Home insurance, also called homeowners insurance, is an essential financial tool that protects the largest single investment most people make: their homes.
Getting a home insurance policy defends against financial loss by defraying the cost of sudden and accidental damage caused by certain perils. “Peril” is a fancy insurance term for an event that might bring about damage. If a covered peril damages your home, you can file a claim with your insurance company to help pay for repairs.
In this home insurance guide, we walk you through what standard homeowners insurance covers and what’s typically excluded. We also:
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Discuss some of your responsibilities as a policyholder.
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Explain several common home insurance terms.
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Examine what to look for when shopping for coverage.
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Offer tips to help you save money on home insurance.
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Describe the claims process.
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Answer some frequently asked coverage questions.
Let’s get started!
What home insurance covers
A standard homeowners insurance policy has six distinct parts. Each addresses a particular risk that may cause you a financial loss as a homeowner.
Dwelling coverage
Dwelling coverage is for the structure of your primary residence. When it's damaged by covered perils, your policy pays for repairs to or even the total replacement of your home minus your deductible and up to the coverage limit.
Other structures coverage
Home insurance also has other structures coverage. People often think that “other structure” only refers to buildings, like sheds and detached garages. In truth, it can mean several types of structures, such as inground pools, walkways, and permanently installed boat docks.
Personal property coverage
Personal property coverage compensates you when items other than your dwelling or other structures are damaged by covered perils. In the insurance industry, these things are often described as the contents of your home and may include:
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Furnishings.
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Electronics.
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Clothing.
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Jewelry.
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Collectibles.
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Bedding.
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Tools.
Coverage limits for personal property are generally a percentage of the total coverage on your structure.
Personal liability coverage
Liability coverage is different from the first three examples in that it protects against loss stemming from claims you caused somebody else’s bodily injuries or property damage. It does this by helping with your legal defense in liability claims.
Loss of use coverage
Loss of use coverage provides valuable additional protection should your home become temporarily uninhabitable due to damage caused by a covered peril. It helps pay for living expenses that go beyond your normal costs while your home is being repaired, like a hotel room or rental home, additional commuting costs, and food bills.
Medical payment coverage
Medical payment coverage is similar to personal liability insurance because it kicks in when someone who isn’t insured by your policy is injured at your home. Even if the accident is that person’s fault, your medical pay coverage can help with their medical bills.
What homeowners insurance doesn’t cover
No insurance can cover every type of loss, and that’s true of home insurance, too. Here are some perils that homeowners policies generally don’t cover.
Wear and tear
Homeowners insurance is designed to defend against sudden or accidental loss. By definition, wear and tear happens gradually, so most policies exclude it from coverage.
Neglect
Like wear and tear, neglect and poor maintenance isn’t covered – in part, because damage caused by either of these tends to happen over time, not suddenly. Plus, homeowners insurance is for catastrophic or unexpected losses, not everyday expenses.
Flooding
Most standard home insurance policies don’t cover flood damage. You may be able to get a standalone flood policy from the National Flood Insurance Program, but that’s not your only option. Private insurers might also offer flood insurance, sometimes as a separate policy and sometimes as an endorsement.
Earthquakes
Your standard home insurance policy doesn’t cover earthquakes and ground movements like landslides or mudflow. Additional protection, however, may be available through a rider or a standalone policy.
How much home insurance do you need?
The amount of home insurance you need depends mainly on two factors. The first is how much it would cost to completely rebuild your home and replace your personal property after a devastating loss. The second is your exposure to risk – including those that aren’t initially covered by a policy.
Calculating the replacement value of your house
Most insurance companies want you to insure your home for its replacement value. That’s how you can make yourself whole after a total loss.
Your home’s replacement cost is what you would pay to rebuild using materials of a similar quality. That number is based on several factors, including:
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Square footage.
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Labor costs.
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Material costs.
As you can probably imagine, replacement value can fluctuate over time as the market changes. But you can estimate your home’s replacement cost by multiplying local building costs per square foot by your home’s square footage.
Value of personal property
Your personal property coverage is usually a percentage of your dwelling coverage, typically around 50% of your home’s replacement cost. But how much personal property insurance you need also depends on what items you want covered.
To figure that out, conduct a thorough home inventory. Go through every room in your house (basement, attic, and outbuilding included), and start a list of each item’s estimated value and any receipts you might have. This will give you a good idea of how much personal property coverage you need.
Add-ons and endorsements to consider
As we already mentioned, home insurance policies typically exclude some perils. But you can sometimes get coverage for them by purchasing an add-on, called an endorsement or a rider, that broadens your coverage.
Extended and guaranteed replacement costs
Guaranteed or extended replacement cost endorsements protect you from surging construction costs in a total loss. Getting a guaranteed replacement cost endorsement means the total expense of rebuilding your home after a total loss is covered, no matter what the final bill is. An extended replacement cost endorsement increases your dwelling coverage by up to 50%.
Water backup and sump pump overflow
Certain types of water damage is covered by home insurance; however, damage from a backed-up sewer or overflowing sump is usually excluded. Homeowners who are concerned about this risk may be able to add water backup and sump pump overflow coverage to their policy. It can help pay for repairs, water removal, and new appliances if yours are damaged in the event.
Personal property replacement cost
Home insurance often covers your personal property for its actual cash value, which means claim settlements for your belongings only reimburse you for their depreciated value. Opting for a personal property replacement cost endorsement changes this coverage so you’re reimbursed for damaged items without subtracting for depreciation.
How are homeowners insurance rates determined?
Several factors influence home insurance rates. We’ve listed several examples below.
Age
The year of your home’s construction affects rates mainly because of changing building codes for major systems, like electrical and plumbing. The assumption is that updated building codes are based on newer technologies, making new homes more resilient.
Location
Location plays an important role in insurance rates on a variety of levels. At the local level, rates can be impacted by how close the home is to fire protection or if it’s in a higher crime area. Your home’s proximity to a coastline or wildfire zone may also play a role.
The state where your home is located also affects home insurance rates. A big part of that can be attributed to insurance laws and regulations, but risk exposure is important, too. Your state’s geography may make it more susceptible to severe weather conditions like hurricanes or tornadoes.
Building materials
Whether your home is primarily made up of brick, stone, wood, concrete, or cinder block influences its resilience to some perils. Construction materials also impact your replacement cost, which is a major factor in your overall premium.
Size of your house
Because the structure of your home is typically insured for its overall replacement cost, its square footage has a big impact on your homeowners insurance rate. The larger your home is, the more expensive it is to replace, and so it requires more coverage.
Amount of coverage
When you need more insurance, you pay a higher premium. So if you have a really large house or lots of valuable personal property, you’ll typically have to pay more to insure it.
The same is true for endorsements and riders. Anything that increases your coverage will cause an increase in your overall home insurance policy premiums.
Deductible amount
A home insurance deductible is the out-of-pocket expense you’re responsible for when you have a claim. As it goes up, your premium usually goes down.
In some situations, homeowners get to choose their deductibles and may try to pick a larger one so they can save money on their premiums. That can be a legitimate strategy for controlling costs, but you want to exercise caution here. If something bad happens and you have to file a claim, you need to be able to cover your deductible.
Credit history
Insurance providers in some states can use a credit-based insurance score when determining premiums. In those places, homeowners who have good credit often see lower rates.
Insurance claims history
While you absolutely should file a claim when you have damage, you want to keep in mind your claims history plays a role in your premium. The claims you file, as well as claims made on your property by previous owners, stay on your record for up to seven years.
Multiple claims may result in a higher premium. That said, insurers don’t necessarily look at your entire history. Some may only check the past three years.
Your provider
Every insurer has its own method for analyzing data and determining rates. As a result, premiums can vary significantly from one insurance company to another. That’s why we typically recommend comparing multiple quotes when shopping for home insurance.
How to choose the right home insurance policy
Choosing the right homeowners policy does require a little effort on your part. The first step is getting quotes – we usually suggest you get at least three – so you can compare offers.
But don’t fall into the trap of only comparing premiums. Cheap home insurance may be great when you buy the policy, but it won’t do you much good if you end up being underinsured. You need to also look at the coverage, deductibles, and potential discounts.
The difference between actual cash value and replacement cost value
One important aspect of a home insurance policy (as you’ve probably already gathered) is whether claims are paid based on your property’s replacement cost value or actual cash value.
The standard is to insure your dwelling and other structures for their replacement cost and your personal property for its actual cash value. However, not every policy is written this way, so you could conceivably be comparing a more expensive RCV policy that provides broader coverage to a less expensive, but also more limited, ACV policy.
Named perils or open perils coverage?
HO-3 polices are the most common type of home insurance, and they’re written as open perils coverage. This means they include all perils except those listed as exclusions. Other policies may be written as named perils coverage that only covers perils listed in the policy. Open peril policies provide more coverage, so they cost more.
The role of deductibles
Because the size of your deductible impacts your premium (i.e., a lower deductible means a higher rate), you want to make sure you’re looking at similar deductibles when you compare quotes.
You also want to check how many deductibles each policy has. Depending on where you live and what insurer you use, you may find your home insurance has:
Policies can have any combination of these deductibles, so you need to check what’s included in the quotes as you compare.
How to save money on homeowners insurance
More and more homeowners are seeking ways to save on their home insurance. Thankfully, many insurers offer discounts that can help.
Discounts for improved safety or security features
Insurance companies want their policyholders to do all they can to reduce claims. One way they do that is by offering discounts for home safety features. You may be able to qualify for a discount if you have fire and smoke alarms, deadbolts, water detection devices, or a security system.
Discounts for annual or automatic payments
Paying for your homeowners insurance annually or through automatic payments may earn you a lower premium on your home insurance. Both annual and automatic payments reduce the chance of an insurance lapse and lower administrative costs for insurance companies. These savings are often passed to policyholders.
Bundling policies
Insurance companies have found selling additional policies to their existing customers is good for retention and helps their customers get coverage they need. To accomplish this, many offer discounts for packaging, or bundling, multiple policies.
New home discount
A new home can be less expensive to insure than an older home of a similar size and with similar features. New construction is often built to meet more stringent building codes and the latest safety standards, which makes them more resilient to damage.
Retiree discount
Insurance companies have discovered that seniors tend to file fewer claims on their homeowners policies. As a result, some insurers automatically include a premium discount for older persons.
No-claim discount
Insurance providers may demonstrate appreciation for homeowners who have remained claims-free by giving them lower premiums.
How to file a home insurance claim
Knowing how to file a home insurance claim can save you a lot of frustration and make the process easier.
Have reasonable expectations
The claims process can take a long time, especially during a catastrophe when your insurer may be inundated with calls from policyholders. Not only does your insurance company need to field all of the incoming claims, it also has to assign adjusters to inspect and report on your damage so it can determine if your coverage applies.
Be prepared for what might happen
Being prepared means a couple of things. On the one hand, it means understanding your coverage before you even have damage so you know when to file. Talking to your insurance agent can help you with that.
It also means having access to the information you might need if you do have to file. For example, you want to:
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Keep your insurance provider’s information on your phone.
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Know where you can get a copy of your policy or declarations page, even in a disaster.
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Maintain a regularly updated personal property inventory to help you demonstrate your loss.
Reach out to your provider
Notify your home insurance company about damage or other potential losses as soon as you can to get the ball rolling on your claim. Your insurer may give you a case or file number as well as information about what to expect throughout the claims process. You may want to keep a log of how and when each contact was made and what was discussed.
Document your damage
Document the damage you sustained through photos and videos, along with the dates and times when the damage occurred. Try to do this before you make any temporary repairs.
Document any remediation steps you may have taken
You want to prevent further damage whenever you can do so safely. This might include shutting off the water supply, sweeping up broken glass, or covering a damaged roof with a tarp. Whatever you do, track what you did and hold on to your receipts.
Homeowners insurance FAQs
Am I legally required to carry homeowners insurance?
No state currently has any law that mandates homeowners to get insurance. However, your lender or mortgage company may require coverage as part of your loan agreement. In other words, your home insurance may not be legally required, but it could still be mandatory.
If I own my home outright, can I go with minimal or no home insurance?
Those without loans against their homes may choose to self-insure or "go bare." This is a risky situation, especially if the homeowner doesn't have the financial resources to repair or replace their homes following a disaster.
What happens if I allow my homeowners insurance to expire?
If your homeowners insurance lapses while you have a loan, your lender can get force-placed coverage for your property to protect its financial interests. This type of homeowners insurance can be very limited and extremely expensive.
What are valuable characteristics to look for when choosing a home insurance provider?
You want an insurance company that has exceptional financial ratings so you’ll know that it’s capable of meeting its obligations. A good reputation with customers is important, too, so check online review sites like Trustpilot and the Better Business Bureau.
