What is Home Insurance

Standard homeowners insurance policies provide a range of protections, divided into these categories:

• Dwelling and other structures: Home insurance pays to repair or rebuild your home if it is damaged or destroyed by a list of covered incidents such as fire, burglary or lightning. This coverage can also extend to other structures on your property, including detached garages, tool sheds and swimming pools.
• Personal property: Homeowners insurance policies also pay to repair or replace belongings, such as your jewelry, clothing and furniture, if they are damaged, destroyed or stolen. You may also purchase extended coverage for expensive items.
• Liability: If you or a family member living in your home are responsible for property damage or injury, your policy can help foot the bill for medical bills and legal fees. For example, this coverage could apply to your dog biting a neighbor or a friend slipping and breaking an arm on your front steps.
• Additional living expenses: Also called loss of use coverage, additional living expenses (ALE) coverage applies when your home is unlivable due to a covered loss. In this case, your policy will pay for expenses such as housing and food while your home is being repaired or rebuilt.

A homeowners insurance policy is an agreement between you and an insurance company in which you pay monthly or annual premiums in exchange for coverage. When you purchase a policy, you agree to a set of established coverage limits (the amounts of coverage that may be paid out for claims) and deductibles (the amounts you will pay out of pocket when claims arise before your coverage kicks in).

In most cases, dwelling coverage limits are equal to the total cost of rebuilding your home, with other structures and additional living expense limits totaling around 10% of the home’s dwelling coverage limit. Personal property coverage limits typically equal around 50% of the dwelling coverage limit and can often be extended with additional coverage for costly items such as fine jewelry, collectibles or artwork.

Most homeowners policies provide a minimum of $100,000 in liability coverage, with the option to increase coverage limits for added financial protection. Home insurance companies also offer policy endorsements, allowing you to customize your policy with added coverages ranging from identity theft prevention to sewage and sump pump overflow protection.

Policy endorsements can vary based on the provider you choose and where you live. We at the Guides Home Team have evaluated dozens of home insurance companies, breaking down their standard policies and optional add-ons to help you compare coverage.

Most homeowners purchase an HO-3 policy, also called a special form home insurance policy. With an HO-3 policy, your home’s structure is protected against open perils, meaning everything except a short list of perils — including wear and tear, government actions and vandalism in vacant dwellings — is covered.

This type of policy covers your personal belongings from the 16 named perils below:

• Accidental AC, plumbing or heating overflow
• Burning, cracking or tearing of water heater
• Damage caused by an aircraft
• Damage caused by a vehicle
• Damage caused by an electrical current
• Explosions
• Falling objects
• Fire or lightning
• Frozen pipes
• Hail or windstorms
• Riots
• Smoke
• Theft
• Vandalism
• Volcanic eruption
• Weight of ice, snow or sleet

Home insurance policies typically exclude “acts of God,” such as natural disasters and “acts of war.” One of the most common exclusions of homeowners insurance that can lead to costly home damage is flooding.

While standard homeowners insurance does not cover damage from floods, you can purchase a flood policy through the National Flood Insurance Program (NFIP) or via a private insurer such as Allstate if you live in a high-risk area prone to floods.

You can also purchase an individual earthquake insurance plan or policy endorsement from some home insurance companies.

Some consumers confuse homeowners insurance with home warranties. Home warranty companies cover your home’s major systems and appliances when they break down. It includes damage from general wear and tear, which homeowners insurance does not cover.

Depending on your policy needs and budget, you can choose from the following three types of home insurance coverage:

• Actual cash value: Actual cash value coverage pays to replace your home or possessions after factoring in depreciation, which can leave you with a lower claim payout.
• Replacement cost: Replacement cost coverage does not account for depreciation or inflation, allowing you to replace your home and belongings with comparable new ones.
• Guaranteed replacement: Also called extended replacement, this coverage shields you against inflation, paying whatever it costs to replace your home, up to a specific limit, even if it exceeds the amount of coverage you purchased.

Some homeowners insurance companies offer replacement cost as a standard coverage, while others require you to upgrade your policy to access it. While replacement cost coverage may be more expensive than actual cash value, it can be a wise investment if the premiums work with your budget.

Homeowners insurance is not required by law, but nearly all mortgage lenders mandate it.

Just as landlords require tenants to maintain a renters insurance policy with a minimum amount of personal liability coverage, mortgage lenders require borrowers to show proof of a homeowners policy. Lenders typically require you to carry at least 100% of your home’s replacement cost.

The replacement cost is the amount of money required to rebuild your home with comparable building materials. To arrive at this figure, your insurance company will consider the home’s square footage, roofing and siding materials, age, architectural style, layout and more.