What is homeowners insurance?

Homeowners insurance is a type of coverage that protects your home and belongings from unexpected damage and loss. If you have a mortgage, your lender will probably require it.

This type of insurance can shield you from costly events. If a storm or fire does damage to your home, the repairs or replacements could be financially devastating. Homeowners insurance can help you recover from these losses so you don’t have to cover the full burden on your own.

We’ll break down how it works and what a policy will and won’t cover.

How does homeowners insurance work?

Homeowners insurance works like any other insurance policy. You pay a fee, called a premium, to receive financial protection for your home and belongings in the event that they are damaged by a covered incident, like a natural disaster.

Policies come with exclusions, meaning some events that aren’t covered. They also have deductibles and coverage limits, which can place restrictions on how much the insurer has to pay out for damages.

If your home is damaged, you can submit a claim to get reimbursed by the insurer. For example, using the example above, if your home is damaged by a tree branch knocked down by a storm, the insurer will help pay for repairs and may replace items in your home that were damaged.

Actual cash value vs. replacement cash value

One key thing to pay attention to when buying home insurance is whether they provide coverage for the actual cash value of your home and belongings or their replacement cash value.

Actual cash value means insurance covers the amount of money needed to fix your home or belongings, minus any decrease in property value due to age and use.

Replacement value means the amount needed to repair your property at current labor and materials costs.

Typically, replacement value coverage is more expensive because it is more complete coverage. Actual cash value coverage is cheaper, but you may have to pay for some portion of costs out-of-pocket.

Homeowners insurance vs. home warranty

Homeowners insurance is different from a home warranty despite their similar names. Insurance protects you from damage to your home throughout the life of the policy.

Home warranties provide much narrower protection, covering major systems of your home, such as HVAC and appliances like your refrigerator, but not damage to the structure of your home or other belongings.

Home warranties are not required, have lower coverage limits, and are far less common than home insurance.

What does homeowners insurance cover?

Homeowners insurance protects both your home and personal belongings from covered perils.

Dwelling coverage

The dwelling coverage portion of your insurance policy refers to the protection for your home’s structure from damages such as fire, theft, or other covered incidents. If you need to pay money to repair or rebuild the home or attached structures, like a deck, this coverage will often do that. Always check your coverage carefully to confirm that you have the insurance you need.

It’s also important to consider detached structures such as detached garages, and sheds, are most likely not covered under dwelling coverage and may be covered under a separate section of your policy called “Other Structures.” Again, check your policy to learn more about what coverage you have.

Coverage limits usually depend on the value of your home. Insurers generally won’t provide coverage far above what your home is worth.

Personal property coverage

Personal property coverage, sometimes referred to as Coverage C on a homeowners policy, 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% to 70%. So, 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 or may not be covered by Coverage C, you may want to take out additional insurance to cover those.

Personal liability coverage

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 – $500,000 of liability coverage if there are additional risk factors.

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 difference between your normal grocery bill and the higher cost of ordering food or dining out due to your no longer having a kitchen.

According to the Texas Department of Insurance, coverage for additional living expenses usually caps out at 10% to 20% of your total policy limit. Individual policies may differ.

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. While you should check your policy for specifics, here are some examples of events that may not be covered by standard homeowners insurance:

• 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 they 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 the property: If you fail to maintain your property or don’t take care of it, and a person falls because of a broken porch step, your liability may not be covered because you did not repair the step.
• Pest-related damage: Damage caused by termites, rodents, or other pests may not be covered by your insurer.
• Certain high-value items: Some policies exclude specific, expensive items such as art, jewelry, or collectibles.
• Business-related items: If you run a business from your home, your business items or tools will likely be excluded from coverage unless you buy business insurance.
• Intentional losses: If you intentionally cause damage to your home or property, your insurance company can refuse to cover the cost of repairs.

Is homeowners insurance required?

Lenders usually 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. But if you lack insurance, you’ll be responsible for all repairs and liability costs.

Even if you don’t have a mortgage, buying homeowners insurance is a good idea. A premium of a few hundred to a few thousand dollars a year can protect you from hundreds of thousands of dollars in out-of-pocket costs should something happen. Buying a policy may be especially prudent if you live in an area at high risk of natural disasters.

How much does homeowners insurance cost?

The cost of homeowners insurance varies significantly based on many factors. Some factors cited by the Consumer Federation of America as influencing insurance costs include:

• Location. Areas at higher risk of natural disaster or crime cost more to insure.
• Home age, features, and condition. Newer homes with modern systems may cost less to insure because they are less likely to fail and file a claim. Older homes may cost more to insure since their systems could be outdated.
• Deductible and coverage limits. The lower your deductible and the higher your coverage limit, the more you’ll pay.
• Endorsements and add-on coverages. If you buy add-ons like coverage for your collectibles or flood insurance, you’ll pay more.
• Coverage length. While most policies are written for one-year terms, staying with the same insurer over time may result in more discounts as they want to retain you as a customer. It’s a good idea to compare the same coverage with multiple insurers to make sure you’re getting the best rates.
• Credit score. In general, people with better credit scores land lower rates because insurers view them as a lower risk of filing a claim. Not all states allow this, however. In California, Hawaii, and Massachusetts insurers are prohibited from factoring credit scores into homeowners or auto policies.
• Claims history. The more insurance claims you’ve filed in the past, the more insurers will tend to charge for future insurance coverage.

If you’re buying a home, your lender may include an estimated insurance cost in your loan estimate. You can also contact insurers to get specific quotes.

How to file a homeowners insurance claim

If something happens to your home, you’ll need to file a claim with your insurer to get reimbursed for the cost of repairs. While each insurer’s process for filing a claim can vary, it will look roughly like this:

• Assess the damage that has occurred, writing a description and taking photos and videos for evidence
• Check your policy for exclusions, limits, and deductibles to ensure filing a claim makes sense
• Contact your insurer as quickly as possible to begin the process and provide details on the damage
• Meet with the insurance adjuster and let them assess the damages
• Submit the required forms and documentation
• Wait to receive a claim decision
• Receive the payout or file an appeal against the claim decision

FAQ

Before buying homeowners insurance, make sure you know the answer to these common questions.

What’s the difference between homeowners insurance and renters insurance?

Homeowners insurance is for people who own property and want to protect that property and their belongings. Renters insurance is for people who rent a home or apartment. It usually only covers their belongings and possibly the cost of living elsewhere if their apartment is unlivable, but it doesn’t actually insure the building.

How can I lower the cost of my homeowners insurance?

Some options for lowering the cost of insurance include shopping around, buying less coverage, accepting a higher deductible, or looking for ways to get discounts, such as bundling.

Why would I be denied a homeowners insurance policy?

Insurance companies may deny your application for insurance for many reasons. For example, if you have a history of filing many claims, you might not be an appealing customer. Homes in poor condition or areas prone to crime or natural disaster may also be hard to insure.

Can I deduct my homeowners insurance premiums on my taxes?

In general, you cannot deduct the cost of homeowners insurance on your taxes. The exception is that if you own an investment property, you can deduct the cost of insurance for that property as a business expense.

How do I 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 provides essential financial protection

Your home is likely your most valuable asset, so it makes sense that you want to protect it. Homeowners insurance can be a good way to protect your property, ensuring you can afford to repair it or replace your belongings should something happen. Take the time to compare insurers and research your options so you can buy the right policy for your needs.

If you’re ready to buy a home, you can apply for a mortgage with Rocket Mortgage today.