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What Homeowner’s Insurance Does (and Doesn’t) Cover

Your home is your biggest investment, and you want to do everything you can to protect it. That means you definitely need homeowner’s insurance

But what does homeowner’s insurance cover? For that matter, what doesn’t it cover? Because as helpful as it is, it won’t pay for everything.

Homeowner’s insurance won’t cover things like flood damage, earthquakes or maintenance issues. But it does help you pay for other big expenses, like rebuilding after a fire, repairing your roof after a windstorm, or replacing your stuff after a break-in. 

So let’s take a closer look at what homeowner’s insurance can (and can’t) do for you!

What Does Homeowner’s Insurance Cover?

Your typical homeowner’s insurance policy covers five basic things:

  • Dwelling
  • Other structures
  • Personal property
  • Personal liability
  • Additional living expense

Here’s how each part of your homeowner’s insurance policy normally works to protect you.

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:

  • Fire
  • Windstorms
  • Hail
  • Lightning
  • Theft
  • Vandalism

Let’s see how dwelling coverage could help people in three different situations.

Protect your home and your budget with the right coverage!

Example 1: A tornado destroys the roof of Tony’s house. Tony has dwelling coverage, so the insurance company pays to replace the roof.

Example 2: Tanya’s garage catches fire. Since it’s an attached garage, her dwelling coverage pays to rebuild it. But if her garage was detached, she would need other structures coverage (more on that in the next section).

Example 3: Jill and Fadi live in a coastal area that gets hit by a hurricane. The good news is their dwelling insurance covers wind damage. On the other hand, it doesn’t cover flood damage. They’ll need a separate flood insurance policy for that—and if you live near water, you probably do 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
  • Barn
  • Gazebo
  • Swimming pool
  • Fence
  • Driveway

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.

So, let’s go back to Tony. The tornado that destroyed his roof also turned his tool shed into kindling. Tony has a $200,000 policy on his home, so the insurance company will pay up to $20,000 to repair or replace his shed.

Different policies cover different structures, so make sure the structures on your property are actually covered in your policy.

3. Personal Property Coverage

So far, we’ve looked at insurance that protects your house and what’s around it. Personal property coverage protects what’s in it.

Imagine coming home one day to find that some 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 homeowner’s insurance will pay for them.       

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 homeowner’s insurance to replace damaged or stolen valuables.

4. Personal Liability Coverage

Liability protection is one of the best types of homeowner’s insurance you can buy, because it protects you from lawsuits for bodily injury or property damage that occurs on your property. Let’s look at what happens when a married couple doesn’t have this coverage—and 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 pays for legal representation, and it’ll 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. 

5. Additional Living Expenses (ALE)

Sometimes, a disaster does 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.

Remember Jill and Fadi? After the hurricane, they have to stay in a hotel for a month. They also have to eat out because the hotel room doesn’t have a kitchen. On top of that, they still have to pay their mortgage. Let’s look at their expenses:

Normal costs:

$1,200 mortgage + $600 groceries = $1,800

Costs after the hurricane:

$3,000 hotel + $1,200 mortgage + $1,800 restaurants = $6,000

That’s a huge increase—you can see why they need ALE to help cover those extra expenses!

Since ALE only pays for extra expenses, it won’t cover the $1,200 mortgage. And since Jill and Fadi didn’t have to buy groceries, the insurance company will subtract the couple’s normal grocery budget from the amount 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 Homeowner’s Insurance Does Not Cover

The five parts of a basic homeowner’s insurance policy are great, but they won’t cover everything!

Most homeowners fail to take disasters like floods and earthquakes into consideration when figuring out their homeowner’s insurance needs.1 That’s a huge mistake because homeowner’s insurance doesn’t cover all disasters!

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 homeowner’s insurance or add a rider to get more coverage on your basic policy.

So, what doesn’t your basic homeowner’s insurance cover? And when should you consider buying additional coverage?

Flooding

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. 

Earthquakes

From cracks in the walls to a damaged foundation, earthquakes can cause some serious problems for your home—and your budget. And basic homeowner’s insurance won’t help. (The one exception: House fires caused by earthquakes should be 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—which is super important if you’re a renter!

Sinkholes

Homeowner’s 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.2

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 determine exactly what coverage you need.

Maintenance Issues

What do termites, mold, burst water pipes and sewage backups have in common? In most cases, your homeowner’s insurance doesn’t cover damage caused by these events. 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 homeowner’s 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.

The next step—this will sound weird, but hang with us—is to get out of debt! Think about how much money you give away every month to pay for your student loans, your credit cards, your car . . .

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 worth of expenses. That’s plenty of money to handle home repairs!

Types of Homeowner’s Coverage

We’ve talked about what homeowner’s insurance does and doesn’t cover. But there’s one thing left: the types of homeowner’s coverage.

Choosing the right type of homeowner’s 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.

Let’s look at four main types of homeowner’s insurance.

Cash Value

A cash value homeowner’s 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 Ted’s 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 Ted paid $1,000, he’s only getting $400 because that’s what his TV is worth now.

Replacement Cost

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 homeowner’s 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.

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 homeowner’s 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 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 Get the Right Homeowner’s Insurance for You

Homeowner’s insurance is amazing because it transfers risk from you to the insurance company. But with so many different coverages, it’s easy to miss one you need or accidentally buy one you don’t need.

That’s why it’s smart to work with an expert. Our trusted insurance providers 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 homeowner’s insurance coverage in your area.

So if you’re ready to make a change and get the right homeowner’s insurance, connect with a pro near you today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

Do You Have the Right Coverage? 

Do You Have the Right Coverage? 

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Do You Have the Right Coverage?  

Find out with our free 5-Minute Coverage Checkup!
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