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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. 

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 is a policy that’s designed to cover your house, your possessions, and your personal liability.
  • You’re required to carry home insurance if you have a mortgage.
  • Home insurance excludes some perils such as floods and earthquakes.

What is homeowners insurance?

Home insurance is a policy that provides four main coverages:

  1. Dwelling coverage. This covers the actual structure of your home, from the foundation to the roof.
  2. Personal property coverage. This protects everything in your home, which includes your furniture, dishes, and even your clothes.
  3. Liability protection. This protects you if you’re responsible for injury to someone else or damage to their property.
  4. Loss of use (additional living expenses). This coverage will pay for you to live elsewhere if your home isn’t livable while it’s being repaired for a covered claim.

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 for your loss when you file a claim. And if that 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 necessary?

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 these.

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)

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 offer coverage for the following perils (risks that can result in damage or loss):

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 these are commonly covered perils, there are many others that are covered by your home insurance. However, it’s important to read your policy. Some policies are “all perils,” which means they cover any peril that isn’t specifically excluded. Others are “named perils,” which means they only cover the perils named in the policy.

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.

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. You can buy this coverage as a standalone policy or some companies may offer it as an endorsement.

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 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. 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. Insurance.com 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.