Homeowners insurance is made up of coverages that may help pay to repair or replace your home and belongings if they are damaged by certain perils, such as fire or theft. It may also help cover costs if you accidentally damage another person’s property or if a visitor is injured at your home.
What is Homeowners Insurance?
Homeowners’ insurance pays out if an event covered under your policy damages or destroys your home or belongings. It will also cover you in certain instances if you injure someone else or cause property damage. Homeowners’ insurance has four main functions:
- Repair your house, yard and other structures.
- Repair or replace your personal belongings.
- Pay for you to live elsewhere while your house is being repaired.
- Cover personal liability if you’re held legally responsible for damage or injury to someone else.
Key takeaways:
- Homeowners insurance provides financial relief if a covered event damages your home, property or personal belongings.
- It can also pay out when you’re held responsible for an accident or injury.
- Homeowners insurance generally covers damage due to fire, wind or snow, but it won’t cover floods or earthquakes.
Your home is more than just a roof over your head. It may be your most valuable asset — and one you likely can’t afford to replace out-of-pocket if disaster strikes. That’s why protecting your place with the right homeowners’ insurance coverage is important.
Is homeowners insurance required?
Homeowners’ insurance coverage isn’t required by law, but if you have a mortgage, your lender will likely require you to insure the home to protect its investment. Even if you don’t have a mortgage, home insurance is almost always a wise purchase.
Because it gives you property and liability coverage, a homeowners policy is a financial safety net you may someday be glad to have.
What does homeowners insurance cover?
Standard homeowners insurance policies generally include six types of coverage. Here they are at a glance:
| Coverage type | What it does | Typical amount |
|---|---|---|
| Dwelling | Covers damage to the home and attached structures, such as a porch. | Enough to rebuild your home. |
| Other structures | Covers stand-alone structures on your property, such as a fence or shed. | 10% of dwelling coverage. |
| Personal property | Pays to repair or replace belongings that are stolen or damaged in a covered event. | 50% to 70% of dwelling coverage. |
| Loss of use | Helps pay temporary living expenses while your home is being repaired. | 20% of dwelling coverage. |
| Personal liability | Pays if you injure someone or cause property damage unintentionally or through neglect. | $100,000 to $500,000. |
| Medical payments | Pays to treat someone injured on your property, regardless of who’s at fault. Also pays if you, a family member, or a pet injures someone elsewhere. | $1,000 to $5,000. |
Dwelling coverage
Dwelling coverage covers the structure of your home, including the walls, floors, windows, and roof. Built-in appliances such as furnaces are also typically included in your dwelling coverage. If your home has an attached garage, porch, or deck, these would fall under your dwelling coverage, too.
Which disasters are covered? In most homeowners’ policies, your dwelling is covered for any cause of damage that isn’t specifically excluded. Some of the most common causes of homeowners’ insurance claims include wind, hail, freezing, fire, and lightning, according to the Insurance Information Institute.
How it works: A severe thunderstorm uproots a tree that falls onto your home, crushing part of the roof and attic. You’d pay your share of the repair cost — known as the deductible — then, the insurer would pay the rest, up to the limit of your dwelling coverage.
Other structures coverage
Just like it sounds, other structures coverage provides insurance for any structures on your property that aren’t attached to your house. That could include a shed, fence, or detached garage.
Which disasters are covered? As with dwelling coverage, most homeowners’ insurance policies cover other structures for any disaster that isn’t specifically excluded. That means you’d likely have coverage for fire, wind, hail, and snow, among others.
How it works: Part of your fence collapses under the weight of an unexpectedly heavy snowfall. The insurance company would pay the cost of repairing it, minus your deductible.
Personal property coverage
“Personal property” is insurance-speak for your personal belongings, like clothes, furniture, electronic devices, and appliances that aren’t built-in.
Most homeowner policies cover these items anywhere in the world, not just inside your house. So if someone steals your bike from outside a store, it’ll likely be covered (minus your deductible).
Which disasters are covered? In most homeowners’ policies, personal property coverage works differently than dwelling and other structure coverage. Instead of covering your stuff for anything that isn’t specifically excluded, homeowners’ policies often cover only disasters that are listed.
These disasters, typically called “perils” in your policy, tend to include the following:
- Fire or lightning.
- Smoke.
- Windstorms and hail.
- Explosions.
- Riots.
- Damage from aircraft.
- Damage caused by vehicles.
- Vandalism.
- Theft.
- Volcanic eruptions.
- Falling objects.
- Weight of ice, snow and sleet.
- Water overflow or discharge from household systems like plumbing, air conditioning and appliances.
- Freezing of those same household systems.
- Sudden damage from a power surge.
- Sudden tearing, cracking or bulging of a hot water system, steam system, air conditioning or fire protective system.
How it works: A pipe bursts on a frigid winter night, sending water cascading into your kitchen. Although dwelling coverage would pay for damage to built-in items such as cabinets, personal property coverage would take care of damaged furniture, minus your deductible.
Loss of use coverage
Sometimes called “additional living expenses,” the loss of use section of your homeowner’s policy can come in handy if your home is too damaged to live in.
Loss of use coverage may pay for hotel stays, restaurant meals, or other expenses associated with living somewhere else if your home is uninhabitable after a disaster your policy covers.
Which disasters are covered: As long as your home is undergoing repairs for a covered claim, you’ll likely be eligible for loss of use coverage. But if your home’s damage is due to a disaster that isn’t covered — such as a flood — your insurer won’t pay your additional living expenses either.
How it works: After a kitchen fire spreads to your living room, your home is out of commission for a few months while contractors make repairs. Your insurance company pays for you and your family to rent a similarly sized house nearby.
Liability coverage
Personal liability coverage offers financial assistance if someone sues you for injuring them or damaging their property. Coverage generally extends to anyone in your household, including pets — so if your dog bites someone at the park, you may be covered.
Which disasters are covered? Liability insurance covers bodily injury and property damage to others, with some exceptions. For instance, you won’t be covered for criminal acts or harm you purposely caused. Nor are you covered for injuries or damage from a car accident (your liability car insurance would pay for those).
How it works: A delivery person slips on your icy sidewalk before you get around to salting it. He breaks his wrist in the fall and sues you for medical bills and lost wages. Your liability coverage could pay your legal fees, plus any damages you’re responsible for in the lawsuit, up to your policy limit.
Medical payments coverage
Like liability coverage, medical payments coverage pays if you cause physical injury to someone outside your household. However, there’s no lawsuit required, and you don’t need to be found at fault in order for the medical payments coverage to payout.
Which disasters are covered: You could tap your medical payments coverage if someone suffers a minor injury on your property, or if you cause harm to someone else outside of your home. Similar restrictions apply to liability and medical payments, with no coverage for intentional acts or car accidents, among other exclusions.
How it works: Your dog bites the hand of a visiting friend. There’s no serious harm, but your medical payments insurance covers the cost of their trip to urgent care for stitches.
What’s not covered by homeowners insurance
Even the broadest homeowners insurance policy won’t cover everything that could possibly go wrong with your home. For example, you can’t intentionally damage your own house, then expect your insurer to pay for it. Policies also typically exclude damage from other causes, such as:
- Flooding, including drain and sewer backup.
- Earthquakes, landslides and sinkholes.
- Infestations by birds, vermin, fungus or mold.
- Wear and tear or neglect.
- Nuclear hazard.
- Government action, including war.
- Power failure.
However, you can buy separate coverage for some of these risks. Flood insurance and earthquake insurance are available separately, and in hurricane-prone states, you may also need or want windstorm insurance.
Expand your coverage with endorsements
Talk to your insurer if you have concerns about damage and events your policy doesn’t cover. In many cases, you can add what are called endorsements — which usually cost extra — to provide more coverage.
Below are a few of the most common home insurance endorsements. Note that availability may vary by state and company.
Scheduled personal property covers a specific valuable item, such as a ring or musical instrument. An appraisal may be required.
Ordinance or law coverage pays to bring your home up to current building codes during repairs or rebuilding.
Water backup coverage pays for damage due to backed-up sewer lines, drains, or sump pumps.
Equipment breakdown coverage pays for HVAC systems and large appliances if they stop working for reasons other than normal wear and tear.
Service line protection pays for damage to water, electric, or other utility lines that you’re responsible for.
Identity fraud coverage pays expenses associated with identity theft, such as lost wages and legal fees.
Types of homeowners insurance policies
Homeowners’ insurance comes in several types, called “policy forms.” Some types provide more expansive coverage than others, so it’s worthwhile to know the difference. Although details can differ by state and company, these kinds are fairly standard.
Most popular: HO-3 insurance
HO-3 insurance policies also called “special form,” are by far the most common. If you have a mortgage, your lender is likely to require at least this level of coverage.
HO-3 insurance policies generally cover damage to your home from any cause except those the policy specifically excludes, such as an earthquake or flood. However, where it concerns your belongings, HO-3 insurance typically covers only damage from the perils listed in your policy.
Broadest coverage: HO-5 insurance
An HO-5 insurance policy provides the most extensive homeowner’s coverage. It pays for damage to your home and belongings from all causes except those the policy excludes by name. It’s typically available only for well-maintained homes in low-risk areas, and not all insurers offer it.
Nerdy tip: HO-5 policies are sometimes called “comprehensive form” or “premier” coverage. However, an HO-3 policy may also be labeled “premier” in some cases, without offering the broader coverage of an HO-5 policy. If you want HO-5 insurance coverage, be sure to ask your agent or representative.
Limited coverage: HO-1 and HO-2 insurance
Much less popular are HO-1 and HO-2 homeowners insurance, which pay out only for damage caused by issues listed in the policy.
Other policy types include HO-4 insurance for renters, HO-6 for condo owners, HO-7 for mobile homes, and HO-8, a rarely used type that provides limited coverage for older homes.
How homeowners insurance works
If your home is destroyed, your homeowner’s insurance company isn’t likely to simply write you a check for the amount listed on your policy.
First, you’ll have to file a claim, documenting what was damaged or destroyed. And your payout could vary depending on the coverage and deductible options you chose.
Replacement cost vs. actual cash value
One key factor in your claim payout is whether your coverage will pay whatever it takes to rebuild your home, even if that cost exceeds your policy limits.
This situation may arise, for instance, if construction costs have increased in your area while your coverage has remained level. Here’s a rundown of several options you may encounter.
Actual cash value coverage pays the cost to repair or replace your damaged property, minus a deduction for depreciation. Most policies don’t use this method for the house itself, but it’s common for personal belongings. For items that are several years old, this means you’ll probably get only a fraction of what it would cost to buy new ones.
Functional replacement cost value coverage pays to fix your home with materials that are similar but possibly cheaper. For example, damaged plaster walls could be replaced with less expensive drywall.
Replacement cost value coverage pays to repair your home with materials of “like kind and quality,” so plaster walls can be replaced with plaster. However, the payout won’t exceed your policy’s dwelling coverage limits.
Some policies offer replacement cost value coverage for your personal items. This means the insurer would pay to replace your old belongings with new ones, with no deduction for depreciation.
If this feature is important to you, make sure to check the policy details before you buy. It’s a common option, but you typically need to pay up for it.
Extended replacement cost value coverage will pay out more than the face value of your dwelling coverage, up to a specified limit, if that’s what it takes to fix your home. The limit can be a dollar amount or a percentage, such as 25% above your dwelling coverage amount. This gives you a cushion if rebuilding is more expensive than you expected.
Guaranteed replacement cost value coverage pays the full cost to repair or replace your home after a covered loss, even if it exceeds your policy limits. Not all insurance companies offer this level of coverage.
Homeowners insurance deductibles
Homeowners’ policies typically include a deductible, which is the amount you’re required to cover before your insurer starts paying. The deductible can be
- A flat dollar amount, such as $500 or $1,000.
- A percentage, such as 1% or 2% of the home’s insured value.
When you receive a claim check, your insurer subtracts your deductible amount. Say you have a $1,000 deductible and your insurer approves a claim for $10,000 in repairs. The insurer would pay $9,000, and you would be responsible for the remaining $1,000.
Nerdy tip: Choosing a higher deductible will usually reduce your premium. However, you’ll shoulder more of the financial burden should you need to file a claim. A lower deductible, on the other hand, means you might have a higher premium but your insurer would pick up nearly the whole tab after an incident.
Be aware that some policies include separate (and often higher) deductibles for specific types of claims, such as damage from wind, hail, hurricanes, or earthquakes.
For example, a policy might have a $1,000 deductible for most losses but a 10% deductible for optional earthquake coverage that was added to the policy. This means if an earthquake damages a home with $300,000 worth of dwelling coverage, the deductible would be $30,000.
How much homeowners insurance do you need?
Covering your home
You need enough homeowners’ insurance to cover the cost of rebuilding your home if it’s destroyed. To estimate your rebuilding cost, multiply the square footage of your home by local construction costs per square foot. Your home insurance agent or insurer should be able to help you calculate the replacement cost.
Don’t focus on what you paid for the house, how much you owe on your mortgage, your property tax assessment, or the price you could get if you sell. If you base your coverage on those numbers, you could end up with the wrong amount of insurance.
Instead, set your dwelling coverage limit at the cost to rebuild. You can be confident you’ll have enough funds for repairs, and you won’t be paying for more coverage than you need.
Covering your stuff
For your belongings, you’ll generally want personal property coverage limits that are at least 50% of your dwelling coverage amount. Your insurer may automatically set the limit that way.
However, you can lower this limit if needed or purchase extra coverage if you think the limit isn’t enough to cover your things.
A thorough home inventory is the best way to pinpoint how much it would take to replace all your stuff. An inventory record can also come in handy later if you have to make a claim and need to know exactly what you lost.
You could make a list or, as a quick inventory hack, use your smartphone to take a video of all your furniture, clothing, and other belongings.
Covering your liability
Consider setting your liability limit at least high enough to cover your net worth. That includes the value of your savings, investment accounts, and other assets, minus auto loans, credit card balances, and other debts.
You may want a higher limit if your lifestyle puts you at greater risk of being sued—for example, if you have a swimming pool, regularly host parties in your home, or participate in activities where you could injure others, such as hunting or skiing.
Nerdy tip: If your homeowner’s policy doesn’t offer high enough liability limits, you can purchase an umbrella insurance policy for extra coverage.
How much does homeowners insurance cost?
According to a NerdWallet analysis, the average cost of homeowners’ insurance is $1,585 a year. But prices can skew much higher or lower, depending on your location and the amount of coverage you buy. In most states, your credit score can also be a factor.
If your premium seems too high, there are easy ways to save on homeowners’ insurance. For example, many insurers offer a discount for bundling your home and auto insurance. You might also get a lower rate for having common safety features like burglar alarms and deadbolt locks.
And it’s always a good idea to shop around and compare homeowners’ insurance quotes to make sure you’re getting the best deal.
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