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Home Insurance Basics


This guide summarizes the most important things you need to know about home insurance and provides links to additional information in case you need a deeper understanding of certain points.

Shopping for homeowners coverage can be confusing at first, and Insurance.com simplifies the process for you. If any terms are unfamiliar, review our glossary of home and renter insurance to get comfortable.

What is homeowners insurance?
Homeowners insurance coverage for personal property
Additional living expenses (ALE)
Home liability and umbrella insurance
Home insurance for different types of homes
Home insurance for renters and landlords
Determining home insurance rates
Tips for buying homeowners insurance

What is homeowners insurance?

Home insurance provides two critical things to policyholders in the event of a loss:

  1. Property replacement. If something happens to your home or its contents, your homeowners policy can help you cover the costs.
  2. Liability protection. If someone gets hurt on your property, or if you or your pets accidently injure someone else, your home insurance can come to the rescue.

For example, if a tree falls on your roof, a fire destroys your kitchen, or a friend injurers himself slipping on your rug, the insurance policy pays for your loss when you file a claim.

Homeowners insurance purpose

Standard home insurance coverage, often referred to as an HO-3 policy, provides reasonable protection for the average homeowner. Some policies even cover unusual home insurance claims, and it is possible to purchase additional protection to fit your needs.

It isn’t necessary to actually own your home to benefit from homeowners insurance; condominium owners and renters also buy these policies. Your home insurance can help pay for many costly problems including:

  • Damage to the building you live in or to other structures (such as sheds or garages) on your property.
  • Improvements you have made, such as appliances or fixtures, that are considered part of your residence.
  • Real property pertaining to your residence.

Is home insurance necessary?

Yes. Your mortgage lender will require you to purchase homeowners insurance to protect the property, unless you are buying a home outright, in cash,.

For most people, it is worthwhile to spend some money on home insurance to replace personal property and/or defend against a liability suit in order to avoid draining savings should a serious problem arise.

Homeowners insurance coverage for personal property

Be sure you have enough homeowners insurance to rebuild a house of similar quality and/or replace your belongings in the event of a serious disaster.  Common personal property coverage levels include:personal property

Actual cash value: Replaces possessions at their current value, deducting depreciation for items you have owned for a long time, up to your policy limit.

Replacement cost: Covers the current cost of replacing your possessions, without any depreciation deduction, up to your policy limit.

Guaranteed replacement cost: Covers the current cost of replacing your possessions, without any depreciation deduction, up to about 20 percent above your policy limit.

Generally, personal property is covered between 40 and 75 percent of your structure’s rebuilding value. While this is a reasonable starting point for many people, your own needs for personal property insurance may vary.

Although it can cost about 10% more to buy replacement cost coverage, many homeowners appreciate the security that it offers.

Home insurance: covered perils

Typical home policies offer coverage for the following perils:

Fire or lightning. Take an inventory your possessions, and evaluate the cost to replace your most important items in the event of a major disaster, such as a home fire. Review your home fire insurance coverage policy details.

Power outage. This benefit is often limited to your personal property coverage amount and may be even lower for items such as spoiled food. Understand the home insurance ramifications of a power outage by reviewing our article power outage insurance.

Wind or hail. Wind and hail are among the most common and costly insurance claims. Learn what protections winter home insurance coverage provides.

Theft. Your tangible personal property is covered by hour home insurance, but there are limits on reimbursement for money, bank notes, gold, silver and other items. It is also common for some personal property to be excluded, such as animals, motor vehicles and property belonging to any boarders or tenants.

Additional perils are covered by home insurance policies. Review homeowners insurance policy types and what they cover.

Home insurance add-ons:  natural disasters, water damage, and home construction

Beyond standard homeowners coverage, some people buy separate insurance for the following:

flooded home

Flood. This insurance can be purchased through an online home insurance quote, your insurance agent, or directly through the U.S. government’s National Flood Insurance Program.  Flood coverage can be important, but may not cover all flood insurance claims.

Water back-up. Most insurers offer optional coverage for property damage that results from sewer or drain back-ups.

Earthquake. Depending upon where you live, you may be at higher or lower risk for earthquake damage. Earthquake insurance policies typically have high deductibles, but the coverage can be important if a significant quake causes serious damage. 

Ordinance. Construction building codes evolve over time and if you need to rebuild an older home, you might find it expensive to comply with stricter ordinances or laws. Optional ordinance or law coverage is designed to pay a set amount to help offset these construction costs.

Additional living expenses (ALE)

If you experience serious damage to your home, it is sometimes necessary to live elsewhere while repairs are underway. Standard home insurance provides some amount for additional living expenses that occur when you are displaced. ALE insurance covers you when your expenses exceed your ordinary living expenses. Coverage limits vary by insurance carrier, many policies provide reimbursement for:

  • Hotels costs
  • Restaurant expenses
  • Other charges

Commonly, ALE amounts are paid up to 20% of your total homeowner policy. It is often possible to purchase additional coverage, if desired. Be warned: should your home be unlivable due to neglect, ALE benefits could be denied.

Home liability and umbrella insurance

Your homeowners liability coverage pays to defend you if you are sued by someone who is injured on your property or who suffers property damage as a result of you, your family members or pets. Many home policies offer a minimum of $100,000 in liability protection.ale

This may seem like a large amount of coverage, but Jury Verdict Research data indicates that about 13 percent of personal injury awards or settlements reach $1,000,000 or more. If you are a high-net-worth homeowner, you may be more likely to attract lawsuits. If you aren’t wealthy, a large judgment could be disastrous for your finances.

For these reasons, homeowners with moderate to high assets choose excess liability, or umbrella insurance policies. This coverage kicks in when standard home liability limits are reached, providing additional protection.

Home insurance for different types of homes

Whether you own a manufactured home, old home, condo or rental property, your insurance needs may differ. Costs to repair damage to a manufactured home may vary from costs associated with repairs to an historic home, and your insurance premiums are likely to reflect these risk estimates. Examples of special considerations include:

  • Older homes can be expensive to repair if building codes have changed since their original construction. Depending upon the scope of any damage, it may be necessary to rewire or re-engineer portions of the building.
  • Historic homes, often built before 1900, may have strict rules related to materials and finishes. Homeowners often seek “guaranteed replacement coverage with restoration” coverage.
  • Condo owners must be aware of where their homeowners association’s master policy protections end and where their own insurance coverage should begin.

For a clear understanding of insurance recommendations for your home, read Insurance.com’s article on homeowners insurance for various types of homes.

Home insurance for renters and landlords

Today’s renters may find that they are required to buy renters insurance as a matter of course, and it’s not a bad idea to protect your personal property even if you aren’t responsible for the structure of your dwelling.

Landlords, whether they are simply renting out a home in their house (such as serving as an airbnb host), or renting out an entire building, are wise to supplement their homeowner policy with landlord insurance or airbnb insurance. Standard homeowner insurance does not provide protection to those who are in the business of renting their property.

Determining home insurance rates

The biggest factors influencing the cost of homeowners insurance are:

  1. The cost to rebuild your home if it were completely destroyed
  2. Your home’s age
  3. Your neighborhood’s fire protection rating
  4. Your personal and neighborhood claims history

Your home’s location and value are also factored in when calculating your insurance premium. Many other items are assessed as well, including:

  • Your credit score
  • The previous homeowner’s claim history
  • The number of “attractive nuisances,” such as ponds, pools and trampolines
  • Whether or not you run a home-based business

For more information on how homeowner premiums are determined, review some of the main factors affecting your home insurance rate. Insurance.com provides details on average home insurance rates by state; compare your current policy cost to the typical premium in your area.

Home insurance surcharges

Surcharges are additional fees, above your base premium, that are added to your home insurance rate to cover special risks associated with your property.  The following items may be viewed as posing an extra risk:

  1. Swimming pools
  2. Pets
  3. Natural disasters common in your area
  4. Claims filed within the past three years

Swimming pool insurance is important, but be sure to do everything possible to prevent a problem. If you install a pool, update the “other structures” portion of your home insurance coverage.

Home insurance can help cover your liability costs if your pet damages someone else’s property or causes an injury to a person outside your home. Some insurance companies exclude certain pets, so be sure yours is covered by your policy or shop for new insurance.

surchargesIt is important to disclose your pets when you purchase your homeowners insurance and essential that you notify your insurer when you add a pet to your household. To gain a better understanding of pets and how they can impact your home insurance, read our article on home insurance and pets.

Take reasonable steps to protect your home from natural disasters and avoid filing small home insurance claims if you have the resources to cover small losses on your own.

Saving on home insurance

Discounts on homeowners insurance are available, and sophisticated shoppers should always ask about them. Potential discounts on home insurance include:

  • Home and auto insurance bundle
  • Loss prevention technology (sensors for fire, theft, gas or water leaks)
  • Non-smoker
  • New or remodeled home
  • Homeowner association
  • Impact-resistant roof
  • Up-front payment

review home insuranceTo learn more about how to save on your home insurance, explore Insurance.com’s list of discounts worth pursuing, including bundling your home and auto insurance.

Tips for buying homeowners insurance

Compare home insurance rates and coverage options before you need to make a claim. Insurance.com’s guide to buying homeowners insurance can help you determine your coverage needs and explains how to save on your policy.

Once you choose the best home insurance, be sure to review your policy at least every two years to adjust your coverage, as needed. Factor in:

  1. Home additions or remodels
  2. Changes that might increase or decrease your risk profile (the new fire station that opened a few blocks away; your new, home-based business, where you meet with clients)
  3. Significant changes in your possessions.

If you’re like most people, your insurance needs change over time and it’s critical to be properly protected for your current situation, in the event of a loss. If your existing coverage no longer meets your needs or provides the best value, it is relatively easy to switch and cancel your home insurance.

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