Home insurance basics

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. The dwelling coverage limit 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. Home insurance costs are largely based on this amount.

What is covered: A standard home insurance policy covers the dwelling for any peril (cause of damage) that is not specifically excluded. That includes fire, vandalism and some forms of water damage.

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)

What is covered: Anything you own that is not a part of the structure itself, including appliances and fixtures.

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 used.

What is covered: Injuries or property damage for which you are responsible, both on and off the premises.

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 is covered: Expenses above and beyond your regular bills that you incur as a result of being unable to live at home during a covered claim.

What does homeowners insurance cover?

Standard home insurance policies cover the dwelling for any peril that isn't specifically excluded. They're known as all or open perils. For personal property, the coverage is for a specific list of named perils.

"Home insurance generally covers damage due to fire, theft, vandalism, and natural disasters, as well as coverage for homeowners' personal belongings," Mckenzie says.

A home insurance policy covers:

Settlements and lawsuits resulting from injuries or property damage you cause to someone else
The dwelling itself at its replacement cost for all perils
Other structures on the property at replacement cost for all perils
Personal property at actual cash value unless you add a replacement cost endorsement
Additional living expenses when you can't live at home due to a covered loss

What does home insurance not 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 home 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.