Your home is your biggest investment, and you want to do everything you can to protect it. Having the right kind of homeowners insurance can make all the difference.
But what exactly does homeowners insurance cover? And what doesn’t it cover?
Insurance might be complicated, but it’s not rocket science, people. Don’t let lack of knowledge keep you from protecting yourself.
Let’s take a closer look at the ins and outs of homeowners insurance!
- What Is Homeowners Insurance?
- What Does Homeowners Insurance Cover?
- What Isn’t Covered by Homeowners Insurance?
- How Does Homeowners Insurance Work?
- Types of Homeowners Insurance Coverages
- How to Save on Homeowners Insurance
- How to Get the Best Homeowners Insurance
What Is Homeowners Insurance?
Homeowners insurance is financial protection for your home and personal belongings in the case of accidents, fires or other disasters. It’s a way to avoid financial ruin by transferring risk to an insurance company. Homeowners insurance also protects you from lawsuits due to accidents on your property (think dog bites or other injuries).
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By paying monthly premiums, you enter into a contract with your insurance carrier. Once you pay your deductible, they’ll pay for certain repairs, including the cost of rebuilding your home sweet home.
The bottom line? If you own a home, you need homeowners insurance. And you need coverage that actually covers you. Even if you rent, a lot of landlords require you to have renters insurance to protect your stuff.
What Does Homeowners Insurance Cover?
Homeowners insurance is just one of the eight types of insurance you need. So before digging in, pat yourself on the back for looking into this. Getting educated is the first step to making sure you’re in that goldilocks sweet spot of just the right amount of homeowners insurance coverage. (And if you’re researching homeowners insurance because you’re just starting to shop for a home, check out our free Home Buyers Guide.)
A typical homeowners insurance policy covers five basic things:
While homeowners insurance does help pay for big expenses like rebuilding after a fire, repairing your roof after a windstorm, or replacing your stuff after a break-in, it doesn’t cover damage from things like flooding, hurricanes, earthquakes or maintenance issues.
Here’s how each part of your homeowners insurance policy normally works. And if you’re wondering what your current coverage looks like, check out your insurance declaration page to see a helpful breakdown of your policy.
1. Dwelling Coverage
This coverage pays to repair or rebuild your dwelling (aka your house and anything attached to it) due to damage from disasters like:
Let’s see how dwelling coverage could help you in three different scenarios.
Example 1: A tornado destroys your roof. With dwelling coverage, your insurance company will pay to replace the roof.
Example 2: Your garage catches fire. Your insurance carrier will pay to rebuild it if you have dwelling coverage. But if your garage was detached, you’d need something called other structures coverage (more on that in a second).
Example 3: If you live in a coastal area that gets hit by hurricanes, dwelling coverage won’t cover wind or flooding damage. You’ll need separate policies for that—and if you live near water, you probably will too. (We’ll get to flood insurance in a minute).
2. Other Structures Coverage
Other structures coverage is just what it sounds like: It covers things other than your house. But what counts as a structure? Here are some examples:
- Detached garage
- Tool shed
- Swimming pool
Basically, a structure is a permanent, valuable feature that’s been built on your property. But there are limits to how much the insurance company will pay to repair or replace these structures—usually around 10% of the total policy you have on your house.
Let’s go back to that tornado for a second (sorry, but these are just scenarios). It not only destroyed your roof but also turned your tool shed into kindling (ouch!). Let’s say you have a $200,000 policy on your home. The insurance company will pay up to $20,000 (10%) to repair or replace the shed.
Different policies cover different structures, so make sure the structures on your property are actually covered in your policy. This is one big reason we recommend working with a trusted and independent insurance agent to look at your unique situation.
3. Personal Property Coverage
Personal property coverage protects what’s in your home.
Imagine coming home one day to find that thieves broke into your home and stole your vintage baseball card collection. While you can’t get back the time and emotion that went into collecting all those cards, at least your insurance will pay for it.
Personal property coverage protects the possessions you use every day, like clothes, furniture and electronics. It also covers expensive stuff like jewelry, art and collectibles. That said, there’s often a dollar limit attached to those high-end items—so you need enough homeowners insurance to replace damaged or stolen valuables. Most insurance companies cover your belongings at around 50% to 70% of what your house is worth.1 So if your house is valued at $300,000, you could expect coverage up to around $210,000 for your things.
To make sure your stuff is actually covered, go through your house and take an inventory of everything. A lot of us underestimate what our stuff is worth. This normally wouldn’t be an issue, but if we underinsure our personal property we could end up with a reimbursement check that doesn’t actually cover the losses.
So pour yourself a strong cup of coffee, get out your clipboard or phone, and take a few hours on a Sunday to inventory your stuff.
4. Personal Liability Coverage
Liability protection is one of the best types of homeowners insurance you can buy. It protects you from lawsuits for bodily injury, property damage that occurs on your property and even dog bites (depending on the breed). Let’s look at what happens when a married couple doesn’t have this coverage versus when they do.
Tom and Amy invited their new neighbors over for dinner. Their neighbor’s son jumped off the staircase and broke his arm. Now the neighbor is suing for $500,000. (Sadly, this happens more often than you might think.)
Without liability insurance, Tom and Amy would be in big trouble. They would have to pay thousands of dollars for lawyers. And if they lost the lawsuit, they could lose everything they own.
But good news! Tom and Amy have liability coverage. The insurance company will pay for legal representation and cover the damages if Tom and Amy are found responsible for the accident.
More good news: Personal liability coverage doesn’t cost much, so you can get plenty of it at a reasonable rate. You should carry at least $500,000 in liability because—let’s be real—no one sues for $250,000. And if you have a larger net worth, you should also look into umbrella insurance to protect everything you’ve worked for.
5. Additional Living Expenses (ALE)
Some disasters do so much damage that you can’t actually live in your home until it’s fixed. Whether it’s for a few days or a few months, additional living expenses (ALE) coverage helps you pay for the costs of living away from home due to damage from an insured disaster.
That includes things like hotel bills, restaurant meals, pet care, transportation and even moving expenses if you’re out of your home for a while. That said, ALE won’t pay for all your expenses. It’s meant to help with costs over and above your usual living expenses.
If a fire forces you into temporary homelessness, you might have to stay in a hotel for a month or so. And if the hotel room doesn’t have a kitchen, you’ll be eating out a lot. On top of that, you’ll still have to pay your mortgage. Let’s look at some sample expenses:
$1,200 mortgage + $600 groceries = $1,800
Costs After the Fire:
$3,000 hotel + $1,200 mortgage + $1,800 restaurants = $6,000
That’s a huge increase—you can see why you’ll need ALE!
Since ALE only pays for extra expenses, it won’t cover the $1,200 mortgage. And since you didn’t have to buy groceries, the insurance company will subtract your normal grocery budget from the amount you spent eating at restaurants.
So let’s see what ALE actually pays for:
Costs ALE Covers:
$6,000 - $1,200 mortgage - $600 groceries = $4,200
ALE has limits—usually around 20% of your dwelling coverage. And it’s designed to help you maintain your standard of living, not live luxuriously on the insurance company’s dime. (If you try that, your claim’s going to get denied. Yikes!)
But when you use ALE right, it’s one of the most helpful coverages to have after a disaster.
What Isn’t Covered by Homeowners Insurance?
Now that we’ve answered the question, “What does homeowners insurance cover?”, we can look at what it doesn’t cover.
Most homeowners fail to take disasters like floods and earthquakes into consideration when figuring out their homeowners insurance needs.2 In fact, 90% of disasters involve flooding, but only 27% of homeowners say they have flood insurance.3,4 And the National Flood Insurance Program believes this percentage is lower since many people think they have it but don’t. Either way, you don’t have to be on the wrong side of these stats. If you plan ahead, you can avoid this mistake.
A lot of disasters tend to be regional—like wildfires in the West or hurricanes on the coast. So depending on where you live, you might need to purchase additional homeowners insurance or add a rider to get more coverage.
So, what doesn’t your basic homeowners insurance cover? And when should you consider buying additional coverage?
Everybody wants to be near the water—until there’s a flood! If you live in a designated flood zone, you’ll need to get flood insurance before the waters start rising. That’s because standard home insurance policies don’t cover flood damage to your home.
Flood insurance pays for damage to the structure and anything attached to it, like your HVAC system or kitchen appliances. But it may not pay for your belongings. You’ll either have to replace those out of pocket or ask your insurance agent about getting extra coverage.
From cracks in the walls to a damaged foundation, earthquakes can cause serious problems for your home—and your budget. And basic homeowners insurance won’t help. (The one exception: House fires caused by earthquakes are usually covered. Otherwise, you’re on your own.)
If you live in an area where earthquakes can shake things up, you’ll want to look into adding earthquake insurance. Earthquake insurance will cover structural repairs to your house (but not outdoor cosmetic repairs or other structures). You can also add coverage for personal property.
Homeowners policies typically don’t cover sinkholes—unless you live in Tennessee or Florida, where insurers are required to offer optional protection against sinkholes.
You might want to consider adding this coverage if you live in one of the handful of states where sinkholes are common. Besides Tennessee and Florida, those states include Alabama, Kentucky, Missouri, Texas and Pennsylvania.5
Sinkhole policies vary in what they cover—everything from your home to other structures to the ground itself—so work with your insurance agent to see exactly what coverage you need.
What do termites, mold, burst water pipes and sewage backups have in common? In most cases, your homeowners insurance doesn’t cover this kind of damage. You might be thinking, What?! But those are super expensive!
That’s true, but they’re also part of owning a home. Just like the car insurance company doesn’t pay for oil changes, your homeowners insurance company won’t pay to maintain your house.
So what do you do when this stuff happens? Well, two things.
First, stay up on your home maintenance and take care of small issues before they get big! Taking small steps to keep your pipes warm during frigid winters and making sure your home is properly ventilated can keep you from footing hefty repair bills.
You should also save up an emergency fund so you’ve got the cash to cover it when something breaks around the house. You’ll want to start with a $1,000 beginner emergency fund.
Now imagine—what if instead of giving that money away, you got to keep it? Once you pay off your debt, you can save a fully funded emergency fund of three to six months of expenses. That’s plenty of money to handle home repairs!
How Does Homeowners Insurance Work?
In a nutshell, homeowners insurance works like this:
- You buy coverage on your own or through an insurance agent.
- You pay your monthly or annual premium.
- Your insurance company then agrees to cover you in the case of an incident, if it’s covered.
- If something happens to your home that’s covered under your policy, you pay a certain amount out-of-pocket (your deductible).
- You file a claim and your insurance company will pay any costs above your deductible, up to the limit of the policy. The limit is the maximum dollar amount they’ll pay out if there is an incident that’s covered under your policy.
- Most insurance companies take about 30 days to cut you a check, unless it’s a bigger repair like rebuilding the entire home. In this case, sometimes they’ll pay the money directly to the contractor.
- If something happens that’s not covered, you’ll have to pay the full cost of the repair.
Types of Homeowners Insurance Coverages
We’ve talked about what homeowners insurance does and doesn’t cover. But there’s one thing left: the types of homeowners coverage.
Choosing the right type of homeowners insurance is important. And it’s a balancing act. You want the most protection at the best value—without being underinsured or paying high premiums for coverage you don’t need. (It’s also worth checking your auto insurance to make sure you’re not underinsured.)
Let’s look at four main types of homeowners insurance.
A cash value homeowners policy will pay to repair or replace your home and personal belongings, minus depreciation. That’s a lot of fancy insurance talk, so let’s break it down.
Let’s say somebody steals your TV. The insurance company will pay what the TV was worth when it got stolen—not when it was new in the box. So even though you paid $1,000 for that 4K Quantum HDR TV, you’ll only get $400 because that’s what your TV is worth now.
Replacement cost coverage offers more protection than cash value coverage because it doesn’t consider depreciation. It’ll pay to repair or replace your home up to the home’s original value (within some limits). So you can rebuild your home like new.
But there can be limits to replacement cost insurance:
- Dwelling Coverage Limits: Your homeowners insurance policy has a dwelling coverage limit. The insurance company pays up to that limit—no more. So if you have a $200,000 dwelling coverage limit and the rebuild will cost $250,000, you’ll have to pay $50,000. To figure out how much coverage to get, you’ll want to estimate the replacement cost. Do this by taking the square footage of your home times the cost per square foot based on local estimates. An insurance agent can also help you figure out this number.
- Partial Replacement Cost: Some replacement cost policies only pay part of the costs to rebuild your home—which can leave you high and dry if the rebuild exceeds what the insurance company will pay.
- Personal Property: And some replacement cost policies still only offer cash value for personal property. That’s why you should always make sure you have enough replacement cost coverage for your home and your stuff. Which brings us to . . .
Guaranteed Replacement Cost
Guaranteed replacement cost coverage pays the full replacement cost if your home is destroyed—without factoring in depreciation or dwelling coverage limits. So if the rebuild costs $250,000, that’s what the insurance company will pay.
The downside is that guaranteed replacement cost raises your insurance rates, so you should only get it if you really need it—like if you live someplace where your home is very likely to be destroyed in a natural disaster and where rebuilding costs are unpredictable. (But if your home is in that much danger, you may just want to move somewhere safer!)
Extended Replacement Cost
Another variation on replacement cost coverage is extended replacement cost coverage. This type of homeowners insurance pays the replacement value of your home up to the coverage limit—plus a percentage of the coverage limit.
Let’s say you have a $300,000 dwelling coverage limit with a 25% extension. The insurance company would pay up to $375,000 to rebuild your home.
$300,000 coverage limit x 0.25 = $75,000 extension
$300,000 coverage limit + $75,000 extension = $375,000 maximum coverage
Extended replacement coverage can be helpful if you live in an area where construction costs are rising a lot (which seems to be nationwide in 2021) and your home is at relatively high risk of being damaged.
Again, this type of coverage is more expensive, so you should only buy it if you really need it.
How to Save on Homeowners Insurance
First, understand that the cost of homeowners insurance varies widely depending on your situation. Your monthly or annual premium will depend on factors like the cost of your home, your past history of homeowners insurance claims, what type of coverage you need, your credit score, if you live in a hurricane-prone area, and how much your belongings are worth.
While you definitely don’t want to cut corners on something like homeowners insurance, there are a few things you can do to save some money.
- Bundle!—We’ve all seen the TV ads: “Bundle and save!” Although it gets old, it’s true. You can save money on your homeowners insurance by bundling it with your auto policy. If you haven’t done this yet, check with your insurance agent or carrier to see if you’ll save.
- Improve safety features—It might seem small, but installing things like burglar alarms, smoke detectors or deadbolt locks can sometimes get you a discount.
- Increase your deductible—A basic insurance principle is that the higher your deductible (the amount you pay out-of-pocket for a repair before insurance kicks in), the lower your monthly premium will be. You could save some money monthly by raising that deductible, but only if you can afford the bigger deductible from your savings.
- Check for better rates—Every once in a while, you should make a habit out of checking to see if you can get a better rate. Don’t feel like you’re stuck with the same policy and monthly premium year after year. You might be leaving money on the table by not shopping around a little or having your insurance agent check for you.
- Pay your mortgage in full—Yes, you read that right. It is possible to pay off your house, but only if you focus and make it a priority. And one benefit to having no mortgage is that your insurance premiums will drop. Sweet!
How to Get the Best Homeowners Insurance
Homeowners insurance is amazing because it transfers risk from you to the insurance company. But it can be complicated. So, what’s the best way to get the best bang for your buck when it comes to homeowners insurance?
One way is to shop around yourself and buy it directly from a carrier. But this can take a lot of time and still leave you without the best protection in place. With so many different coverages and add-ons, it’s easy to miss one you need or accidentally buy one you don’t need.
But sometimes it’s just better to work with a professional. That’s why we recommend working with one of our Endorsed Local Providers (ELPs). Our trusted insurance ELPs know the industry inside and out. Plus they live all over the country—so you can find a pro to help you get the right homeowners insurance coverage in your area.
So if you’re ready to make a change and get the right homeowners insurance, connect with a pro near you today!