There are many hidden costs that come along with owning a home. One that is often overlooked is homeowners insurance.

Many lenders will require a homeowners insurance policy before financing a home, but even if this is optional, experts suggest that this is the smartest way to protect your most valuable assets when the unexpected happens.

How homeowners insurance works

Accidents happen—and a homeowners insurance policy is one way to keep your home safe. Homeowners insurance offers financial coverage when your home is damaged or destroyed.

But this type of insurance does a lot more than cover your home. “Homeowners insurance can help pay for additional living expenses if you’re forced to live elsewhere while your house is being rebuilt. It will also cover most legal fees related to defending lawsuits arising from injuries that occur on your property,” says Brian Greenberg, CEO and founder at Insurist, a life insurance agency based in Arizona.

Homeowners insurance provides the following coverage:

Dwelling: This covers any damage to your home’s physical structure. It won’t cover anything inside your home or on your property.
Loss of use: Coverage for any expenses you incur while your home is uninhabitable because of a covered event.
Medical payments: In case someone gets hurt on your property, your homeowners insurance will kick in to cover their medical bills—up to a certain amount.
Other structures: This covers structures outside of your home that are still on your property like a fence or detached garage.
Personal property: This covers your personal belongings like your clothes, furniture, electronics, and more.
Personal liability: If someone gets hurt on your property, personal liability coverage serves as an added layer of financial protection to cover legal costs.

Signing up for coverage

When you’re shopping around and requesting quotes from insurance companies, you’ll need to provide information to apply for a policy. This includes identifying information about yourself, as well as key information about the home you want to insure. You can typically fill out an application online, in-person at a physical location, or with the help of an agent on the phone who can help you choose a policy that meets your coverage needs and fits into your budget.

Many insurers are flexible with policyholders and leave it up to them to decide how they want to spread out their payments. On average, yearly insurance premiums are about $1,311, according to the most recent data from the Insurance Information Institute (III). That translates to a monthly payment of about $109 per month, although this cost can range widely depending on where you live.

How your premium is determined

When calculating your premium, insurers are trying to determine the risk you pose to them and the likelihood that you’ll file a claim.

Some of the key factors they weigh:

Location: Repair costs can vary widely based on your ZIP code, and insurers like to take a closer look at where you live to determine your level of risk when it comes to crime rates, exposure to natural disasters, and more. However, there are cases when your location might help lower your rate. For example, homes that are closer to a staffed fire station tend to have lower premiums because in the event of a fire, it will likely be put out in a timely manner, minimizing the overall damage and cost to your insurer.
Your home’s characteristics: This includes the type of roof you have, how old your home is, or if you have any other structures on your property like a garage or fence. Insurers also consider your home’s value and square footage. Knowing all of these details will give insurers a better idea of how much it would cost to repair or completely rebuild your home if disaster strikes.
Your deductible: That’s the amount of money you are willing to pay out-of-pocket toward a claim. Typically, the higher your deductible, the lower your premium will be.
Your claims history: Having a history of filing multiple claims could mean paying a higher premium.
Your background: Many different underlying factors can play a role in your rate—some you may not even think about. Your age, marital status, the family heirlooms or antiques you keep in your home, and even your dog’s breed can all affect what your premium will be.

7 ways to lower your premium

Insurance premiums are not set in stone, so there are plenty of ways you can reduce your premium to make your policy more affordable while still getting the coverage you need.

Raise your deductible: The higher your deductible, the lower your premium. But be careful: You shouldn’t choose a deductible higher than you can afford to pay out of pocket for the sake of having a lower monthly payment. You want to be sure that you have the right amount of protection if the worst does happen.
Ask your insurer if you qualify for any discounts: Older policyholders may qualify for senior discounts, and insurance companies may also offer discounts for new homeowners as a way to secure new clients. Before you choose an insurance company, see if they can sweeten the deal for you.
Bundling your insurance policies: Many insurers — like State Farm and Allstate — offer home and auto insurance bundles. It’s an easy way for you to keep track of all of your policies and potentially score a lower rate by getting more than one policy from the same insurer.
Look for ways to boost your credit score: A higher credit score can help you score a lower rate with your home insurance company. Before you renew your policy or apply for a new one, check your credit score and see if you can boost it by making on-time payments, lowering your credit utilization, and avoiding applying for new lines of credit unless it’s absolutely necessary. If you have low scores due to errors or discrepancies in your report, you may want to consider hiring a reputable credit repair company to dispute those errors on your behalf. One of the best ways to improve your credit score is by paying off debt.
Limit how many claims you file: Having too many claims on your record could give insurers the idea that you’re a high-risk customer. “If you can, save claims for dire situations only,” says Angel Conlin, chief insurance officer at KIN Insurance. “See if you can make small repairs yourself or enlist the help of a skilled friend or acquaintance. You can and should rely on your home insurance to help you avoid big financial burdens, not small annoyances.”
Reduce your risk: Investing in security features could help lower your premium by reducing the likelihood that a break-in will happen or minimizing the damage if one does occur. “Consider adding more than one layer of security like an alarm system [and] security cameras so that if an incident does occur, you’ll have evidence on hand that can help get your home back into shape faster,” says Greenberg.
Shop around: Take your time and request quotes from different insurance companies. Requesting estimates from several different companies will help you determine where you can get the best coverage to meet your needs and fit your budget.

The takeaway

Having a homeowners insurance policy could help you avoid a financial pitfall should your home or belongings be damaged or stolen. Still, that doesn’t mean that the cost of your premium should put a significant dent in your budget. Looking for opportunities to limit your risk exposure can help trim your bill.

“One of the best options a homeowner has available to them to save money on their home insurance is to take steps to harden their home against the events that can cause damage,” says Conlin.

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How homeowners insurance works

Signing up for coverage

How your premium is determined

7 ways to lower your premium

The takeaway

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How your homeowner’s insurance premium is determined—plus 7 tips to help you save