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A homeowners insurance policy protects your biggest investment, from the roof over your head to the bed where you lay it down at night. If you’re new to buying home insurance, you probably have a lot of questions.  

What is home insurance and how does it work? How much home insurance do you need to buy? What does homeowners insurance cover?

Here, we’ll start with the basics to help you understand what home insurance is, what it covers and how to shop for the right policy. 

Key takeaways

  • Home insurance covers your house and any other structures on the property, your possessions and protects you against liability claims for injuries or damage.
  • You’re required to carry home insurance if you have a mortgage, but even if you don't it's a smart investment.
  • Home insurance excludes floods, earthquakes, and several other perils, but you can add coverage for most of them, including water and sewer backup.

What is homeowners insurance?

Home insurance is a policy that includes four main coverages to protect your house, its contents, and you:

  1. Dwelling coverage. Covers the actual structure of your home, from the foundation to the roof.
  2. Other structures. Covers any structures on the property that are not attached to the home, like a detached garage or shed.
  3. Personal property. Protects everything in your home, which includes your furniture, dishes, and even your clothes.
  4. Liability protection. Protects you if you’re responsible for injury to someone else or damage to their property.
  5. Loss of use (additional living expenses). Pays for you to live elsewhere and any related expenses if your home isn’t livable while it’s being repaired after a covered loss

If a tree falls on your roof, a fire destroys your kitchen or a friend is injured slipping on your rug, the insurance policy pays the bill. And if a fire means you can’t live at home while it’s being repaired, insurance pays for a hotel and food.

Homeowners insurance may also cover a variety of other needs, depending on your policy.

What is the purpose of homeowners insurance?

The purpose of a home insurance policy is to protect you financially from the potentially devastating effects of a loss like a fire. Few people can afford to rebuild their homes from the ground up. But the right home insurance policy will do just that.

Home insurance also provides protection from the liability risks that come with owning a home. That includes things like the risk of someone falling on your property or a tree on your land falling onto a neighbor’s home.

Is home insurance required?

Home insurance is not required by law. However, your mortgage lender will require you to purchase homeowners insurance to protect its investment in the property. If you own your home outright, you don’t have to carry home insurance.

For most people, home insurance is a wise investment. Even if you aren’t required to have it, the protection it provides is well worth the cost.

The basic types of home insurance coverage

Home insurance policies include four basic types of coverage. They cover your home, its contents, your personal liability and additional living expenses if you can’t live at home during repairs.

Let’s take a closer look at each of the coverages and how they work.

Dwelling coverage

Dwelling coverage is the largest part of your insurance policy, and it provides coverage for the house itself. This coverage is based on the replacement cost of your home. In other words, it’s the actual amount that’s required to rebuild your home from the ground up.

The dwelling coverage amount is calculated based on the cost of the materials needed to rebuild your house, including everything from lumber to carpet. Most insurance companies offer extended or even guaranteed replacement cost options to make up for inflation.

Personal property

Personal property coverage pays to replace all of the contents of your house. This coverage is usually 50-70% of your dwelling coverage. Personal property may be covered for actual cash value (depreciated value) or replacement cost (the cost to buy new items)

Some personal property has special limits on coverage, like jewelry or fine art. You can purchase additional coverage for these items, called floaters, to ensure they're covered for their full value.

Personal liability

Your homeowners liability coverage pays the damages if someone is injured on your property or who suffers property damage as a result of you, your family members or your pets. It also pays court costs if you are sued. Many home policies offer a minimum of $100,000 in liability protection, but you can increase this amount and experts recommend that you do.

Loss of use or 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, also called loss of use, covers you for things like:

  • Hotel costs
  • Restaurant expenses
  • Other needs like laundry services

ALE is a percentage of your dwelling coverage, usually set at 20%, but you can increase this amount.

What is covered by home insurance?

Typical home policies are what is known as all-perils. The cover any peril that isn't specifically excluded from the policy. Common perils covered by a home insurance policy include:

Fire or lightning. Homeowners insurance covers damage to your home and your possessions as the result of a fire. Fire coverage for your home includes most causes of fire, including lightning, with the exception of an intentionally set fire.

Wind or hail. Wind and hail damage to your home, including windows, the roof and siding, is covered by home insurance. 

Theft. Your personal property is covered by your home insurance if it’s stolen, but there are limits on reimbursement for some types of property, like jewelry and cash. High-value items may need a rider (an add-on coverage) to be fully covered.

Water damage. Home insurance covers damage from sudden and accidental discharge of water, such as from a burst pipe. It will also cover damage from a leaking roof or window if the damage was caused by a covered peril and not poor maintenance.

Power outage. Home insurance will cover damage that occurs as the result of a power outage, including spoiled food in some cases.

While most home insurance policies are all perils, there are some policies that are named perils, which means they only cover the perils named in the policy. This usually applies to homes that don't qualify for a standard home insurance policy and require specialty coverage. 

What doesn’t home insurance cover?

Home insurance policies have a few common exclusions. They include:

  • Flood
  • Earthquake
  • Mold
  • Water and sewer backup
  • War or nuclear disaster
  • Intentional damage
  • Wear and tear

Make sure to read your policy to find out what’s covered and what’s not. You can add many of these coverages either with an endorsement on your policy or a separate policy. 

Optional coverage endorsements

These are just a few of the add-ons you can buy to increase your coverage.

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.

Water and sewer backup. Most insurers offer optional coverage for property damage that results from sewer or drain backups.

High-value items. You can buy a rider to cover a high-value item, like a wedding ring or art piece. These items are covered for their appraised value.

Business property. This coverage is for any business property at your house, like computers or other equipment.

Flood and earthquake insurance

Since home insurance doesn’t cover either floods or earthquakes, you can buy separate policies to provide that coverage.

Flood. This insurance can be purchased directly through the U.S. government’s National Flood Insurance Program or from an insurance company. Flood insurance may not cover all flood insurance claims.

If you live in a high-risk flood zone, your mortgage company may require you to have flood insurance.

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. Earthquake insurance is usually offered as a endorsement, but may be a standalone policy.

Home insurance for different types of homes

Your insurance needs will differ based on the type of home you own. 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 condo insurance coverage should begin.

For a clear understanding of insurance recommendations for your home, read more 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. Renters insurance covers personal property and personal liability.

Landlords, whether they are simply renting out a room 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.

How are home insurance rates determined?

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. provides details on average home insurance rates by state; compare your current policy cost to the typical premium in your area.

Tips for buying homeowners insurance

Compare home insurance rates and coverage options before you buy a home insurance policy.

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 will change over time and it’s critical to be properly protected.

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