For many, buying a home is one of the biggest purchases they’ll ever make. So, it makes sense to want to protect it from the “what ifs.” That’s where homeowners insurance comes in. Homeowners insurance helps cover your home, belongings, and finances if something unexpected happens, such as a fire or storm damage.
While it’s not required by law, most mortgage lenders require it, and many financial experts consider it an important part of protecting your investment. Let’s explore how it works, what it covers, and how to choose the right policy for your needs.
How homeowners insurance works
Homeowners insurance is essentially a contract between you, the homeowner, and your insurance company. As the policyholder, you make a recurring payment, known as a premium, and in return, the insurer helps cover costs if your home or belongings are damaged by a covered event.
To keep your policy active, you’ll pay a monthly or annual premium. If something unexpected happens, like a fire, storm damage, or theft, you can file a claim with your insurance provider.
Before your coverage kicks in, you’ll usually need to pay a deductible, which is the amount you’re responsible for out of pocket. After that, the insurance company helps pay the remaining costs, up to your policy limits.
Ultimately, what your policy pays for depends on the types of coverage you have and whether the damage was caused by a covered event.
Learn more: What every first-time home buyer needs to know
What does homeowners insurance typically cover?
Most homeowners insurance policies are made up of four core coverages, which usually include:
Dwelling coverage
This covers the structure of your home and other structures on your property, such as a detached garage, shed, or fence. If your home is damaged by a covered event, your policy can help pay to repair or rebuild it. This type of insurance is also called “hazard insurance.”
Personal property coverage
This covers your belongings, like your furniture, clothing, electronics, and other household items. So, if your possessions are damaged or destroyed, personal property coverage can help pay to repair or replace them.
Liability coverage
This coverage can help pay for legal costs, such as lawyer fees and settlements, or for damages if someone is injured on your property or if you accidentally damage someone else’s property. For example, if someone slips and falls and gets injured on your home’s walkway, liability coverage can help pay for their medical bills and legal expenses if you’re found responsible.
Loss of use coverage
If a covered event, such as a fire or severe windstorm, makes your home temporarily unlivable, this type of coverage can help pay for hotel stays, meals, and other temporary living costs while your home is being restored. You may also hear it referred to as additional living expenses (ALE) coverage.
It’s important to note that some homeowners insurance policies use replacement cost, while others use actual cash value. Simply put, policies that have replacement cost insurance pay the cost to repair or replace items at today’s prices. Policies with actual cash value, on the other hand, factor in depreciation to your payout amount and may pay less for damaged items.
When reviewing your home insurance policy, make sure you understand how it pays out when you need to file a claim.
Read more: Actual cash value vs. replacement cost: Understanding the difference
What doesn’t a homeowners insurance policy cover?
Since homeowners insurance policies vary, it’s important to read your policy to understand what it covers and what it doesn’t. Generally, a standard homeowners insurance policy does not cover damage from flooding or earthquakes. There are separate insurance policies you can buy to cover those issues if you live in an area prone to them.
Damage to structural items, such as a roof or a fence, may not be covered under your homeowners insurance policy if the damage occurs because of a lack of maintenance or wear and tear.
Your homeowners insurance policy also has limits on your coverage, which means some expensive items in your home may not be covered. For example, if you have costly jewelry, art, or silver, you may need to purchase additional coverage, called a rider or an endorsement, for those items.
Common types of damage covered by homeowners insurance
Homeowners insurance will only cover damage if it’s listed in your policy as a covered “peril,” which is insurance lingo for a problem or event. Your policy outlines the types of situations where coverage applies.
Here are some common types of damage typically covered:
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Fire and smoke damage
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Windstorms and hail
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Lightning strikes
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Explosion
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Theft
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Vandalism
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Falling objects
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Riot or civil commotion
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Weight of snow or ice
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Water damage from burst pipes or plumbing issues
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Damage from a vehicle or aircraft
What homeowners insurance typically doesn’t cover
Homeowners insurance covers many types of damage, but it doesn’t cover everything.
Some types of damage fall outside what a standard homeowners insurance policy usually covers. Common exclusions typically include:
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Flood damage, which includes flooding caused by heavy rain, storm surge, or overflowing rivers
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Earthquake damage, such as structural damage caused by ground movement
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Gradual wear and tear or lack of maintenance, like an aging roof or deteriorating plumbing
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Pest or rodent damage, which includes termites, insects, or mice
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Intentional damage caused by the homeowner or someone living in the household
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Mold damage from long-term humidity, leaks, or poor maintenance
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Sewer backups, unless your policy includes a special endorsement
Depending on your policy and insurance company, you may be able to add a separate policy or extra insurance, usually called riders or endorsements, to help cover certain risks such as flood damage or earthquake damage.
Types of homeowners insurance
There are several types of homeowners insurance policies, typically referred to as HO policies, ranging from HO-1 to HO-8. The key differences usually come down to how coverage is structured, which types of damage are included, and the type of property being insured.
Some policies cover only the specific events listed in the policy, while others offer broader coverage and include most types of damage unless they are specifically listed as an exclusion.
Here are some of the most common types of policies for single-family homes:
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HO-1: This policy provides the simplest level of coverage, which is why it’s also known as a basic form and is not offered as often today. It offers minimal protection and only covers damage caused by a limited list of events, such as fire, windstorms, theft, and vandalism.
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HO-2: Also known as a broad form policy, HO-2 expands coverage beyond HO-1 by including more types of events, such as falling objects, frozen pipes, and damage from the weight of snow or ice. It still only covers the events listed in the policy, but it offers more protection than a basic form.
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HO-3: Most single-family homes are insured with this type of policy. It generally covers your home for most types of damage unless they are specifically excluded, such as floods or earthquakes. Your belongings are usually covered only for the events listed in the policy. This provides strong coverage for your home while keeping costs more manageable than other comprehensive policies.
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HO-5: An HO-5 policy provides the highest level of coverage available. It typically covers both your home and your belongings for most types of damage unless something is specifically excluded. These policies may also offer higher limits for valuable items and fewer limitations overall.
Read more: Types of homeowners insurance
Who needs homeowners insurance
Just like it sounds, homeowners insurance is designed for anyone who owns a home, including those who have a mortgage.
When your lender helps you finance your home purchase, the property is used as collateral for the loan. If your home is damaged or destroyed, the lender may not be able to recover the full value of the loan. That’s why most lenders require borrowers to buy homeowners insurance, since it protects their financial interest in the property as well.
In some cases, homeowners associations (HOAs), condo associations, or co-ops may also require certain types of coverage as part of their community guidelines. However, even if you own your home outright, buying homeowners insurance is still a good idea. This way, it can help cover the cost to repair or rebuild your home, replace your belongings, and help pay for liability-related expenses if you’re responsible for damage or injury, so you don’t have to pay those costs on your own.
How much does homeowners insurance cost
The average homeowners insurance premium in the U.S. is around $2,543 per year, or about $212 per month for $300,000 in dwelling coverage, according to a recent study by Insurance.com. However, rates can vary significantly from state to state.
For example, Florida is one of the most expensive states for homeowners insurance, with average costs around $7,136 per year. In contrast, Hawaii tends to have much lower premiums, averaging about $659 per year.
In addition to location, other factors can influence how much you pay for coverage, including:
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The age, type, and condition of your home
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The cost to rebuild your home
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Your coverage limits
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Your deductible amount
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Your claims history
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Property features, such as a pool or hot tub
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Your insurance provider
Read more: How much is homeowners insurance: A guide to lowering costs
How to file a homeowners insurance claim
While every insurer has a slightly different claims process, here are a few simple steps you can follow when filing a claim:
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File a police report if needed: If the claim involves theft or vandalism, file a police report and keep a copy for your records.
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Contact your insurance company right away: Report the damage, theft, or vandalism as soon as possible to start the claims process.
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Document the damage: Take photos and videos, and keep detailed notes of the damage, along with any related documents.
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Make a list of losses: Write down what needs to be repaired or replaced, including damaged, destroyed, or stolen items.
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Submit forms and get ready for an inspection: Your insurance company may ask you to fill out forms and will typically send an adjuster to estimate the damage.
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Take care of repairs and cleanup: Follow your insurer’s instructions for any initial repairs or cleanup. Keep receipts and document any work you complete.
Your insurance company will usually walk you through the process and let you know what information they need at each step. Remember, if you have any questions, don’t hesitate to reach out to your insurer.
Read more: How to file a homeowners insurance claim
How much homeowners insurance do I need?
Coverage needs can vary from one homeowner to another. That said, a good rule of thumb is to have enough insurance to rebuild your home and replace your belongings if something like a fire causes a total loss.
Whether you’re buying a new home or reviewing your current policy, your home’s appraised value can be a helpful guide for estimating rebuilding costs. Because home values can change over time, it’s a good idea to review your coverage regularly, especially if you’ve made upgrades or renovations that could increase your home’s value.
It’s also important to consider coverage for your belongings and your liability protection. Some high-value items, such as jewelry or collectibles, may require additional coverage, and homeowners with more assets may want higher liability limits.
If you’re unsure where to start, an insurance agent can help you review your options and estimate how much coverage you need.
Read more: Why you need a home inventory checklist and how to make one
How to choose the right homeowners insurance policy
When you’re buying a home or thinking about switching your homeowners insurance, here are a few simple steps to help you choose the right policy:
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Get quotes: Reach out to several insurance companies or work with an agent who can help you compare multiple providers. Request quotes with the same coverage amounts and deductible so you can make a clear, apples-to-apples comparison. Keep in mind that lower rates don’t always mean better coverage, so it’s important to look at both when exploring your options.
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Read reviews: Look at ratings from companies like J.D. Power and AM Best and check online reviews to get a sense of customer experience, including both complaints and positive feedback.
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Ask about discounts: Many insurers offer discounts for things like having a home security system or bundling your home and auto insurance. It’s worth asking what options are available.
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Know what’s covered: Take time to understand what your policy includes, what it doesn’t cover, and whether you may need extra coverage.
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Understand how you’ll pay: Insurance companies typically offer payment options such as quarterly, semiannual, or annual billing. If you have a mortgage, your lender may require you to pay through an escrow account, where part of your premium is included in your monthly mortgage payment.
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Regularly review your policy: Even after you select a policy, it’s a good idea to review your coverage regularly. This can help ensure your coverage keeps up with changes to your home or belongings.
Remember that choosing the right policy comes down to understanding your options and what works best for your budget and needs.
What is homeowners insurance? FAQs
Is homeowners insurance required?
No, you’re not legally required to carry homeowners insurance. But if you have a mortgage, your lender will likely require it, and some HOAs may as well. Even if it’s not mandatory, buying homeowners insurance is a good idea, as it can help cover your home, belongings, and finances if something unexpected happens. Without it, you would need to pay out of pocket for repairs, replacements, or liability claims.
Read more: Is homeowners insurance required? The answer might surprise you.
How do I get paid after a claim?
After you file a home insurance claim, your insurer will review the details and assess the damage, usually by sending out an adjuster to your home. Once your claim is approved, they’ll issue payment based on your coverage and policy limits. They may send you a check or issue a direct deposit so you can move forward with repairs.
If you have a mortgage, your lender may be included in the payment since they have a financial interest in your property. In some cases, your insurer may send payments in stages as repairs move forward, allowing funds to be released as the work is completed (instead of a lump sum).
Do I need umbrella insurance too?
Technically, you’re not required to carry umbrella insurance, but it can be worth considering if you want extra liability coverage. Essentially, it works on top of your homeowners policy and, usually, your auto insurance by extending your liability limits. So, if you’re responsible for a large claim or lawsuit that goes beyond your standard coverage limits, umbrella insurance can help cover the remaining costs. For example, if a claim is $700,000 and your liability limit is $500,000, your umbrella policy may help cover the difference.
Some homeowners may choose umbrella insurance for added peace of mind, especially if they have more assets or want additional coverage.
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