Homeowners Insurance: Coverage, Costs, and How It Works
Owning a home is a major milestone and one of the biggest financial commitments most people make. Plenty of things can put this investment at risk, however, ranging from weather damage to unexpected accidents. Homeowners insurance helps protect against related costs and covers repairs, replacements, or liability expenses when life doesn’t go as planned.
Not all homeowners policies are created equal, though. What do they actually cover, and how does coverage work when you need it most? Let’s take a closer look.
Homeowners insurance, explained
At its core, homeowners insurance is a contract between you and an insurance company; you pay a monthly or annual premium, and the insurer agrees to cover specific losses if something unexpected (e.g., a fire, burst pipe, or windstorm) occurs—meaning you’ll pay only your deductible (the portion covered before insurance kicks in) rather than tens of thousands of dollars for repairs or replacement after a disaster. Most mortgage lenders require this type of insurance as a condition of your loan, but even if you own your home outright, coverage protects your investment. Not sure where to start? Check out Bankrate’s list of the best homeowners insurance companies, comparing current top insurers to help get a feel for pricing and coverage options.
What does homeowners insurance cover?
Most standard homeowners insurance policies include six main types of coverage, each designed to protect a different part of your property and provide financial well-being. Here’s a breakdown of each one…
Dwelling coverage
This covers damage to the structure of a home and anything attached to it (e.g., roof, walls, porch, or built-in appliances). The goal is to have enough coverage to completely rebuild your home if it’s destroyed by an insured event such as a fire or severe storm.
Other structures coverage
With fences, sheds, detached garages, etc. not physically connected to a home, this part of a policy covers stand-alone structures like these (typically for about 10% of dwelling coverage).
Personal property coverage
A home isn’t just a building but filled with belongings that matter to the people who live there. Personal property coverage helps pay to repair or replace such items if they’re stolen, vandalized, or damaged in a covered disaster. Most policies set this limit at around 50% to 70% of dwelling coverage, but this is adjustable based on the breadth of property owned.
Loss of use coverage
If a home becomes uninhabitable due to a covered event, this can help with temporary living expenses (e.g., hotel stays, rental costs, and meals, usually up to about 20% of dwelling coverage) while repairs are made.
Personal liability coverage
Accidents happen! Liability coverage—protecting you financially if you unintentionally cause injury or property damage—can help cover legal fees, settlements, and medical costs with limits typically ranging from $100,000 to $500,000.
Medical payments coverage
This type of coverage offers a small safety net for minor injuries that happen on your property (even if you’re not at fault) and can also cover incidents caused by a family member or pet away from home. Most policies provide $1,000 to $5,000 in coverage, which can help with unexpected medical costs.
What’s not covered by homeowners insurance?
Homeowners insurance offers broad protection, but it doesn’t cover everything under the sun. Knowing what’s excluded and what’s extra can help avoid expensive surprises down the road. Common exclusions include…
Floods and earthquakes
Standard policies don’t cover large-scale natural disasters like floods, earthquakes, or landslides. You’ll need separate flood insurance (often through the National Flood Insurance Program) and earthquake coverage if you live in a high-risk area.
Sewer or drain backups
Damage from backed-up drains, sump pumps, or sewer lines usually isn’t covered, but you can add water backup coverage to protect against this type of damage.
Mold, rot, and pests
Issues caused by gradual deterioration thanks to mold, termites, or rodents are considered maintenance problems rather than sudden losses. If mold results from a covered event (e.g., a burst pipe), cleanup may be included.
Normal wear and tear
Insurance won’t replace an aging roof, worn-out plumbing, or broken water heater that’s simply reached the end of its lifespan. Routine maintenance is the homeowner’s responsibility.
Intentional damage or neglect
If you deliberately damage your home or ignore necessary repairs, your insurer won’t pay for the consequences.
Government action or war
Events like war, nuclear hazards, or government seizure of property are excluded as they’re considered uninsurable.
Optional add-ons and endorsements
You can fill many of the aforementioned gaps with policy endorsements, optional coverage you can purchase for extra peace of mind. This includes…
Water backup coverage
Pays for damage caused by sump pump or drain overflows
Equipment breakdown coverage
Covers sudden appliance or other major system mechanical or electrical failures (not normal wear and tear)
Service line coverage
Protects underground water, gas, or electrical lines you’re responsible for
Scheduled personal property coverage
Provides extra protection for valuables such as jewelry, art, or collectibles
Ordinance or law coverage
Helps cover the cost of bringing your home up to current building codes after a loss
Identity theft protection
Covers expenses such as legal fees or lost wages if your identity is stolen
Homeowners insurance claims process
If you ever need to use your homeowners insurance, the first step is to file a claim by…
1. Documenting the damage
Take photos and videos of everything affected and gather receipts or estimates for repairs or replacements. The more details you provide, the smoother the claims process.
2. Notifying your insurer
Contact your insurance company as soon as possible to report the incident, knowing most insurers have 24-hour claim hotlines or online portals where you can submit the first notice of loss.
3. Working with an adjuster
Your insurer will assign a claims adjuster to inspect the damage, review your documentation, and estimate repair costs via an in-person visit or virtual inspection.
4. Reviewing your settlement
After the adjuster completes the report, your insurer will issue a payment (minus your deductible) based on your policy terms and the extent of the damage.
Your payout amount ultimately depends on the type of coverage you have (either covering the replacement cost or actual cash value, for example) and your deductible.
Note: You’re responsible for the difference if repairs cost more than your coverage limit.
Replacement cost vs. actual cash value
Policies differ in how they reimburse you, as outlined here:
Actual cash value (ACV) pays what the item is worth today (factoring in depreciation).
Replacement cost value (RCV) pays what it costs to buy new items of similar quality.
Guaranteed or extended replacement cost coverages ensure you can rebuild your home to its original condition without paying significant out-of-pocket expenses.
Example:
If your five-year-old TV was destroyed in a house fire, ACV coverage might pay $200 (its depreciated value) whereas RCV coverage would pay $600 to buy a brand-new one.
Understanding deductibles
Most homeowners choose a flat dollar amount ($500, $1,000, or sometimes a small percentage of the home’s insured value) for their deductible, the amount you need to pay before insurance covers the rest. Going with a higher deductible can save you money on your monthly premium, but it also means spending more out of pocket when disaster strikes. A lower deductible does the opposite with less stress come claim time but slightly higher costs upfront.
Example:
If your $10,000 roof repair claim has a $1,000 deductible, the insurer pays $9,000, and you cover the rest.
Types of homeowners insurance policies
Not all policies are created equal. While insurers use standard policy “forms” (labeled HO-1 through HO-8), most homeowners will only encounter a few of them. Here are some essentials…
HO-3 (special form)
HO-3 policies are the most common overall for single-family homes, providing “open-peril” coverage for the structure extending to any cause of damage (unless specifically excluded) and “named-peril” coverage for belongings.
HO-5 (comprehensive form)
HO-5 policies are a step up from HO-3, offering the broadest protection whereby both the dwelling and personal property are covered for all causes except those listed as exclusions. This is typically available for newer, well-maintained homes.
HO-4 (tenant’s form)
Designed for renters, HO-4 policies cover personal property and liability but not the building itself—which is the landlord’s responsibility.
HO-6 (condo form)
Tailored for condo or co-op owners, HO-6 policies cover personal property, liability, and portions of the unit they’re responsible for such as interior walls, fixtures, or flooring.
Other forms (HO-1, HO-2, and HO-8)
Older or specialized policy types with limited availability, these typically provide narrower coverage and are less common nowadays.
The bottom line on homeowners insurance
Homeowners insurance protects your home, belongings, and financial future should the unexpected happen. Whether you’re a first-time buyer or long-time homeowner, understanding your coverage will help ensure you’re not caught off guard when you need it most.
Have questions about homeowners insurance or the home-buying process? Schedule a free consultation with one of our CFP® professionals to get them answered.
People also ask
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Legally, no, but your lender will almost certainly require you to carry a policy if you have a mortgage. Maintaining coverage is also strongly recommended even if you own your home outright to protect your investment from costly damage or liability claims.
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A good rule of thumb is to have enough dwelling coverage to rebuild your home completely if it were destroyed (based on construction and labor costs, not your home’s market value).
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It depends on the cause. Sudden accidental leaks (e.g., a burst pipe) are usually covered, while gradual leaks, flooding, or sewer backups typically aren’t—though you can often add water backup coverage or flood insurance for such situations.
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Yes! Most policies cover your belongings no matter where they are in the world, such as if your laptop is stolen from your car or luggage goes missing while you’re traveling (for example).
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Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
