What Is Homeowners Insurance and How Does It Work?

What is homeowners insurance? Homeowners insurance — also called home insurance — is a type of property coverage that pays to repair or replace your home and belongings if they are damaged, stolen or destroyed. It also provides personal liability protection for legal and medical payments if someone is injured at your home or you damage their personal property.Typically required by mortgage lenders, a homeowners insurance policy is a solid investment and essential for most homeowners. Read on to learn the basics of homeowners insurance and see how you can protect your home and family with a policy.

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

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:

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 types of home insurance coverage:

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.

The average cost of homeowners insurance in the United States is $1,249 per year, according to 2018 data from a 2021 study by the Insurance Information Institute. However, homeowners insurance costs can vary drastically based on various factors.

When you apply for a homeowners insurance policy, the insurance company will ask a series of questions and reference data points to determine the level of risk involved in insuring you.

The company will consider the following factors to establish the likelihood of you filing a claim and determine the appropriate cost of coverage:

To see what homeowners insurance costs in your area, enter your zip code here or call 855-948-5219 for a free custom quote.

When you start shopping for a homeowners insurance policy, it's essential to do your homework As you compare homeowners companies yourself, follow these steps:

A.M. Best Disclaimer

Parker King is a writer, editor and SEO content strategist with a master's degree in professional communication from Clemson University and years of experience in the digital marketing industry. She specializes in writing, editing and optimizing personal finance, home services and insurance content.

Rebekah Young is an editor with a decade of experience in educational content and editing. Before joining the Guides Home Team to focus on home services content, she guided content strategy and edited in the insurance, venture capital, financial and health care fields. Rebekah has a bachelor's degree in communication and English.