What is Homeowners Insurance?

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

• Dwelling and other structures: Home insurance pays to repair or rebuild your home if it is damaged or destroyed by a list of covered incidents such as fire, burglary or lightning. This coverage can also extend to other structures on your property, including detached garages, tool sheds and swimming pools.
• Personal property: Homeowners insurance policies also pay to repair or replace belongings, such as your jewelry, clothing and furniture, if they are damaged, destroyed or stolen. You may also purchase extended coverage for expensive items.
• Liability: If you or a family member living in your home are responsible for property damage or injury, your policy can help foot the bill for medical bills and legal fees. For example, this coverage could apply to your dog biting a neighbor or a friend slipping and breaking an arm on your front steps.
• Additional living expenses: Also called loss of use coverage, additional living expenses (ALE) coverage applies when your home is unlivable due to a covered loss. In this case, your policy will pay for expenses such as housing and food while your home is being repaired or rebuilt.

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:

• Accidental AC, plumbing or heating overflow
• Burning, cracking or tearing of water heater
• Damage caused by an aircraft
• Damage caused by a vehicle
• Damage caused by an electrical current
• Explosions
• Falling objects
• Fire or lightning
• Frozen pipes
• Hail or windstorms
• Riots
• Smoke
• Theft
• Vandalism
• Volcanic eruption
• Weight of ice, snow or sleet

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 three types of home insurance coverage:

• Actual cash value: Actual cash value coverage pays to replace your home or possessions after factoring in depreciation, which can leave you with a lower claim payout.
• Replacement cost: Replacement cost coverage does not account for depreciation or inflation, allowing you to replace your home and belongings with comparable new ones.
• Guaranteed replacement: Also called extended replacement, this coverage shields you against inflation, paying whatever it costs to replace your home, up to a specific limit, even if it exceeds the amount of coverage you purchased.

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 $2,511.25 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:

• Where you live: Your location plays a significant role in determining home insurance costs. Homeowners rates fluctuate across different states and cities, with metropolitan areas seeing the highest rates, on average. Providers will consider local construction costs, crime rates and weather-related perils in your area.
• Your credit history: Having a good credit score (580 or higher) suggests to insurers that you are less likely to file a claim, and it can result in lower home insurance premiums. When you apply for a policy, the company may run a soft credit check to verify your credit history, which does not impact your credit score.
• Your claims history: Similar to your credit history, your home insurance claims history can give insurers an idea of your likelihood to file future claims. The fewer claims you’ve filed in the past, the lower the home insurance premiums you can expect to pay.
• Replacement cost: One of the most significant determining factors for home insurance is replacement cost. When you apply for a home insurance quote, you can expect to answer questions about your home’s age, construction and condition, which all help the company determine a value for its replacement cost.
• The roof: Roof problems can lead to expensive damage to your home’s structure and interior. Home insurance rates can be affected by the materials used to build your roof, as well as the year it was built or replaced. Some companies provide discounts for fire- and impact-resistant roofing.
• Age: Older homes are typically more expensive to insure because they are harder to replace. Construction materials and methods, as well as electrical wiring and plumbing, change with time. 
• Home security: Anything you can do to reduce the risk of filing a claim, including installing home security features, can help lower your home insurance premiums. If you arm your house with burglar alarms, fire alarms, sprinklers or deadbolts, it could earn you lower rates.
• Your policy’s structure: The policy limits, deductible and whether you opt for actual cash value or replacement cost can significantly impact the cost of coverage. For example, if you choose a higher deductible level, you could pay less in monthly premiums, but you’ll need to pay more out of pocket on a claim. Extending coverage on personal property and adding other endorsements to your policy can also increase premiums. 
• Your pets: Owning a dog could also impact your home insurance premiums, especially if your furry friend has a history of biting or is considered at a higher risk of hurting someone based on its breed. Restricted dog breeds vary by state and insurer, but pit bulls, chow chows and German shepherds are a few common breeds that can lead to a higher premium or exclusion from full liability coverage.
• Discounts: Homeowners insurance companies offer a range of diverse discounts to homeowners policyholders. For instance, you may be able to unlock significant savings by bundling your home insurance with an auto insurance policy with larger companies that offer multiple lines of insurance products.
• Pools and trampolines: Both of these structures come with an added risk of injury, which can lead to elevated costs for liability insurance if they’re on your property.
• Renovating your home: Renovations and remodels can alter the replacement cost of your home and impact rates. If you’re considering a renovation project, consider the cost of different building materials and how costly they might be to replicate.
• What company you choose: Not all homeowners insurance companies are created equally. Some providers may be more competitively priced than others based on your area, home and coverage needs.

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

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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:

1. Read customer reviews: Reviews from policyholders can give valuable insight into how a company interacts with customers, processes claims and responds to complaints. You can find customer reviews on platforms such as the Better Business Bureau, Trustpilot and Google.
2. Check third-party ratings: Ratings are another crucial indicator of a homeowners insurance company’s reputation. Agencies such as AM Best provide ratings based on a company’s financial standing and its likelihood of paying out claims. Additionally, the annual J.D. Power home insurance survey scores the nation’s top providers based on overall customer satisfaction.
3. Review coverage options: Look at the basic coverage and endorsements offered by different providers to narrow down the list of companies you’re comparing. You may find that one company stands out among the competition and has endorsements that fit your unique situation well.
4. Evaluate the claims process: As you read consumer reviews and analyze the company’s website, take a look at the claims process. Is it straightforward? Does the company state an average turnaround time? What do current policyholders have to say about their claims experiences?
5. Talk to an agent: If you have questions about the coverage, claims process or quotes, most homeowners insurance companies have a team of accessible agents who can answer your questions. You can also reach out to an independent insurance agent who is not tied to any one company during your comparison process.
6. Compare quotes: The best way to see what rates and coverage you’re eligible for is to compare quotes. The quotes process can vary among providers, with some asking for only minimal information and others requiring your Social Security number. We always recommend getting quotes from at least three providers. That way, you can lock in the lowest rates possible and choose the best provider for your needs.

A.M. Best Disclaimer