What is homeowners insurance?
Home insurance is a package policy that includes four main coverages to protect your house, its contents, and you. Because it provides more than one type of coverage, it's known as a multi-line policy. The two main lines are property and casualty.
Property insurance covers things that can be repaired or replaced: your house, your garage, your appliances and personal property. Casualty insurance covers damages and injuries to others
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 the bill. That's a property damage claim.
If someone falls on your icy sidewalk and sues you, personal liability insurance will pay the bill. That's a casualty claim.
Homeowners insurance also provides coverage for loss of use, paying temporary living expenses when you can't live at home during repairs on a covered claim.
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 protects from the liability risks that come with owning a home. That includes the risk of someone falling on your property or a tree on your land falling onto a neighbor’s home.
How does home insurance work?
Home insurance works by returning you to where you were after an unexpected incident does damage to your property. In the home insurance industry, that's called indemnity.
You and all of the other insured people pay premiums, and when you file a claim, that premium money is drawn upon to repair the damage up to your policy's limits after the deductible.
Is homeowners insurance required?
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 homeowners 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 the coverages and how they work.
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.
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.
Loss of use or additional living expenses (ALE)
Loss of use, or additional living expenses coverage pays for additional costs you incur when you can't live at home during repairs on a covered claim. That includes hotels, dining out and other costs.
What does homeowners insurance cover?
Typical home policies are what is known as all-perils. The cover any peril that isn't specifically excluded from the policy.
"Home insurance generally covers damage due to fire, theft, vandalism, and natural disasters, as well as coverage for homeowners' personal belongings," Mckenzie says.
While most home insurance policies are all perils, there are some policies that are named perils, which means they only cover the perils named in the policy. This usually applies to homes that don't qualify for a standard home insurance policy and require specialty coverage. Common perils covered by a home insurance policy include fire, wind, hail, theft and some water damage.
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
Optional coverage endorsements
You can add additional coverage to your policy as needed. Some common endorsements include:
- Building ordinance coverage for changed building codes
- Water and sewer backup
- High-value item floaters (scheduled personal property)
- Business property
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.
Earthquake. Earthquake insurance is usually offered as a endorsement, but may be a standalone policy.
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 more 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:
- The cost to rebuild your home if it were completely destroyed
- Your home’s age
- Your neighborhood’s fire protection rating
- 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.
What is the average cost of home insurance?
The average cost of a home insurance policy with $300,000 in dwelling coverage and liability and $1,000 deductible is $2,777 a year nationwide.
How to choose homeowners insurance
Compare home insurance rates and coverage options before you buy a home insurance policy.
"When looking over your home insurance policy, or searching for a new home insurance policy, the most important thing to look for is the coverage amount on the home, or in other words, the amount of insurance you would need to cover the home," Mckenzie says.
Be sure to review your policy at least every two years to adjust your coverage as needed. Factor in:
- Home additions or remodels
- 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)
- 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.
Helpful home insurance tools and calculators
