What is homeowners insurance and how does it work?

Homeowners insurance is a financial safety net. If a fire destroys your home, your homeowners insurance will pay you to help rebuild. The same happens if someone breaks into your home and steals your electronics, artwork, jewelry, or other valuable possessions. Your policy will help cover the expenses of replacing these items.

And if a visitor falls and breaks a leg while walking down your property's front steps? Your insurance policy will pay to help cover any medical or legal expenses resulting from the accident.

You’ll need enough homeowners insurance to replace or repair your home and possessions if they are destroyed or damaged. And if you’re taking out a mortgage loan to buy a home? Mortgage lenders require that you have homeowners insurance before they’ll approve you for a loan.

What does homeowners insurance cover?

Your homeowners insurance policy comes with a range of financial protections, some designed to help you rebuild if your home is damaged or destroyed and others that protect you from theft and the injuries that others suffer while visiting your residence.

• Personal property coverage: Personal property includes the items in your home, such as furniture, electronics, and other personal possessions. Homeowners insurance can replace your personal property if it is stolen or damaged.
• Liability coverage: Liability coverage protects you from a financial settlement if someone sues you after suffering an injury on your property or you cause an accident to someone else on your property.
• Fire: Homeowners insurance can cover accidental electrical, grease, or candle fires. If your home burns down, your insurance will cover the cost of rebuilding your home and pay living expenses, such as hotel bills, while your home is rebuilt.
• Natural disasters: Homeowners insurance covers natural disasters such as windstorms, hail, lightning strikes and wildfires.
• Theft or vandalism: Aside from covering the cost of stolen items, homeowners insurance covers vandalism, riots and civil unrest. For example, if someone breaks into your home, your insurance may pay to repair or replace your doors and windows.
• Additional living expenses: Many homeowners insurance policies cover living expenses while you are unable to live in your home due to damage and repairs. This may include hotels, rentals, food and more.

What does homeowners insurance not cover?

Many people are shocked to learn that a catastrophic loss to their home isn’t covered by their policy. Here are some examples of events that may not be covered by standard homeowners insurance policies.

• Floods: You must get separate flood insurance to cover water damage caused by a river running over its banks, rainstorms, melting snow or other natural causes.
• Earthquakes: Many homeowners have to pay out of pocket for repairs if you don’t have separate earthquake insurance.
• Water damage: Water damage may include sump pump or sewer backup water damage. You must obtain additional coverage or select add-on policies to cover this type of water damage. However, property damage from malfunctioning sprinkler systems or water pipes that burst is usually covered.
• Failure to maintain property: If you fail to maintain your property or don’t take care of it. If a person falls because of a broken porch step, for example, your liability may not be covered because you did not repair the step.

Is homeowners insurance required?

Lenders require homeowners insurance to protect the home, which secures the mortgage. If you don’t have a mortgage, you’re not required to have homeowners insurance. If you lack insurance, you’ll be responsible for all repairs and liability costs.

How does homeowners insurance work?

Here’s what you need to know about choosing homeowners insurance and filing a claim.

1. Choose the amount of coverage you need

An insurance broker can help you find the best coverage based on the characteristics of your home, how much coverage you want and your budget. Your homeowners insurance should provide meaningful coverage over four categories.

Dwelling

This coverage broadly covers the cost of rebuilding your entire home – including outbuildings and other structures – in the event of a catastrophic, total loss. This is known as the “replacement cost,” and reflects current construction costs in your area.

Personal Property

Personal property coverage is for the possessions you keep at home in case they are lost or damaged due to theft, fire or another calamity. Most insurance companies set a personal property coverage limit as a percentage of the dwelling coverage, usually 50% or 70%. If your dwelling limit were $400,000, personal property coverage of 70% would cover $280,000 in losses. If you have expensive possessions, such as artwork or jewelry that could not be replaced with your standard personal property coverage, you may want to take out additional insurance to cover those.

Personal liability                                                                                  

Personal liability coverage protects you in case someone is injured on your property or their property is damaged. For example, if a guest falls on your property and breaks their arm, you could be found liable for their medical expenses. Without insurance, you could be on the hook for thousands or even millions of dollars.

The Insurance Information Institute says that most homeowners policies provide a minimum of $100,000 of liability coverage. You might need more than this if you have frequent guests in your home. The institute recommends that homeowners purchase at least $300,000 to $500,000 of liability coverage.

Additional living expenses

If your house is destroyed or rendered unlivable by a fire or natural disaster, this coverage is there to pay for a temporary place to live, such as a hotel or rental property, while your home is being rebuilt. It would also cover the additional cost of food due to your no longer having a kitchen. Additional living expenses (ALE) coverage is usually stated as a percentage of your extended dwelling coverage, typically in the 20% – 30% range, according to insurance provider Travelers.

2. Compare quotes from different insurance companies

Look at insurance coverage options from several companies to make sure you get the best rate.

Compare the different types of coverage against the cost – even within the same company. Check out reviews for each insurance company to learn more about their customer service. You can buy insurance online, but many people prefer a personal connection with the local insurance agent or broker.

3. Choose a policy

Choosing a homeowners insurance policy is the last step in what should have been a careful assessment of your particular property, preferably face-to-face with an insurance broker. Be sure that any valuable possessions get extra coverage.

You might consider taking out “replacement value” coverage on your dwelling, as opposed to a “cash value” policy. It will cost a little more, but replacement value covers the cost of a new version of your home and possessions, while a cash value policy considers the age and depreciation of your property.

4. File a claim

If you need to file a claim with your homeowners insurance policy, there are a few things to keep in mind. There are steps you'll want to take before filing your claim and steps to take after the claim has been filed.

Before

• Take inventory of your home. Make a thorough record of everything in your house that has value, such as furniture, appliances, clothing, artwork, and jewelry. Take photos and write descriptions of each item, with an assessed dollar value. If you have receipts, include those.
• Know your deductible. There’s no point in even filing a claim if the cost of repairs is less than your deductible.

After

• Make a list of all your damaged property. You’ll need this when you meet with your adjuster.
• Take photos and videos of the damage.
• Contact your insurance company or agent with your policy number, name, address, and phone number. 
• Meet with the adjuster, who will inspect the damages, asses the repair or replacement cost, and write you a check.

5. Pay a deductible

A homeowners insurance deductible is the amount of money a homeowner must pay out of pocket before coverage kicks in. When the insurance company pays the claim, it will be for the total amount of the damage minus the deductible.

You won’t pay your deductible to the insurance company, like a bill. Instead, it’s subtracted from the amount the insurance company pays. Progressive says that deductibles for homeowners insurance usually range from $500 to $5,000. The higher the deductible, the lower your monthly premium, since it’s less risk for the insurance company. Also, know that the deductible is applied to each claim, and not on an annual basis.

How much is homeowners insurance?

The cost of homeowners insurance varies, even from house to house in the same neighborhood. This is because the formula insurance companies use to calculate their prices is dependent on several factors.

The average insurance rate is $2,377 a year and has steadily increased in recent years.

The cost of your insurance premium is affected by:

• Geographic location
• Age and condition of the home
• House features
• Deductible
• Endorsements
• Credit score
• Claims history

FAQs About House Insurance

Here are answers to some frequently asked questions about homeowners insurance.

Why do you need homeowners insurance?

It’s not uncommon for your home to be worth several times more than your annual income. If you were to lose it to a fire or other tragedy, you’d face financial ruin. Buying homeowners insurance protects you against such losses.

How much homeowners insurance do I need?

You can shop various insurance companies, and each will have its own formula for determining how much it would cost to rebuild or replace your home. The actual current value of your home is called its actual cash value, while the cost it would take to rebuild your home is called its replacement cost. You can choose extra coverage for special possessions or more liability protection, but your premiums will be higher.

Does homeowners insurance cover flooding?

Homeowners insurance does not cover damages from flooding. You’ll have to purchase separate flood insurance. If you live near a river or other body of water that has a history of breaching its banks, you should budget for flood insurance. Likewise, a flood in your house due to a storm sewer backup or failed sump pump usually is not covered. Homeowners insurance does cover water damage from burst pipes.

How do you pay for homeowners insurance?

You renew your homeowners insurance annually but most people pay an estimated monthly installment into an escrow account. The account collects the payment throughout the year and pays your insurance bill on your behalf when it’s due.

The bottom line: Homeowners insurance protects your home

Homeowners insurance offers a financial safety net that compensates you if your home is damaged or destroyed. It helps you rebuild or repair your home and replace your possessions in case of theft, fire, storms, or other disasters. While it is not required by law, lenders require you to have enough homeowners insurance to replace the home as a condition of your mortgage. It’s a good idea to shop around and compare policies to ensure you’re getting the coverage you need at the best possible price.

If you’re researching homeowners insurance and thinking more seriously about buying a house, the best way to get started is to apply for initial mortgage approval online today.