Buying your first house is one of the most exciting times of your life. If you’ve managed to snag a house in today’s highly competitive market, congratulations! You’ve made a stable investment you can enjoy for years to come.
However, buying a house comes with a lot of “moving” parts (if you’ll pardon the pun). One of those moving parts is homeowner’s insurance. A house is a big purchase, so you’re probably looking for ways to cut costs.
This can lead you to ask, “Do I need homeowner’s insurance?” Today, we’ll be diving into homeowner’s insurance – what it is, how it works, and whether you can skip the insurance and opt for something else.
What is homeowner’s insurance (and why should I care)?
Before you can decide if you need homeowner’s insurance, you need to know what it is. The short answer is that homeowner’s insurance functions like any other insurance.
The longer answer? A homeowner’s insurance policy protects three things: your home, your stuff, and your guests. All of these things are covered and protected against fire, theft, injury, and some natural disasters (more on that later).
Insurance will pay out the cost to repair or rebuild a house, garage, or shed that was damaged in a fire, for instance. If a guest is injured on your property, your homeowner’s insurance can pay for the cost of their medical care, as well!
Depending on your policy, your homeowner’s insurance might even cover the cost of:
- Repairs from a bad storm – like a tornado or hurricane
- A place to stay while your home is being repaired or rebuilt
- The cost of high-value items like jewelry, even if you lost it while away from home
If you’re fresh off buying a house, you know exactly how expensive it was. Now imagine rebuilding it from scratch, out of pocket! So if you’re asking yourself, “Do I need homeowner’s insurance?” you should also ask, “Am I financially ready to build a house?” If the answer is no, you should look at a homeowner’s insurance policy.
One last note before we move on – more than 60% of homeowners have a mortgage. This means that for the majority of people, you’ll be required to have a policy. The bank, builder, or other institution that holds your mortgage will usually require you to have homeowner’s insurance.
After all, they know that you don’t have the money to build a house outright. The insurance policy helps them protect their investment because they have a guarantee that any damage to the house – large or small – will be taken care of.
Ok, so I know I need homeowner’s insurance… Now what?
Alright, let’s say you’ve determined that you for sure need homeowner’s insurance. Whether that’s because your mortgage requires it or because you want to avoid paying out of pocket, there are a few next steps.
First, it is possible to save money on homeowner’s insurance. Most of the time, people ask “do I need homeowner’s insurance?” because they don’t want to deal with another expense. Totally understandable! Owning a home can get very expensive, very quickly. The more places you can save money, the better!
With homeowner’s policies, you can save money in three ways:
- Picking the right policy
- Picking the right provider
- Taking advantage of discounts
Now that we know it’s possible to save on homeowner’s insurance, let’s look at each of the ways we listed. To start with, you’ll need to decide what kind of policy and how much coverage you want.
How much homeowner’s insurance coverage do I need?
This functions just like your auto insurance or health insurance. The higher your monthly payments, the more coverage you have. And just like auto and health insurance, you need to look at more than just the “premium”, or the amount you pay every month.
When shopping for a homeowner’s insurance policy, check the coverage first and the premiums second. This will require some effort since most policies will list the premium first. Lower premiums might convince you to crack open your wallet faster, but you’ll be in for disappointment later when you learn how little coverage you have.
The amount of coverage you personally need is something you’ll have to figure out for yourself. One good rule of thumb is to think about how much severe weather and crime your hometown experiences. The higher the number of weather events and the higher the crime rate, the more coverage you should have – just in case.
Being informed of your policy coverage before you buy means you’ll know for sure what’s covered if you ever need to file a claim. Knowing ahead of time is better than learning that you aren’t eligible for help right when you need it most!
What kind of homeowner’s insurance policy do I need?
This next piece of info is also better to know before you have to file a claim. There are three kinds of policies, generally speaking. Each one is going to pay out differently and each has its pros and cons.
First, there’s actual cash value. This kind of policy would pay out what your home/property is worth minus depreciation. To put it simply: (what your home was worth when you bought it) – (the amount of time you’ve owned it) = actual cash value.
So, say you bought your home 6 years ago and it burned down. An actual cash value policy would take what your home is worth, and subtract what they estimate 6 years’ worth of wear and tear would cost. This means that a big chunk of those repair or rebuilding costs would still fall on you.
Next, you have replacement cost value policies. This kind of policy will pay out what your home/property is worth now. So if you bought your house 6 years ago, the replacement cost value would cover what a similar house would be worth today – without calculating wear and tear. (This is why replacement cost value policies are more expensive.)
Last, you could look at extended or guaranteed replacement cost policies. These are the most expensive, but they provide you with the most coverage.
Let’s say that your home gets destroyed in a tornado, along with more than a dozen homes in your area. Since so many homes need to be rebuilt, it costs more than usual to hire a builder, and it’s more difficult to buy materials. Before you know it, you’ve hit a ceiling – your insurance won’t cover any more of the cost to rebuild your home, even though you need it.
An extended replacement cost policy would give you a set percentage to add to your policy. So if you had a policy coverage of $500,000 and an extended replacement cost policy, you might get an extra 20% on top of that. Meaning that if you needed it, you could spend $600,000 to rebuild your home.
Meanwhile, a guaranteed replacement cost will help you rebuild your home exactly as it is, no matter how much it costs. Obviously, this is the most expensive policy any company can offer!
The kind of coverage that’s best for you is going to depend on your financial situation. If you have plenty of savings in an emergency fund, an actual cash value policy should be fine. If you’re worried about making up the cost in the event of an emergency, a replacement cost value is going to be best. If you don’t want to ever worry about repairing or rebuilding, extended or guaranteed replacement cost policies are the way to go.
Deciding who you want to work with: your homeowner’s insurance guide
Now, you need to decide who you want to buy insurance through. This homeowner’s insurance guide is going to be pretty brief since we don’t want to overwhelm you with options. The great news is that there’s one way you can save money on homeowner’s insurance right off the bat.
Most likely, you already have auto insurance. You might also have renter’s insurance from your last home. If you like the company you have these policies through, ask about homeowner’s insurance. Most insurance companies will offer a bundling discount for holding multiple policies with them. This means you can take insurance shopping off your plate and save some money. Score!
If you don’t hold insurance with a company that offers bundling discounts, it’s time to shop around. The best way to pick an insurance policy is to check reviews and talk to a real person. Taking these steps can help you determine which company will work best for you since everyone needs and values different things from an insurance company.
Our homeowner’s insurance guide has three options, but there are dozens of companies available online. The important thing here is to look beyond the price, which is why we haven’t listed price ranges here. When it comes to insurance, you need to make sure they have the coverage options you need and they’ll allow you to file a claim without much hassle.
After all, spending days or weeks trying to file an insurance claim is the last thing you need when your home is damaged! If you’re still wondering “do I need homeowner’s insurance?”, give these companies a call. They can walk you through the process of buying and using insurance so you can make the best decision.
Nationwide – the “proven track record, trusted by millions” choice
For the new homeowner who doesn’t want to take any risks, try Nationwide. With nearly 100 years of experience in insurance, Nationwide has forgotten more about insurance than you or I could hope to know.
Best of all, they have tons of discount options, including one just for new homeowners!
Hanover Insurance – the “only pay for what you need” choice
Maybe you want to work with an insurance group that lets you customize your policy. In that case, give Hanover Insurance a call. Their “Our Connections” home insurance lets you set up your policy to cover just what you need.
With a coveted A+ BBB rating and bundling discounts, Hanover is the prime choice for people looking to save some money while keeping their homes safe.
Hippo – the “I hate being on the phone” choice
Honestly, who likes making phone calls? If making dozens of phone calls while your home is in shambles sounds like torture, check out Hippo. Hippo specializes in home insurance, currently insuring more than 200,000 homes in the US.
When you need to file a claim, they make sure you only call once. On that call, they’ll assign you a dedicated “Claims Concierge” who handles your case from start to finish. They’ll walk you through the whole process, and they even have recommended contractors all over the US to take one more thing off your plate.
What if I still don’t want homeowner’s insurance?
Let’s say you don’t have a mortgage, or your mortgage doesn’t require homeowner’s insurance. You might ask yourself, “Do I need homeowner’s insurance?” and decide the answer is, “No”. The good news is that you can do that if you want to. There’s no legal requirement for homeowner’s insurance.
The bad news? In the event of an accident or natural disaster, you’ll be on your own. This means that you’ll have to pay for all the rebuilding or repair, as well as finding a place to stay. While you could save that much, it would take quite a while, but that’s not the most important reason to get homeowner’s insurance.
The number one reason you shouldn’t self-insure? Sometimes bad things come in threes… or more than threes. If you have a run of bad luck, chances are you’ll use all your savings and then some. Insurance can protect you from draining your savings and going into debt.
Protect your home, your stuff, and yourself
Homeownership can bring lots of new challenges with it. When it comes to caring for your home, some things are safe to DIY, while others are DON’T-IY. Insurance is one of those things. You could self-insure, but do you really want to risk something going wrong before you have the full repair cost saved up?
The best way to protect your home, your stuff, your guests, and yourself is an insurance policy with a company you trust. The best way to save money? Subscribing to our newsletter. We’ll bring fresh new advice on what you need and what you can skip every week. Insurance can protect your home, so let us protect your wallet.