Home insurance protects homeowners from financial losses caused by damage, theft, or liability claims. Most mortgage lenders require this coverage before approving a loan. Yet many homeowners don’t fully understand what home insurance includes or how much they actually need.
This guide explains home insurance in plain terms. It covers how policies work, what they protect, and how to choose the right amount of coverage. Whether someone is buying their first home or reviewing an existing policy, this information helps them make smarter decisions about protecting their property.
Key Takeaways
- Home insurance protects homeowners from financial losses due to damage, theft, and liability claims—and most mortgage lenders require it.
- Standard home insurance policies cover four main areas: dwelling, personal property, liability, and additional living expenses.
- Floods, earthquakes, and maintenance-related damage are excluded from standard home insurance and require separate coverage.
- HO-3 is the most common home insurance policy, covering the dwelling against all perils except those specifically excluded.
- Dwelling coverage should equal the cost to rebuild your home, not its market value—review annually to keep up with rising construction costs.
- Bundle home insurance with auto insurance to save 5% to 25% on premiums.
How Home Insurance Works
Home insurance works through a contract between the homeowner and an insurance company. The homeowner pays a premium, usually monthly or annually, and the insurer agrees to cover certain losses up to specified limits.
When damage occurs, the homeowner files a claim. The insurance company sends an adjuster to assess the damage and determine the payout amount. Most policies include a deductible, which is the amount the homeowner pays out of pocket before insurance kicks in. Higher deductibles typically mean lower premiums.
Home insurance premiums vary based on several factors:
- Location – Homes in areas prone to hurricanes, wildfires, or crime cost more to insure
- Home value and construction – Larger homes and those made with expensive materials have higher premiums
- Coverage limits – More protection means higher costs
- Claims history – Previous claims can increase rates
- Credit score – In most states, insurers use credit information to set prices
Policies renew annually, and homeowners can shop for better rates or adjust coverage at renewal time. Many people bundle home insurance with auto insurance to get discounts of 5% to 25%.
What Home Insurance Covers
A standard home insurance policy covers four main areas. Understanding each helps homeowners know exactly what protection they’re buying.
Dwelling coverage pays to repair or rebuild the home’s structure after covered events like fire, windstorms, or vandalism. This includes attached structures like garages and built-in appliances.
Personal property coverage protects belongings inside the home, furniture, electronics, clothing, and more. Most policies cover these items even when they’re stolen away from home, like a laptop taken from a car.
Liability coverage protects homeowners if someone gets injured on their property or if they accidentally damage someone else’s property. It covers legal fees and settlements, typically starting at $100,000.
Additional living expenses (ALE) pays for temporary housing and extra costs if the home becomes uninhabitable after a covered loss. This might include hotel bills, restaurant meals, and storage fees.
Common Exclusions to Know
Home insurance doesn’t cover everything. Several common perils require separate policies or endorsements.
Floods are excluded from standard home insurance. Homeowners in flood-prone areas need a separate flood insurance policy, often through the National Flood Insurance Program (NFIP).
Earthquakes also require separate coverage. About 13% of homeowners in the U.S. live in high-risk earthquake zones, yet only a small percentage carry earthquake insurance.
Maintenance issues like mold from ongoing leaks, pest infestations, or wear and tear aren’t covered. Insurance handles sudden, accidental damage, not gradual deterioration.
Certain dog breeds may be excluded from liability coverage. Some insurers won’t cover bites from breeds they consider high-risk.
High-value items like jewelry, art, and collectibles often have coverage limits of $1,000 to $2,500. Homeowners with valuable possessions should consider scheduled personal property endorsements for full protection.
Types of Home Insurance Policies
Home insurance comes in standardized forms, each offering different levels of protection. The most common types include:
HO-3 (Special Form) is the most popular home insurance policy. It covers the dwelling against all perils except those specifically excluded, while personal property gets named-peril coverage. About 80% of homeowners choose this option.
HO-5 (Comprehensive Form) provides the broadest coverage. Both the dwelling and personal belongings are protected against all perils unless specifically excluded. It costs more but offers fewer gaps in protection.
HO-1 (Basic Form) covers only 10 named perils, including fire, lightning, and theft. It’s the most limited and least expensive option, but it’s rarely sold today.
HO-2 (Broad Form) expands coverage to 16 named perils. It’s more affordable than HO-3 but leaves homeowners exposed to risks not on the list.
HO-6 (Condo Insurance) is designed for condominium owners. It covers personal property, interior walls, and liability while the condo association’s policy handles common areas and the building’s exterior.
HO-8 (Older Home Form) serves owners of historic or older homes where replacement cost exceeds market value. It pays actual cash value rather than replacement cost.
Renters need HO-4 policies, while mobile home owners typically purchase HO-7 coverage. Each policy type addresses specific living situations and coverage needs.
How Much Home Insurance Do You Need?
Determining the right amount of home insurance requires calculating several coverage types separately.
Dwelling coverage should equal the cost to rebuild the home, not its market value. A $400,000 home might cost $300,000 to rebuild, or vice versa. Local construction costs, square footage, and special features all affect this number. Many insurers offer guaranteed replacement cost coverage, which pays to rebuild even if costs exceed the policy limit.
Personal property coverage typically equals 50% to 70% of dwelling coverage. But, homeowners should create a home inventory to calculate the actual value of their belongings. Many people underestimate how quickly furniture, electronics, clothes, and kitchen items add up.
Liability coverage of at least $300,000 is recommended for most homeowners. Those with significant assets should consider umbrella policies that provide $1 million or more in additional protection.
Several factors help determine if current home insurance coverage is adequate:
- Has the home been renovated or improved?
- Have valuable items been purchased since the last policy review?
- Have local construction costs increased?
- Does the liability limit protect the homeowner’s total net worth?
Reviewing home insurance annually ensures coverage keeps pace with changing circumstances. Inflation guard endorsements automatically increase dwelling coverage each year to match rising construction costs.
