Homeowners Insurance: What Is It And What Does It Cover?
Melissa Brock6-minute read
January 13, 2023
You likely already know that homeowners insurance is important, but you might have many questions about what it covers, what it doesn’t cover and how to get it. Let’s explore the cost and benefits of homeowners insurance and how to purchase a policy so you can protect yourself.
What Is Homeowners Insurance?
Homeowners insurance, also called home insurance, can cover loss, damage and liability that occurs on your home and property. Because homeowners insurance protects both you and your mortgage lender, your lender will want proof that you have purchased homeowners insurance before they give you a loan to purchase a home. They will also want to ensure you can cover repair bills after an incident occurs.
Homeowners insurance should cover the costs of your home in full. In the event of damage, you should have enough coverage to restore your home to its original value. Most standard policies also provide coverage for garages, sheds, outdoor grills, swing sets, fences, etc. High-risk items like swimming pools may require additional coverage.
Home buyers usually pay for homeowners insurance through an escrow account. When you make your monthly mortgage payments, a portion of your money goes into your escrow account to pay your homeowners insurance. This means you don't have to pay your premium (your homeowners insurance payment) in a lump sum every year.
How Does Homeowners Insurance Work?
Insurance companies offer a wide range of property insurance types, from renters insurance to insurance for single-family homes. HO-1 typically gives you more barebones coverage, while HO-5 insurance will give you the most comprehensive coverage you can get.
For example, an HO-3 policy covers personal property just for named perils, while an HO-5 policy covers personal property for all perils. You choose the level of coverage you want.
Then, if the unexpected happens, you, the home buyer, will file a claim with your insurance company. The company will send an adjuster to estimate how much it will cost to repair the damage.
You will also need to let your lender know about the claim. Your homeowners insurance policy lists your lender and the lender will need to endorse any checks sent by your insurance carrier to give to the contractors for the repair. Your lender may also require inspections to ensure the work meets specific standards.
You will also have to pay your home insurance deductible. The deductible is the amount you pay out of pocket before your insurance company pays on the claim. For example, if your homeowners insurance insures your home for $300,000 with a 1% deductible and you experience a house fire, you will pay $3,000 out of pocket.
You may receive payment for covered losses or property damage up to your policy's coverage limit, including for personal belongings inside your home.
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What Does Homeowners Insurance Cover?
There are a number of potential threats to your home and property that homeowners insurance is designed to protect you from and give you peace of mind. Homeowners insurance typically covers:
- Natural disasters: Homeowners insurance covers natural disasters such as wind, hail, lightning strikes and wildfires. However, you must purchase a separate policy for floods or earthquakes because homeowners insurance doesn't cover these perils.
- Theft or vandalism: Homeowners insurance covers vandalism, riots and civil unrest. For example, if someone breaks into your home, your insurance may pay to replace your doors and windows to make it safe again. Insurance may cover other elements of your home, depending on the circumstances.
- House fire: Homeowners insurance can cover fires that occur on accident, such as electrical fires and grease and candle fires. House fires are common, which is why standard policies cover them. Your homeowners insurance will cover the cost of rebuilding your home and cover living expenses while your home gets rebuilt, such as hotel bills.
- Personal property coverage: Personal property includes the items in your home, such as furniture, electronics and other personal possessions. Homeowners insurance may replace your personal property if damaged in a covered loss.
- Liability coverage: Liability coverage covers if someone injures themselves on your property or if you cause an accident to someone else on your property.
What Doesn’t Homeowners Insurance Cover?
While your homeowners insurance policy covers many items, it’s important to be aware of its limitations. There are several items that are not covered under your basic policy but can be picked as additional coverage based on your needs.
- Water damage: Water damage may include sump pump or sewer backup water damage, but homeowners insurance typically doesn't cover it. You must obtain additional coverage or select add-on policies to cover this type of water damage. Note that property damage from burst water pipes or malfunctioning sprinkler systems is covered. You must get separate flood insurance to cover storms, melting snow or other natural causes.
- Failure to maintain property: If you fail to maintain your property or don't take care of it, homeowners insurance may not cover certain damage. Consider a home warranty to cover systems and appliances.
- Earthquakes: Most standard homeowners insurance policies do not cover earthquake damage. You will pay out of pocket for repairs if you do not have a separate earthquake insurance policy.
Is Homeowners Insurance Required?
Homeowners insurance isn’t required on a state or federal level. However, your mortgage lender will usually require you to purchase homeowners insurance to protect you and your lender if something happens on the property.
Benefits Of Purchasing Homeowners Insurance
Purchasing homeowners insurance may offer some intuitive benefits, including that you're covered if disaster strikes. However, there are some other benefits you might not be aware of, including:
- Liability coverage: Homeowners insurance protects your home in the case of a natural disaster, but it also covers your home if someone trips and injures themselves on your property.
- Personal property protection: Homeowners insurance also offers coverage to your personal belongings. For example, if a burglar ravages your home and ruins your bedroom, your homeowners insurance can cover the cost of your bed, dresser and other items.
- Housing assistance: If you cannot live in your home due to damage, your homeowners insurance may pay for temporary housing. For example, you may need to rent a storage facility while your home is being rebuilt. Homeowners insurance will cover the fees.
- Financial safety net: Homeowners insurance may help you stay out of debt, keep your savings intact and preserve your credit if you lose your home in a disaster. You pay a deductible and your homeowners insurance will cover the rest. You can feel better knowing that homeowners insurance will help protect you from financial emergencies after a disaster.
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How To Find A Good Home Insurance Policy
Follow these simple steps to get the right home insurance policy.
Shop Around For Quotes
Look at many different insurance coverage options from a variety of insurance companies so you make sure you get the best rate for you. Compare the different types of coverage against the costs. Check out the reviews of each insurance company to learn more about customer service. Learn everything you can about each company you're considering.
Read The Terms And Conditions
What do the terms and conditions reveal about each insurance plan? Get a sense of what your coverage includes, particularly if you live where you encounter floods, earthquakes or hurricanes. You may have to purchase additional coverage for these perils.
Take inventory of your personal belongings so you and your insurer know the replacement costs of all your items. This will help you get an idea of how much coverage you need and will help you if you need to file a claim.
Homeowners Insurance FAQs
Take a look at some commonly asked questions regarding homeowners insurance.
How much is homeowners insurance?
Homeowners insurance cost depends on many factors, including the type of property you own, the condition and age of your home, what you want covered and the state you live in. Homeowners insurance costs also depend on your credit score (the higher your credit score, the lower your premiums may be) and the number of structures on your property. Your claims history also matters (if you've made a claim before, your insurance company may charge you more).
When you close on a home, you can check the cost of your homeowners insurance premium on your Closing Disclosure, which you'll receive 3 business days before you close on your loan.
What’s the difference between homeowners insurance and a home warranty plan?
Homeowners insurance differs from a home warranty plan in that a home warranty plan covers your home's systems and appliances, whereas a homeowners insurance covers disasters or accidents that damage your home.
How long does homeowners insurance last?
Homeowners insurance typically lasts a year but homeowners insurance often renews annually. Ask your insurance company for more information about how long your coverage lasts.
How do you lower your homeowners insurance cost?
Homeowners can lower their insurance costs by maintaining a good credit record, sticking with the same insurance companies, seeking out discounts and taking preventative measures, such as installing smoke and carbon monoxide detectors in your home. Some insurance companies may give you discounts for doing so.
The Bottom Line
Homeowners insurance covers home loss and damage from incidents such as burglary, fire, lightning, hail or theft. But is homeowners insurance required?
No, it's not. Note that your lender may buy homeowners insurance for you. However, note that your lender will charge you for it. The insurance may only cover the lender – not you – and it may end up costing you more than what you could have purchased on your own.
Covering your home and belongings with homeowners insurance can give you valuable financial peace of mind.
Check out the Rocket Mortgage® Learning Center for more information.
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