What Is Homeowners Insurance and How Does It Work? (2024)

What Is Homeowners Insurance?

Homeowners insurance is a form of property insurance that covers losses and damages to your residence, along with furnishings and other assets in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.

Key Takeaways

  • Homeowners insurance is a type of property insurance that covers losses and damages to your home.
  • It also protects assets in the house.
  • The policy usually covers interior damage, exterior damage, loss or damage of personal assets, and injury that arises while on the property.
  • Every homeowners insurance policy has a liability limit.
  • Homeowners insurance should not be confused with a home warranty or with mortgage insurance.

Home Insurance

How Homeowners Insurance Works

A homeowners insurance policy usually covers four kinds of incidents on the insured property: interior damage, exterior damage, loss or damage of personal assets/belongings, and injury that occurs while on the property. When a claim is made on any of these incidents, the homeowner will typically be required to pay a deductible.

Policy providers offer riders that increase coverage for specific events, cover high-value property, and canreduce deductible amounts. These adders cost an additional premium.

The insurance provider will usually depreciate the value of the covered property based on its age, use, condition, and useful life. The insurer deducts the depreciation value from the replacement cost to arrive at the actual cash value(ACV) that they will return to the insured.

You can get a recoverable depreciation clause added to your contract that will pay you the depreciation value along with the replacement cost.

For example, say a claim is made to an insurer for interior water damage that has occurred in a home. A claims adjuster estimates the cost to bring the property back to livable conditions to be $10,000. If the claim is approved, the homeowner is informed of the amount of their deductible, say $4,000, according to the policy agreement.

In this case, the insurance company will issue a payment for the excess cost of $6,000. The higher the deductible on an insurance contract, the lower the monthly or annual premium on a homeowners insurance policy.

Liability limit

Every homeowner's insurance policy has a liability limit that determines the amount of coverage you have. The standard limits are usually $100,000, but you can often choose a higher limit. If a claim is made, the liability limit stipulates the percentage of the coverage amount that would go towardreplacing or repairing damage to the property structures, personal belongings, and costs to live somewhere else while the property is worked on.

Acts of war or acts of God such as earthquakes or floods are typically excluded from standard homeowners insurance policies. If you live in an area prone to these natural disasters, you may need special coverage to insure your property against floods or earthquakes.

Most basic homeowners insurance policies cover events such as hurricanes and tornadoes.

Homeowners Insurance and Mortgages

When you apply for a mortgage, you're usually required to provide proof of insurance on the propertybefore the banks will loan you funds. The property insurance can be acquired separately or by the lending bank.

If you want to get your own insurance policy, you can compare multiple offers and pick the plan that works best for your needs. If you don't have your property covered from loss or damages, the bank may get one for you at an extra cost.

Payments made towarda homeowners insurance policy are usually included in the monthly payments of your mortgage. The lending bank that receives the paymentallocates the portion for insurance coverage to an escrow account. Once the insurance bill comes due, the amount owed is settled from this escrow account.

Homeowners Insurance vs. Home Warranty

Homeowners insurance is different from a home warranty. A home warranty is a contract that provides for repairs or replacements of home systems and appliances such as ovens, water heaters, washers/dryers, and pools.

These contracts usually expire after a certain period (usually 12 months) and are not mandatory for a homeowner to buy to qualify for a mortgage. A home warranty covers issues and problems that result from poor maintenance or inevitable wear-and-tear on items—situations in which homeowners insurance doesn't apply.

Homeowners Insurance vs. Mortgage Insurance

A homeowners insurance policy also differs from mortgage insurance. Mortgage insurance is typically required by the bank or mortgage company for homebuyers making a down payment of less than 20% of the cost of the property.

The Federal Home Administration also requires it of those taking out an FHA loan. It's an extra fee that can be figured into the regular mortgage payments or may be a lump sum charged when the mortgage is issued.

Some homeowner policies include a mortgagee clause. The clause covers and pays the lender in case your home is lost or irreparably damaged during the time you have a mortgage on it.

Mortgage insurance covers the lender for taking on the extra risk of a home buyer who doesn't meet the usual mortgage requirements. If the buyer should default on payments, the mortgage insurance would compensate the lender. Basically, while both deal with residences, homeowners insurance protects the homeowner while mortgage insurance protects the mortgage lender.

What Does Homeowners Insurance Cover?

Homeowners insurance generally covers a wide range of potential damages to your home, other structures on your land, personal property, and your liability for injuries others sustain on your property. Policies typically cover losses due to such causes as fire, lightning, high winds, and vandalism. However, coverages vary widely among insurance companies and states, so read the fine print carefully to ensure you understand what is and isn't covered.

Does Homeowners Insurance Cover Floods?

Flooding caused by internal problems (such as a leaking bathroom pipe) is typically covered by homeowners insurance. However, if the damage is caused by a natural cause outside the home such as flash flooding, a basic policy will not usually cover the loss. Often, you can purchase supplemental flood insurance at an additional cost to cover flood damage. Also, most policies do not cover damage from earthquakes and other types of natural and man-made catastrophes.

How Much Does Home Insurance Typically Cost?

Home insurance premiums average about $1,300 a year across the nation. However, rates for individual policies can vary significantly depending on your location, coverage limits, credit score, insurance company, state regulations, and other factors.While location is one of the most important factors, insurers also look at the condition of your home, how old it is, and the history of previous claims.

The Bottom Line

Homeowners insurance covers a variety of damages to your home and other assets at your residence. While most policies provide several basic coverages, the types of losses that are insured can vary widely across the industry. To find the most affordable home insurance for your situation, consider gettinghome insurance quotesfrom several insurance providers.

What Is Homeowners Insurance and How Does It Work? (2024)

FAQs

What Is Homeowners Insurance and How Does It Work? ›

Homeowners insurance is a type of property insurance that covers losses and damages to your home. It also protects assets in the house. The policy usually covers interior damage, exterior damage, loss or damage of personal assets, and injury that arises while on the property.

What exactly does home insurance cover? ›

Homeowners insurance typically covers your dwelling, other structures on your property, personal property, personal liability, medical payments to others, and loss of use costs.

How does a homeowners insurance payment work? ›

When you pay your mortgage, a portion of the overall payment is set aside in your escrow account to pay for your homeowners insurance and property taxes (and mortgage insurance if your lender requires it). Your insurance and property taxes are automatically paid from the escrow account when they're due.

What are the three main types of homeowners insurance? ›

Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others. Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value.

What does a homeowner's insurance policy protect you against? ›

Homeowners insurance is made up of coverages that may help pay to repair or replace your home and belongings if they are damaged by certain perils, such as fire or theft. It may also help cover costs if you accidentally damage another person's property or if a visitor is injured at your home.

Is homeowners insurance worth it? ›

In the end, homeowners insurance isn't something you'll feel forced to have – it will be something you'll want to have. Homeowners insurance is the best financial defense against bad things that may happen in life, giving you much-needed peace of mind.

What is homeowners insurance and why do I need it? ›

Homeowners insurance is important because it protects consumers' homes and personal property. In the event of a total loss, insurance can provide the primary source of rebuilding funds. It also provides liability coverage for legal actions from injuries or damage from another person on their property.

How often is homeowners insurance paid? ›

If you've paid off enough of your loan home, or if your bank doesn't require you to escrow your homeowners insurance, the choice is up to you. You can pay the premium in monthly, quarterly or annual increments.

Is home insurance added to your mortgage payment? ›

Homeowners insurance is not part of your mortgage loan agreement, but many homeowners choose to have their insurance policy premium rolled into their monthly mortgage payment.

What not to say to a home insurance adjuster? ›

Avoid any language that could be construed as apologetic or blameful. Admitting any level of fault can eliminate or reduce the compensation that may be available.

What is the cheapest homeowners insurance? ›

State Farm, Auto-Owners and Erie provide the cheapest homeowners insurance, based on the MarketWatch Guides team's review. We based our top picks on the most affordable options for customers across a variety of situations and backgrounds, including various credit scores and claim histories.

What happens if you have a mortgage and no homeowners insurance? ›

If your mortgage lender requires it and discovers your home isn't insured, it could initiate foreclosure, resulting in the loss of your home.

What is the most important thing in homeowners insurance? ›

Make sure you're covered for the right amount – your home insurance policy should cover the full value of your home in case of damage or destruction. When it comes to home insurance, you want to make sure you're getting the right amount of coverage.

Which one is not protected by most homeowners insurance? ›

Most homeowner policies do not cover damages caused by the following situations:
  • Flooding.
  • Earthquakes.
  • Business equipment.
  • Jewelry or artwork.
  • Power outages.
  • Nuclear hazard.
  • War.
  • Dog bites.

Who is not eligible for a homeowners policy? ›

Living in a high-risk location, having hazardous home features, home maintenance issues, your home's history of insurance claims, and more can be reasons an insurance company may determine a house to be uninsurable.

What is the first step to consider when buying homeowners insurance? ›

Decide what you want to cover. Determine how much homeowners insurance you need. Choose an insurance company. Choose a policy.

Which of the following losses would not be covered by a homeowners policy? ›

Protecting that investment from fire and other perils is extremely important. Please note, homeowners insurance policies do not provide protection against losses from floods, earthquakes, mudslides, mudflows or landslides. You can learn more about what homeowners policies cover in this guide.

Which area is not protected by most homeowners insurance? ›

These are the areas that are not protected by most home insurance.
  • Flooding. ...
  • Earthquakes. ...
  • Business equipment. ...
  • Jewelry or artwork. ...
  • Power outages. ...
  • Nuclear hazard. ...
  • War. ...
  • Dog bites. Most homeowner insurance covers medical bills and legal fees caused by dog bites.

What disaster is typically not covered by property insurance? ›

Earth movement, landslide, tremors, mudslide or earthquake caused by a volcano is not usually covered under homeowners insurance.

What is homeowners insurance vs home insurance? ›

The term 'house insurance' is usually meant to mean homeowners insurance- but it implies that the policy only protects your house. This is why professionals in the home insurance industry refer to it as homeowners insurance, or home insurance for short.

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