When you buy a new home, it is an excitement that is second to none. Regardless of whether it is a brand new build or a "new to you" home, it is thrilling to have a new home that is all yours to enjoy. However, it is far from the cheapest time in one’s life. 

With the average home insurance costs at $2,285 per year, it can be one expense that homeowners wonder is really necessary. The answer, in short, is yes, it is. While it may be tempting to skip out on the extra expense of home insurance, there are few mistakes bigger if disaster strikes.

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But while homeowners insurance is necessary for financial well-being, is it required?

Key Takeaways:

  • Homeowners insurance is not required by law.
  • If you have a mortgage, your lender likely requires that you maintain a certain amount of homeowners insurance.
  • Regardless of requirements, home insurance can protect from financial devastation should an accident or loss occur.
  • To help you find the right insurance, talk to an insurance agent about what coverage is right for you.

Do you have to have homeowners insurance?

is homeowners insurance required

Unlike car insurance, which is required by state law, home insurance is not a state requirement. However, to satisfy the terms of your loan, your mortgage lender will require you to carry a certain amount of home insurance. This is often based on the value of your home and ensures that you will receive financial assistance should you experience a loss.

If you do not have a mortgage, you may not be required to carry homeowners insurance, but it is an enormous risk to go without coverage. You can risk financial devastation when you do not have adequate coverage to protect your home and all of your belongings, even risking homelessness.

When is homeowners insurance required?

when is home insurance required

When you finance your home, your lender will not complete your financial transaction without proof of homeowners insurance. That is why you should get started early.

After you sign the contract for your new home, begin the search for the best home insurance company for your needs. It is always wise to shop around and compare multiple quotes before your lender expects to see a purchased policy.

Typically, you have about a month or more to finalize the process, but the timeline may vary. Your lender will generally want to see proof of insurance with all premiums paid for your first year, so the escrow or title company will request proof of insurance from your insurance company prior to closing.

How much homeowners insurance do I need?

Home insurance typically covers several types of protection for your home:

  • Exterior of your property and other dwellings on the property
  • Interior of your home and other dwellings on the property
  • Loss or theft of personal property
  • Personal liability coverage
  • Medical costs and legal damages for guest injuries 

 Your insurance policy can cover any destruction and damage to your home from a number of different losses. It can also protect against greater losses that can occur from everyday threats like theft and vandalism.

There are many unplanned emergencies that can happen in life, including acts of nature that can cause extreme damages to your home. Common causes of loss can include:

  • Fire: Fires can start without warning and destroy your entire home, especially as wildfires become more prevalent in the West. Of course, a house fire can also occur from an accident or even just one errant strike of lightning, so it is always a good idea to use home insurance to protect yourself in case.
  • Flood: Your lender may require you to carry additional flood insurance if you live in a flood zone. You can check your address using FEMA’s search tool to see if this is a necessary protection for your home.
  • Tornados: If you live in Tornado Alley, it is all too possible for a tornado to tear into your home, causing lasting devastation. Tornado insurance can be a good idea for homeowners who live in Central states and other areas commonly affected by tornados.

To be sure that you purchase the right amount of coverage, you can ask your insurance agent about what type of home insurance coverage is right for you.

Read more about: How much homeowners insurance do I need

Dwelling coverage

The amount of home insurance that you need depends on several factors, but most policies offer three types of dwelling coverage:

  • Actual cash value
  • Replacement cost
  • Extended replacement cost/value

Experts recommend dwelling coverage that is 100% of your replacement cost.

Liability coverage

Even though most standard home insurance includes $100,000 in liability coverage, it's wise to increase that up to at least $300,000 if possible.

While it is cheaper to purchase minimum coverage, it is important to consider what kind of expenses you would face if you experience a major loss. A slightly higher premium each month could make all the difference if the unthinkable happens.

Be sure to ask your insurance agent about what kind of coverage is best for your home based on factors like where you live, the type of home you have and the value of your belongings.

Personal property coverage

Home insurance usually covers between 50% to 70% of your dwelling coverage as personal property coverage but you can also buy additional protection.

Keep an inventory of your personal property. Make a list and take pictures and videos. Look up replacement costs for the items on your list. This will help you determine the amount of personal property coverage you need.

Medical payments to others

Guest medical payments coverage typically has limits between $1,000 and $5,000. This will help cover medical expenses for guests who are injured on your property, regardless of fault. This coverage can help to avoid larger liability claims resulting from lawsuits.

How can I save money on home insurance?

The home buying process can bring a very expensive time in one’s life, and home insurance can feel like just another added expense. However, there are many ways that you can save money for a cheap home insurance policy, including these:

  • Safety discounts: Many companies offer a discount when you have smoke alarms or a security system in your home.
  • Bundle discounts: If you bundle your home and auto insurance with the same provider, you could save extra savings on both.
  • Loyalty discounts: You could earn extra savings when you have a prior insurance policy with the same company or use the same provider as a family member.
  • Increase deductible: One way to lower your monthly premium cost is to increase your deductible, although this means that you will have to pay more out of pocket if you experience a loss.
  • Improve credit score: This is not something you can do immediately but as a long-term plan, focus on improving your credit score to eventually lower your insurance rates.
  • Avoid unnecessary claims: Claims increase insurance premiums, so avoid small claims that could be handled independently.
  • Decrease coverage limits: Speak with your insurance agent to ensure you are adequately covered if needed, but consider reducing coverage limits if you have more insurance than is actually needed.

Before you buy your policy, don't forget to ask your insurance provider what home insurance discounts may apply to your policy.

Frequently asked questions

Do I need homeowners insurance if my home is paid off?

When your home is paid off, you will not have a lender requiring that you maintain specific coverage, but it is still always a good idea to carry adequate coverage, so you are protected in the event of an emergency.

When does the lender require you to purchase a homeowners insurance policy?

Your lender will likely require you to show proof of insurance by closing on your home. Be sure to start the process early, so you have time to fully shop your options.

Is homeowners insurance required by law?

Homeowners insurance is not required by law, but many lenders do require you to carry a minimum amount of coverage in order to satisfy the requirements of your home loan.

What do I need to bring to closing to satisfy the homeowners insurance requirement?

Usually, the title company will ask your home insurance company for proof of insurance to be faxed or emailed prior to closing. However, you should confirm in advance, so you have time to make the necessary arrangements prior to closing.

What will happen if I don't have homeowners insurance?

If you have a mortgage, the lender will require you have homeowners insurance. In fact, they'll be listed on the insurance policy along with you. If you do not renew your home insurance policy, your lender will find out. If you do not remedy the issue quickly, they may implement forced place insurance which will cost you much more than a standard homeowners policy you get on your own.