Buying a Vacation Home? Then Don't Forget This Crucial Step

Buying a vacation home is a fantasy for many, but let's get real: Such a purchase should not be attempted without the proper safeguards—starting with insurance.

In this latest installment of our Guide to Buying a Vacation Home, we highlight everything you need to know about vacation home insurance.

For starters, lenders require insurance on all homes that have a mortgage, and a vacation home is no exception. But the type of policy and amount of coverage you need depend on how your place will be used.

Vacation homes need separate homeowners policies

When your vacation home is solely for personal use, a standard homeowners insurance policy will suffice. If you already have homeowners insurance on a primary residence, you’ll need a separate policy for your vacation home, says Ben Mellino, senior assistant vice president of sales and client services at Amica Mutual Insurance Co.

The policy for a vacation home would be “specific to the different coverage needs” of the home, he says.

Homeowners insurance covers damage or loss of a home and its contents, as well as liability if there’s an accident on the property. Policies average about $1,200 annually, according to the National Association of Insurance Commissioners.

The good news: Many insurance companies let homeowners bundle policies and offer a “multipolicy discount, but each property will be covered under a different insurance policy contract,” says Lynne McChristian, media spokesperson and nonresident scholar at the Insurance Information Institute.

To determine coverage and rate, insurers take into account the home’s location and its risk factors (e.g., a beach home in a hurricane zone or cabin in the woods at risk for wildfires). Insurers also consider the type and age of the home, and amenities (e.g., a pool) that could increase any risks for owners.

Renting out your vacation home? You need a different policy

If owners decide to rent out the vacation home for short-term stays (e.g., Airbnb), it increases liability for owners, Mellino explains.

This is outside the scope of a standard homeowners policy, which is designed for owner-occupied properties, and the exact type of policy that’s needed for a short-term rental gets complicated because of the increased risk involved.

Several scenarios could apply:

• Some insurance companies allow a homeowners policy to extend to a short-term rental on certain one-off cases if the company is notified.
• Some insurance companies require a rider, or additional benefit, to the existing policy to cover a short-term rental.
• Some consider a short-term rental a business, which would not be covered by a standard homeowners policy and would require a commercial policy.

Vacation home owners need to disclose to their insurance company how often they plan to rent out the home and whether they will be at the home while it's being rented out. Insurance companies may require a commercial policy, similar to what a bed-and-breakfast would have, for homes rented out for several short-term stays in a month.

Commercial policies are pricey, with annual premiums costing as much as $5,000 per year. They cover damage to the property, liability, and workers compensation.

Some companies offer on-demand coverage expressly for short-term rental properties and home shares, like a vacation home rented on Airbnb. For example, one such company, Slice, offers policies that include $2 million in commercial liability, full replacement cost of the home and its contents, and additional coverage for vandalism and other instances, for around $7 per night and up.

Vacation booking sites offer some insurance coverage

Certain short-term rental platforms offer some insurance coverage.

Airbnb, for example, provides listings with liability insurance of up to $1 million to “protect homeowners against third-party claims for personal injury or property damage,” according to the company’s site.

The policies are limited to certain kinds of liability, however, and don’t cover damage or injury caused by pollution, mold, an intentional act, or loss of earnings.

Another caveat: Policies apply only during a guest’s stay. So, homeowners should view it as an additional layer of coverage and purchase a primary policy to ensure that the home is protected all the time, Mellino says.

Renting it out for the long term? Get a landlord policy

Sometimes, vacation home owners decide to turn their property into a long-term rental.

Landlord policies are typically designed for such rentals, McChristian says. These policies protect the home’s structure and cover the owner in case someone gets injured on the property. Some also cover damage caused by tenants, rent default, and loss of income.

Landlord insurance can be up to 30% higher than standard homeowners insurance.

Different insurance companies offer different kinds of coverage, so McChristian urges homeowners to shop around to get the best price and the most complete coverage.

Adding an umbrella policy is a smart move

No matter how you plan to use your vacation home—as a personal getaway or rental to make money—Mellino and McChristian urge homeowners to consider adding umbrella policies for additional protection.

An umbrella policy offers extra liability coverage, and could be a worthwhile investment to protect homeowners from the additional risk that a vacation home brings (e.g., a home with a pool, or a home located in a flood-prone area).

“The additional exposure may mean a higher likelihood for a loss, so the more protection you have, the more peace of mind you'll have in the event of a loss,” Mellino says.

An umbrella policy adding $1 million liability protection beyond the primary policy on the home averages $200 to $300 per year.

Other weather-related policies that you may need for your vacation home include the following:

• Flood insurance, which averages about $700 annually, according to FEMA.
• Earthquake coverage, which can cost $100 to $800, depending on location, according to USAA.
• Windstorm or hurricane insurance averages about $400 per year.

“Insurance is about protecting your finances, and you’ll want to give yourself the peace of mind that comes from knowing your vacation home can be enjoyed for years to come,” McChristian says.