What Does Homeowners Insurance Cover?

Reader Question: “My mortgage lender said I need to have a homeowners insurance policy in place before I can close on the home. What does this insurance cover and how much does it cost?”

I can’t answer the cost question for you, because there are too many variables at work. The cost will vary based on the value of the home, the location, and the contents within the home. On average, homeowners in the U.S. pay somewhere between $400 and $600 per month. The only way to find out for sure is to get a homeowners insurance quotes from multiple providers. You can get quotes online these day, so it’s an easy process. But before you can do that, you need to determine how much you want to cover with the policy. So let’s address that side of your question…

What does homeowners insurance cover? This is a common question among first-time home buyers. Once again, however, there are many variables at work. You have a lot of choices to make when you choose your insurance policy, so your policy might be different from your next-door neighbor’s policy. Generally speaking, a home insurance policy will cover the cost to replace the home (up to a certain amount) and the contents within the home (personal property).

If you life in a flood-risk area, you will have to purchase an additional policy — or a rider / addition to your primary policy — for flood insurance. Homeowners insurance typically does not cover flood damage, so you’ll have to get that coverage separately. You can learn more about this by visiting the government’s flood insurance site: http://www.floodsmart.gov

When you set up your policy, you should also make sure it covers the contents of the home (i.e., personal property). If you want the best coverage, you should insure your personal property for replacement cost instead of cash value. If you choose the cash value option, the insurance company will factor in depreciation when replacing your belongings. If you choose the replacement cost option (my recommendation), the company will cover the full cost of replacing your property with items of equal value, quality, etc.

So, to sum up, your homeowners insurance policy will cover whatever you set it up to cover. And obviously, the cost will vary based on the amount of coverage and the size of your deductible. If you want to lower the monthly cost of your homeowners insurance without sacrificing coverage, you can increase the amount of your deductible. This will lower your monthly payment while offering the same protection.