Complete Guide to Homeowners Insurance

Buying a home is one of the most significant financial moves you’ll ever make. At the beginning of 2023, the median nationwide home price was $436,800. That’s a massive chunk of change you’ll want to protect.

Enter homeowners insurance.

Homeowners insurance keeps you off the financial hook for repairing costly damages to your home. It also helps cover things like paying for a hotel room if you move out during repairs.

Thankfully, finding an affordable policy doesn’t have to be complicated. Here’s what you need to know to find the right policy.

How Does Homeowners Insurance Work?

Homeowners insurance provides financial protection to homeowners in the event of damage or loss to their property. Homeowners pay a monthly or annual premium to an insurance company. In return, the insurance company agrees to cover the costs of repairs or replacement of the home and personal property in the event of covered perils.

Is Homeowners Insurance Required?

Homeowners insurance is not legally required. However, most mortgage lenders will require borrowers to carry a policy as a loan condition.

Regardless, it is a good idea to be insured. Damages to your property can happen at any time and the cost of repairs — particularly when you factor in rising construction costs — can be financially devastating. In 2020, homeowners filed claims for $13,962 on average, according to the Insurance Information Institute. Without a policy, you’ll be on the hook for paying those costs out of pocket.

Ready to compare rates? In just a few steps, our Homeowners Insurance Comparison tool can show you rates from multiple insurance providers.

What Is Covered by a Standard Policy?

A standard homeowners insurance policy typically includes at least four types of coverage:

Dwelling coverage

Dwelling coverage protects the structure of your home and any attached structures, such as a garage or deck. It typically covers damages caused by perils such as fire, wind, hail and vandalism up to the limit specified in your policy.

Loss of use coverage

Loss of use coverage, also known as additional living expenses coverage, helps cover additional living expenses if your home becomes uninhabitable due to a covered peril. This coverage can pay for temporary housing, meals and other living expenses you incur while your home is being repaired or rebuilt.

The coverage typically has a limit specified in your policy and may have specific exclusions or requirements.

Personal property coverage

Helps pay to repair or replace items such as furniture, clothing, electronics and other personal belongings that are damaged or destroyed in a covered event. The coverage typically has a limit specified in your policy and may have specific exclusions or requirements.

Liability coverage

It helps protect you financially if you are found responsible for causing bodily injury or property damage to someone else. Liability coverage can help pay for legal fees, medical expenses and other costs that you may be liable for if someone is injured at your home.

What Is the Difference Between Actual Cash Value and Replacement Costs?

Most homeowners insurance policies offer two types of coverage for your personal property: actual cash value (ACV) or replacement cost.

Actual cash value coverage pays the current value of your damaged or lost item, considering its age, condition and depreciation. This means the payout you receive from your insurance company will likely be less than the cost of replacing the item with a new one.

On the other hand, replacement cost coverage pays the total cost of repairing or replacing the damaged or lost item without considering depreciation. For example, if a fire destroys your five-year-old TV, the insurance company will pay you the full cost of a new TV of similar quality, although the original TV was worth less due to depreciation.

Remember that replacement cost coverage typically has a higher premium than actual cash value coverage, but it can provide greater financial protection in the event of a loss. When choosing between the two types of coverage, it's essential to consider the value and age of your personal property and your budget and coverage needs.

Want to compare ACV and replacement cost plans? Try our Homeowners Insurance Comparison tool.

What About Natural Disasters?

Many homeowners get caught in the trap of assuming their insurance policy covers natural disasters, only to find out it doesn’t when they file a claim.

On a basic level, homeowner’s insurance covers damage caused by:

• Fire
• Wind
• Hail
• Lightning
• Theft
• Vandalism

If you live in an area prone to natural disasters like earthquakes, consider purchasing additional insurance, known as a rider or an endorsement policy. If you live in a coastal area or an area prone to flooding, you may need a separate flood insurance policy through the National Flood Insurance Program or a private insurance company.

How Much Homeowners Insurance Do I Need?

The amount of homeowners insurance you need will depend on the value of your home and personal belongings, the cost of rebuilding your home, and your personal liability risk.

To determine the right coverage level, assessing your needs and comparing rates from several insurance providers to find the best deal for you is crucial.

Ready to compare rates? Use our Homeowners Insurance Comparison tool to see personalized quotes from some of the biggest providers nationwide.