Homeowners Insurance: What It Is And How It Works
Holly Shuffett7-minute read
December 16, 2021
Life has a way of throwing us curveballs, so it’s important to have a safety net in place for when things get tricky. Insurance policies like those for health and life are key components to prepare yourself for the unexpected, but what can you do about protecting your home?
That’s where a homeowners insurance policy comes in. Homeowners insurance can provide you with peace of mind knowing that your home and personal belongings are secured against certain damages or unknowns.
Let’s explore some homeowners insurance basics to give you a better understanding on what it is, how it works, and how you can find a policy that works best for you.
What Is Homeowners Insurance?
Homeowners insurance, sometimes shortened to “home insurance,” offers coverage for interior and exterior damages to your property, plus coverage for losses or damages to your personal assets and belongings.
Homeowners insurance will typically cover the costs necessary to restore your home to its original value in the event of damage. In some cases, homeowners insurance will also provide personality liability coverage against lawsuits for injuries sustained on your property.
How Does Homeowners Insurance Work?
When getting a mortgage, lenders will also require that you buy a homeowners insurance policy. There are generally two ways to go about finding a policy.
If you know what kind of limits, premiums, and coverage terms you’re looking for, you can shop around for the best deal on homeowners insurance for you. Most lenders only stipulate that your policy of choice must have enough coverage for the full replacement value of your home. This protects everyone’s investment in the home.
The other option is typically more of a last resort and involves your lender purchasing insurance for you. This is referred to as force-placed insurance and with it, you usually don’t get a say in the level of coverage or the insurance premiums.
When closing on a home, your mortgage lender will typically require that you pay between 6 months and a year of homeowners insurance premiums in advance. After this upfront payment, payments will be divided into monthly increments and put into an escrow account to be paid off when the annual premium comes due.
What Does Homeowners Insurance Cover?
Homeowners insurance typically covers issues which fall into the following three categories: property damage, stolen or damaged personal property and personal liability. Let’s dive further into some common home insurance clauses.
Many kinds of property damages are covered with a homeowners insurance policy. Here are some protections home insurance will usually afford you:
- Wind and hail damage: Wind and hail damage, including destruction caused by tornadoes, is covered under standard homeowners insurance. However, if you live in an area particularly susceptible to tornadoes, your premiums may be higher.
- House fires: Fire and smoke damage from house fires are covered.
- Lightning: If your house is struck by lightning, you’ll be covered. Depending on your policy’s terms, any electronics damaged could also be covered under property damage or protection for personal assets.
- Frozen plumbing: If your plumbing freezes, you’re at risk of a cracked or burst pipe. Homeowners insurance has got you covered.
- Appliance-related water damage: If your washing machine has a leak or something with your hot water heater goes awry, homeowners insurance will cover damages.
- Falling objects: If a tree or other unexpected object falls on your garage, home insurance has you covered.
- Theft-related damage: In the instance of theft, if the perpetrator damaged your property through forced entry, like a broken lock or window, homeowners insurance will cover the cost of repairs.
- Temporary housing expenses: If your home is in need of a big repair which renders your home unlivable during construction, homeowners insurance will also cover the costs of temporary living arrangements.
Stolen Or Damaged Personal Property And Assets
A good homeowners insurance policy will also offer coverage for stolen or damaged personal property and assets. Typical things covered by homeowners insurance include:
If your policy features personal property protection, you usually only have coverage up to a specified dollar amount. Beyond that, you can choose to buy extra protection for high value items, like jewelry, which will offer coverage beyond a policy’s standard limits.
As a rule, you should keep inventory of your valuables - whether through a smartphone app or an old school filing system. Just do your best to have receipts and documentation on hand, since your insurer will likely request as much during the claims process.
Homeowners insurance also gives you personal liability coverage, with limits. This will help with the following instances:
- Medical expenses related to injury on your property: Should a neighbor or friend slip on a patch of ice in your driveway, they won’t have pay medical bills alone.
- Injury or property damage caused by you or a member of your household: Whether your dog bites someone or you accidentally break a neighbor’s window, personal liability insurance can offer assistance.
- Lawsuits related to injury or property damage: If someone wants to pursue legal action against you due to an injury or property damage, personal liability home insurance can help you with legal fees and related expenses.
What Doesn’t Homeowners Insurance Cover?
While homeowners insurance protects you in a variety of situations, coverage isn’t all-encompassing. To fully protect your home, you may need to purchase additional hazard insurance or coverage.
Here are some common situations where homeowners insurance will not offer protection.
- Flood damage: While homeowners insurance may cover water damage in numerous situations, it does not protect against natural flooding. For this, you’ll need a separate flood policy, which can be purchased through private insurers or the National Flood Insurance Program. Most lenders require flood insurance if your home is in a vulnerable area.
- Wildfires: If you live in an area with increased chances for wildfires, you may need to purchase a separate fire hazard insurance. Homeowners insurance only offers coverage for house fires.
- Earthquake damage: If you live along a fault line, you’ll need to buy additional hazard insurance for protection against earthquake damages.
- Pet damage: Homeowners insurance doesn’t cover any damages strictly caused by domesticated pets.
- Infestations: Termite, cockroaches, or other pest related damages aren’t covered by most home insurance policies.
Homeowner Insurance FAQs
How much is homeowners insurance?
Since many different factors will affect your deductible and monthly premiums, it’s impossible to pin down a blanket cost for homeowners insurance. According to the most recent data from the Insurance Information Institute in 2021, the average annual premium for homeowners insurance cost $1,398.
Here are some things that can play a role in how much your home insurance will cost:
- Home value
- Credit history
- Age and condition of home
- Extra structures on your property (like a fence, shed or pool)
- Claims history
How do I get a homeowners insurance quote?
If you’re looking for homeowners insurance, you can either shop with an insurance agent, make phone calls, or surf the web. Most insurance companies offer free insurance quotes right on their website which can offer more accurate estimates based on your specific property information.
What’s the best homeowners insurance policy?
When determining the best insurance policy for you, it’s important to consider several factors. Among these should be the types and levels of coverage you need, plus your budget. Shop around to get the right price for your home and wallet, and consider speaking with a financial advisor to determine the best coverage for you given your situation.
The Bottom Line
Homeowners insurance can protect you and your home in the event of property damage or theft. With personal liability coverage, you can also gain resources to turn to should someone suffer injury or property damage because of you. While home insurance covers many things, you may need hazard insurance for items like floods, wildfires and earthquakes.
You can shop for homeowners insurance either on your own or get it through your lender. Homeowners insurance costs vary greatly based on your location, credit history and the condition of your home. We recommend consulting with a financial advisor to find what’s best for you and your situation.
If you feel ready to take next steps toward homeownership, get approved with Rocket Mortgage® today.
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