Is Homeowners Insurance Required?

No federal, state, or local laws require you to carry homeowners insurance for your house. But if you have a mortgage, your lender will most likely require you to purchase a policy.

Even if you own your home outright, buying home insurance is still a good idea because it can help protect your finances. For example, if a covered loss like a fire or windstorm damages or destroys your home, your insurance policy will help pay for repairs.

Here’s why lenders require home insurance, what it covers and doesn’t cover, and some optional coverages to consider.

Why do mortgage lenders require homeowners insurance?

Lenders require you to purchase home insurance to protect their investment in your property. If your home is destroyed or damaged, homeowners insurance helps protect the lender’s finances, as well as yours.

You’ll be required to show proof of home insurance before closing on a new home. And if your policy lapses or is canceled while you still have a mortgage, you’ll be required to purchase a new one. If you can’t find a policy on your own, your lender will purchase a new one on your behalf, which is often more expensive and more limited in coverage.^[1] And if you don’t pay your premiums for the lender-placed insurance, the lender could foreclose on your home.

See Also: Can’t Get Homeowners Insurance? Here’s What to Do

What does home insurance cover?

Home insurance coverage varies depending on your insurer and the type of insurance you buy. A standard home insurance policy generally protects your home against these 16 perils — events that cause damage to your home or property:^[2]

• Explosions

• Windstorms or hail

• Fire and lightning

• Riots or civil disturbances

• Damage caused by aircraft

• Damage caused by vehicles

• Smoke

• Vandalism or malicious mischief

• Volcanoes

• Theft

• Weight of ice, sleet, or snow

• Accidental discharge of water or steam from a household appliance or system, like your air conditioner or plumbing

• Sudden and accidental tearing apart, cracking, burning, and bulging of various systems, like your water heater or air conditioner

• Freezing of household appliances and systems, like your air conditioner or sprinkler

• Falling objects, such as a tree falling on your roof

• Sudden and accidental damage caused by an artificially generated electrical current

Read More: Named Perils Home Insurance Policies: The 16 Named Perils and Choosing the Perfect Policy

What isn’t covered by homeowners insurance?

Standard home insurance policies cover several perils, but they don’t cover everything. Here are some things homeowners insurance often excludes:^[3]

• Floods

• Earthquakes and other natural earth movements, such as landslides or sinkholes

• Normal wear and tear

• Damage from lack of maintenance

• Sewer backup

• Acts of war

• Intentional damage caused by you or someone on your policy

• Nuclear accidents

• Mold damage not caused by a covered peril

• Termite damage

In many cases, you can purchase optional coverages to increase your home’s protection and help you pay for damages from things like floods, wildfire, or earthquakes.

How much homeowners insurance do lenders require?

Homeowners insurance requirements vary by lender, but you’ll most likely be required to purchase enough home insurance to cover the value of your mortgage or replace your home if it’s destroyed.

For example, if your home’s replacement value — the amount it costs to rebuild your home with similar building materials at today’s costs — is $300,000, your insurer might require you to purchase $300,000 worth of dwelling coverage.

Learn More: How Much Homeowners Insurance Do You Need?

What type of homeowners insurance can you get?

You can choose from many different types of home insurance policies, ranging from HO-1 to HO-8. HO-3 is the most common type of home insurance policy, and it usually includes these six coverages:

• Dwelling coverage: This coverage protects your home’s physical structure and any attached structures, such as an attached garage or backyard patio.

• Other structures coverage: A standard home insurance policy also protects other structures on your property, such as a detached garage or backyard shed.

• Personal property coverage: Your personal belongings are protected from covered perils — up to your policy limits.

• Additional living expenses coverage: If your home becomes uninhabitable due to covered damages, your insurance company will help you pay for various additional living expenses, such as hotel costs, laundry, parking, and food.

• Personal liability coverage: If you or another person on your policy causes bodily harm to someone or damages their property, this coverage can protect you in the event a lawsuit is filed.

• Medical payments coverage: This coverage helps pay for a guest’s medical expenses if they get hurt on your property, regardless of whether a lawsuit is filed.

How much does homeowners insurance cost?

The average price for an HO-3 home insurance policy is $1,272 per year, or $106 per month, according to the National Association of Insurance Commissioners (NAIC). But the exact price you’ll pay for insurance depends on many factors, including:

• Age of your home

• Size of your home

• Your claims history

• Your credit score

• Your home’s replacement cost value

• ZIP code

• How much coverage you need

• Your deductible

• Building materials of your home

• Your insurance provider

Check Out: Why Is My Homeowners Insurance Cost So High?

Homeowners insurance basics to know

As you’re researching home insurance policies, here are some home insurance basics that can help you choose the right amount of coverage for your unique situation.

Deductible

Your home insurance deductible is the amount of money you pay before your insurer helps pay for a covered claim. For example, say your deductible is $1,000 and a huge tree falls on your roof, causing $10,000 worth of damage. In this circumstance, you’d pay $1,000 out of pocket and receive a payout of $9,000.

Insurers often offer a minimum deductible of $500 to $1,000, according to the Insurance Information Institute.^[4] You can choose a higher deductible amount to save money, but the downside is that you’ll pay more out of pocket if you need to file a claim.

When choosing your deductible, make sure to select an amount that you’d feel comfortable paying in the event your home is damaged or destroyed.

Replacement cost vs. actual cash value

Replacement cost and actual cash value are two ways your insurance company reimburses you for a covered claim.

• Replacement cost coverage: If you have this coverage, your insurer will pay to repair or replace your home with similar construction materials and replace your personal items at today’s prices.

• Actual cash value coverage: With this coverage, your insurance company will factor in depreciation when reimbursing you for a covered claim.

For example, imagine you purchased a gaming laptop five years ago for $3,000, but it’s now worth $1,000. If you had replacement cost coverage, you’d receive enough money to buy a laptop of similar quality once you met your deductible.

By comparison, with actual cost value coverage, you’d receive $1,000 after meeting your deductible — the gaming laptop’s current value.

Which coverage option is best for you depends on your preferences and unique financial situation. Actual cash value coverage usually costs less, but the downside is that you’ll pay more out of pocket to replace your belongings. With replacement cost coverage, the cost of your policy will be higher, but you’ll pay less out of pocket after a covered event.

Do you need flood insurance?

Although flooding is one of the most common natural disasters in the U.S., standard home insurance doesn’t protect your home against flood damage. If you live in a high-risk flood area and have a mortgage, your lender will likely require you to purchase a separate flood insurance policy. But if you live in a lower- or medium-risk area, flood insurance is usually optional.

Even if you own your home outright or don’t live in a flood zone, purchasing a flood insurance policy can be beneficial. To protect your home against flooding, you’ll need to purchase a flood insurance policy from a private insurer or the National Flood Insurance Program (NFIP).^[5]

Do you need earthquake coverage?

Standard home insurance doesn’t cover earthquakes, either. Even if you have a mortgage, a lender won’t require you to purchase earthquake coverage. But if you live in a high-risk earthquake area, adding an earthquake endorsement to your current policy or purchasing a separate earthquake policy can be a good idea.

Other optional coverages to consider

If your goal is to maximize your home’s protection, consider adding these coverages:

• Scheduled property coverage: If you own a high-value item — like an expensive engagement ring or a firearm — a standard home insurance policy most likely won’t cover the market value of the item. But you can purchase a scheduled property endorsement to cover the item for its appraised value.

• Water backup coverage: Basic home insurance typically doesn’t cover water damage to your home caused by your sewer pipes backing up. But you can add a water backup endorsement to your existing policy that can help cover water damage caused by a sewer backup in certain circumstances.

• Windstorm coverage: Although windstorm damage is often covered by a standard home insurance policy, insurance companies in some coastal states might require you to purchase a separate policy to cover hurricane and hail damage to your home.

Homeowners insurance FAQs