vehicles
  • Aircraft
  • Explosions
  • Smoke (from a fire)
  • Volcanic eruptions
  • Falling objects
  • Weight of ice, snow, and sleet
  • Accidental discharge of water/steam
  • Tearing apart, cracking, burning, or bulging of materials
  • Freezing
  • Power surges

Due to its broad and extensive coverage, HO3 insurance is the most common type of homeowner’s insurance. Premiums will be slightly higher than HO1, HO2, HOA, and HO8 policies, but they will also be lower than H05 insurance, providing a nice balance between affordability and efficacy.

HO4 – Renters Insurance

While technically considered homeowner’s insurance, HO4 insurance is designed for people who rent. It provides coverage against stolen or damaged personal property, and it also provides some liability and Medical Payments to Others coverage. It is typically a named perils policy which covers damage resulting from the same perils as listed above in the personal property part of an H03 policy.

HO5 – Home Insurance Policy

HO5 insurance is an open perils policy that covers both your home and your belongings in the same way. The exceptions are the same as an HO3 policy, but they apply to both structures and personal property. Because of this, HO5 is typically considered to provide the most coverage to homeowners.

HO6 – Condominium Insurance

An HO6 policy is nearly identical to H05, but it applies to condominiums instead of houses. This differentiation comes into play when calculating coverage largely because a condo owner is not responsible for nor owns the land upon which their property sits. As a result, coverage is usually lower.

HO8 – Home Insurance Policy

This type of policy is very similar to HO1 and HOA insurance in that it is a named perils policy that provides either cash value or replacement coverage for both your property and your belongings. However, one major difference is that HO8 policies cover you against fewer things.

Because of this, HO8 policies are typically reserved for older homes that would otherwise be difficult to insure. Replacement payouts are generally tied to market value. This type of policy covers you from:

  • Fire or Lightning
  • Windstorm or Hail
  • Explosion
  • Riot or Civil Commotion
  • Aircraft
  • Vehicles(unless caused by the insured)
  • Smoke
  • Vandalism or Malicious Mischief
  • Theft (limit of liability on HO8 is usually $1,000)
  • Volcanic Eruption

Location

Next to the type of policy you choose, this is perhaps the biggest factor in determining the cost of your insurance policy. For example, if you live in areas with lots of crime, expect to pay more. However, even more important is weather and other natural phenomena.

For example, if you live in areas that are prone to earthquakes, tornadoes, hurricanes, floods, etc., then you will pay more. In fact, no insurance policies cover you from damage caused by hurricanes and floods, so if you live in an area where this is a problem, then you will need to purchase extra coverage, which will drive up the total cost of your premiums.

Currently, the average cost of flood insurance in the United States is $1,000 per year, but this number applies to the entire country. In areas where there is a higher risk of flood, then you can expect to pay more, and vice versa. Earthquake insurance can really break the bank.  Premiums range from $800-$5,000 with a deductible that is equivalent to 15 percent of the home’s value.

To give you an idea of just how much location affects the price of your insurance, take a look at the average rates in states with the most expensive premiums:

  • Florida: $3,575/year – 191% higher than the national average
  • Louisiana: $2,979/year – 143% higher than the national average
  • Oklahoma: $2,651/year – 116% higher than the national average
  • Alabama: $2,314/year – 88% higher than the national average
  • Mississippi: $2,290/year – 86 % higher than the national average.

Florida is in the news every year for hurricanes, as is Louisiana, Alabama, and Mississippi, and Oklahoma is the heart of tornado country. The next few on the list are Arkansas, Texas, Kansas, Missouri, and Nebraska, all of which are at high risk of tornadoes.

On the other side of things, the states with the lowest average rates are:

  • Oregon: $643/year – 48% below the national average
  • Utah: $642/year – 48% below the national average
  • Idaho: $622/year – 49% below the national average
  • Vermont: $589 – 52 percent below the national average
  • Hawaii: $337/year – 73 percent below the national average

All five of these states are known for moderate weather and few natural disasters. The five states that precede them are:  Washington, New Hampshire, Nevada, and New Jersey. So, clearly, the state in which you live will have a massive impact on how much your homeowners insurance policy costs.

Home Value

Another factor that will determine the cost of your insurance is the value of your home. As you might expect, more expensive homes are going to be more expensive to insure, largely because the replacement value is going to be higher. Furthermore, more valuable homes are more vulnerable to theft and burglary, meaning the insurance company will need to assume more risk to insure your personal belongings.

Age of the Home

In addition to the value of your home, its age will also determine the cost of your insurance. Older homes tend to require higher premiums, largely because they are more susceptible to damage and because they are more vulnerable to theft. Newer homes are often more equipped with anti-theft mechanisms, and they are going to be more sturdy in the face of extreme weather, meaning there is less of a chance of needing to file a claim.

Deductible

While you don’t have much influence over how location affects the cost of your homeowners insurance, one thing you can control is the size of your deductible. For those who don’t know, the deductible is the amount you will need to pay before your insurance takes effect. So, for example, if you have a $1,000 deductible, you will be responsible for the first $1,000 of damage to your home, and then insurance will cover the rest.

Right now, in the United States, the most common deductibles are $500 and $1,000, but you can go all the way up to $100,000 if you’re willing to take the risk. Be aware, though, that deductibles can be different for different parts of your policy. For example, you may have a separate deductible for hurricane or tornado damage.

Claim and Credit History

Other things that can affect the price of your homeowners insurance are your claim and credit history. If you have owned a home before, new insurers may look to see how often you have put in a claim, and they will likely charge you a higher premium if they see you are a high-risk client. For those who have never owned a home before, insurance companies may want to do a credit check to gauge the overall risk level.

Ways to Save on Your Homeowners Insurance

The cost of your homeowners insurance is determined by many things, some of which are completely out of your control. However, there are ways to save some money. The most obvious is to choose less coverage, but this is risky. Instead, you should pick coverage based on what you need, and then try to find discounts wherever you can.

However, insurance companies aren’t always itching to save you money, so you may need to speak up and ask about the discounts available to you. Contact customer service, or reach out to whoever manages your policy and find out how you can save.

Another option is to work with an insurance agent. They will do the legwork in comparing different companies, and they will often ask you more specific questions about your home that are designed to find potential discounts. Once they have this information, they will seek out policies that offer them. You pay a small service fee to the agent, but the resulting savings can be well worth it.

Here are some of the more common things you can do to earn you a discount on your homeowner’s insurance:

Install an Alarm System

Study after study show that burglars tend to ignore homes with a home security system, and insurance companies may reward you for installing one with a lower premium as it means you will be at less risk of theft. This will depend on your specific company, and savings may not be greater than the cost of installing the system. However, it’s worth exploring this as a potential savings opportunity.

Fortify Your Home

If you live in a high-risk area, consider taking some steps to make your home more secure. Installing stronger storm windows or reinforcing certain structures can help minimize damage and reduce your need for insurance, which will allow you to either take less coverage or a higher deductible, both of which will result in savings.

Bundle with Auto Insurance

If you own a home, you probably also own a car. Speak with your insurance agent to see if you can save by bundling both your home and auto.

Stay Loyal and Negotiate

While it’s important to shop around when you’re looking for insurance, once you make a choice, stick with it. Then, after you’ve been with the same company for a while, negotiate with them for a lower rate. If this doesn’t work, threaten to leave for a competitor, and this should make it easier to save.

Make Fewer Claims

While insurance is there in the event you need it, making a claim will cause your premiums to go up, as this indicates to the insurance company that you’re a greater risk. Depending on the state in which you live, this increase could be as much as 32 percent.

So, when something goes wrong at the house, take a look at your financial situation and determine if a claim is really necessary. Doing repairs on your own, or paying out of pocket, might come with significant upfront costs, but the savings as compared to higher premiums might be worth it.

Choose a Higher Deductible.

Because a higher deductible essentially reduces the risk the insurance company must assume, it also lowers the price of your premium. Right now, the typical deductible on an insurance plan in the U.S. is between $500-$1,000, but increasing it to $2,500 can save you as much as 25 percent on your premium, depending on the state in which you live. Of course, if you live in a high-risk area, this savings might not be worth it as you will have to pay more out of pocket when disaster does eventually strike.

Conclusion

At the outset, homeowners insurance seems like a complicated topic. And while it’s true that the actual cost of your policy depends on a wide range of factors, we hope you now understand better what goes into determining that cost, as well as some things you can do to save money. Of course, we all hope you never need insurance, but if you do, at least now you’ll have quality coverage at an affordable price.