Do You Have to Have Homeowners Insurance?

There are many mysteries surrounding homeownership. And to make matters more complicated, there’s no homeownership 101 course in college — instead, those looking to get educated on the subject are left to do their own independent research. In this article, we’ll demystify every aspect of homeownership, answering common questions aspiring homeowners have. Today: Do you have to have homeowners insurance?

Like many aspects of homeownership, there’s a short answer and a long answer to this question. The short answer is that no states currently require homeowners insurance, but your personal situation will determine whether you have to have homeowners insurance or not. So, do you need homeowners insurance? Read on to find out. 

What is Homeowners Insurance?

A home is a sizable investment, and homeowners insurance makes sure this investment is protected. Specifically, homeowners insurance guarantees that the investment a mortgage lender makes in helping you purchase your home is protected in the event of a damaging incident like a fire.¹

There are several different types of homeowners insurance, some primarily covering the home’s structure and others covering the things that make the home, home (like personal belongings). Here are the primary forms of homeowners insurance at a glance: 

• HO-1: The most basic form of homeowners insurance, covering only the home’s “four walls” in addition to appliances and features, like flooring. Basic coverage may vary based on your homeowners policy, but is generally provided in the case of damage from fire, hail and wind, aircraft damage, vandalism, theft, and explosions. 

• HO-2: This homeowners insurance policy expands on the coverage offered in HO-1, adding protection for personal belongings and covering different types of damage, including electrical, water, and freeze damage. 

• HO-3: Considered to be “standard coverage,” this home insurance policy covers damage to the home and personal property, in addition to living expenses resulting from temporary relocation should damages render the residence uninhabitable. 

• HO-5: An HO-5 policy offers the most extensive personal property coverage, including all the above protections as well as coverage for medical expenses. It’s also one of the most costly homeowners insurance policies, but it may be worth it for the added peace of mind it provides.²

Is Homeowners Insurance Required by Law?

There’s no state or federal law requiring homeowners to have a homeowners insurance policy, but that doesn’t necessarily mean you can go without it. If you own your home outright, you’re in the clear—there’s no requirement that you have homeowners insurance. But if you still currently owe on your mortgage, your mortgage lender will require that your property is insured. 

Of course, there are certain caveats to consider. And even if you no longer have a mortgage, you may not be completely off the hook. For example, if you’re accessing a home equity loan or home equity line of credit using your paid-off home, you may need to have homeowners insurance to secure the property, seeing as you’re still borrowing from a lender. The same can be said if you choose to use your home as collateral for an investment or to purchase additional properties. 

Benefits of Having Homeowners Insurance

While homeowners insurance isn’t required by law, you may still find yourself in need of homeowners insurance. And even if you don’t have to have homeowners insurance, the benefits this personal property coverage provides may be reason enough to make the investment. 

Protection Against Property Damage

The biggest advantage of having homeowners insurance is knowing that during storms, natural disasters, fires, and other emergencies, your home is protected. For all of homeownership’s perks, it can bring with it a high degree of uncertainty, especially for first-time homeowners. Insurance removes some of this uncertainty, assuring homeowners that any covered damage that befalls their property will not become their personal liability or responsibility — nor will it harm their investment. Homeowners insurance can’t stop a tree from falling on your roof during a storm, but it can give you the support you need to fix it. 

Liability Coverage 

Homeowners insurance doesn’t just protect against damage to your property or personal belongings. It can also help protect you in the event that someone is injured on your property, or if you damage someone else’s property. Say, for example, someone slips and falls in your foyer. The liability coverage that comes with many homeowners insurance policies can help you save thousands of dollars in legal and medical expenses. And if you’re trimming a tree in your yard and a falling limb damages your neighbor’s home, this liability protection will come in handy just the same. 

There are infinite ways liability coverage can protect you from headaches and hefty expenses, making it one of the biggest benefits of having homeowners insurance. 

Temporary Housing and Relocation Support

As we mentioned above, homeowners insurance can’t prevent damage to your home, but it can help you pick up the pieces. In few ways is this more evident than in the temporary housing and relocation support many homeowners insurance policies provide. In the event that your home is damaged by a storm to the point of being uninhabitable, homeowners insurance makes sure you have a safe place to go while the damage is being repaired, while you’re waiting to sell your home, or while your new property is being built. This coverage can prevent you from spending thousands of dollars on hotels and other short-term housing costs. 

Downsides of Homeowners Insurance

Despite the many advantages of having homeowners insurance coverage, there are a few reasons why some homeowners choose to go without it. 

Cost of Premiums

Homeowners insurance is there in case of emergencies, but many homeowners will never use it. In 2022, only 5.5 percent of insured homeowners filed even a single claim.³ Compare this to the high price of homeowners insurance in many parts of the country, and you can begin to see why some homeowners question the value of this coverage. 

On a $350,000 home, the average annual cost of homeowners insurance is $1,678, or around $140 per month. In Oklahoma and Nebraska, however, this number can reach $4,000 per year ($333 per month.)⁴ It’s worth noting that the primary reason for this substantial price increase is the weather conditions in these states, meaning the likelihood of filing a claim — and putting this costly homeowners insurance to work — also increases in Oklahoma and Nebraska. 

Coverage Limitations

We discussed the various types of policies offered to homeowners and the increasing level of coverage that comes with an increased price. But even some of the highest-tier plans have glaring gaps in coverage. Perhaps the most notable of these limitations is the lack of coverage for earthquakes and floods. In earthquake-prone states like California, earthquake insurance is a necessity — and will likely be required by mortgage lenders. The same can be said for flood insurance in coastal areas like Louisiana and Florida. 

These gaps in coverage can be costly, with flood and earthquake insurance each costing up to several thousand dollars a year, in addition to standard homeowners insurance.⁵ If you live in flood- or earthquake-prone areas, you’ll want to shop around to find the best homeowner's insurance coverage at the best rate. 

How a Sell and Stay Transaction Can Help Manage Homeownership Costs

You may not need homeowners insurance, but there are clear benefits to having this coverage. Given the high premiums and gaps in coverage, even at the highest level, however, it makes sense that some homeowners choose to go without it. Fortunately, there’s a way for people to enjoy the benefits of homeowners insurance coverage without the hefty costs. 

Truehold’s sell and stay transaction allows you to sell your home and access your home equity, then continue living in the home as a renter. We cover essential repairs, property taxes, and property insurance.

Want to learn more about Truehold’s sell and stay transaction? Connect with one of our representatives today. 

So, Is Homeowners Insurance Worth it? 

Weighing the pros and cons of owning a home and availing homeowners insurance along with it will take some time, and your individual situation will determine whether homeowners insurance is right for you, or whether you have a choice to forgo insurance. But given the coverage provided by homeowners insurance and the peace of mind that comes from a property insurance policy, you may find that this parachute is worth the $100–$300/month price tag. 

Homeowners insurance is just one piece of the puzzle. For more of our series on homeownership, visit the Truehold library. Then connect with us to see how Truehold’s sell and stay transaction can fit into your homeownership journey. 

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Sources: 

1. Consumer Financial Protection Bureau. What is homeowner’s insurance? Why is homeowner’s insurance required? https://www.consumerfinance.gov/ask-cfpb/what-is-homeowners-insurance-why-is-homeowners-insurance-required-en-162/ 

2. Bankrate. Types of homeowners insurance. https://www.bankrate.com/insurance/homeowners-insurance/types-of-homeowners-insurance/ 

3. Insurance Information Institute. Facts + Statistics: Homeowners and renters insurance.  https://www.iii.org/fact-statistic/facts-statistics-homeowners-and-renters-insurance 

4. Forbes. The Average Homeowners Insurance Cost for August 2024. https://www.forbes.com/advisor/homeowners-insurance/average-cost-homeowners-insurance/ 

5. Allstate. Earthquake insurance: Protecting your home and assets. https://www.allstate.com/resources/home-insurance/earthquake-insurance