What is Homeowners Insurance and What Does it Cover?

Highlights:

• Homeowners insurance helps protect your home and belongings from financial loss in the event of an accident, disaster or theft.
• Homeowners insurance is not mandated by law; however, it may be required by your mortgage lender.
• The cost of a homeowners policy varies widely depending on your location, the amount of coverage you have, the size and condition of your home, your claims history, your credit scores and more.

Severe weather and other unexpected disasters can wreak havoc on your home and your finances. Luckily, homeowners insurance offers protection in the face of home emergencies without totally draining your budget.

What is homeowners insurance?

Homeowners insurance helps protect your home and belongings from financial loss in the event of an accident, disaster or theft. Depending on your policy, this coverage may include your house, the personal property you keep inside it and any outbuildings, including detached garages and sheds.

If damage is sustained during events your insurer considers a “covered peril,” you may receive funds to cover the damage: fully or partially. Fires, smoke, windstorms, lightning, hail, hurricanes, theft and vandalism are typically considered covered perils, but coverage can vary widely between policies. Damage caused by floods and earthquakes typically isn't covered by a standard homeowners policy. If you live in an area where flooding or earthquakes are common, you'll need to purchase additional insurance to cover those perils.

What does homeowners insurance cover?

If a covered peril occurs and results in financial loss, you may be eligible for a payout from your insurer. Policies vary, but they typically cover these four categories:

• Structural harm. With homeowners insurance, your dwelling is protected from top to bottom. Coverage may extend to certain other buildings on your property, such as your garage, garden shed and even fences.
• Personal property. This covers your personal belongings on or off the premises, although coverage may be limited for property loss that occurs off-site. Certain valuable belongings, such as art, antiques, jewelry and electronics, may require insurance riders, which are add-ons to your primary policy that are frequently used to extend coverage.
• Liability. Homeowners insurance also covers lawsuits and certain other legal costs incurred when you are responsible for injuries that occur on your property or for damage done to someone else's property. You'll also benefit from medical payment coverage. So, if another person is injured in your home, they can submit their medical bills directly to your insurance company, regardless of who's at fault.
• Additional living expenses. Loss of use coverage reimburses you if your home becomes uninhabitable due to a covered peril. This coverage may include any storage, meal lodging and other costs that you incur because you're temporarily unable to live in your home. However, this kind of coverage is usually limited to a specific time window.

Is homeowners insurance required by law?

Homeowners insurance is not mandated by law. However, if you finance your home with a mortgage, your lender may require it. If you stop paying your homeowners insurance, your lender may have the right to purchase homeowners insurance on your behalf and charge you for the cost.

How does homeowners insurance work?

When you purchase an insurance policy, you're usually required to send your insurer regular payments called premiums. With a homeowners insurance policy, you'll still owe premiums — but they're not necessarily paid directly to an insurer. Oftentimes, your premiums are folded into your monthly mortgage payment and deposited into an escrow account, which your mortgage lender sets up and then uses to pay your homeowners premiums, property taxes and other expenses.

As long as you're up to date with your premiums, you're eligible to receive compensation from your insurer if your home suffers damage covered by your policy. To do so, you must submit a formal request known as an insurance claim.

How much does homeowners insurance cost?

The cost of your policy can vary widely. Homeowners insurance premiums are calculated based on details about you and your home, including:

• Your location
• The amount of coverage you have, including riders
• The age and condition of your home
• The square footage of your home
• Your claims history
• Your credit scores, in some states

Since it's difficult to predict what you'll pay each month, you'll need to seek out quotes from several different insurers to weigh your options.

How to get homeowners insurance

When you're in the market for an affordable homeowners insurance policy, research is key. To get the best bang for your buck, use your insurance quotes to compare costs, standard coverage quality, and options for riders and other forms of extended coverage. For additional peace of mind, consider working with an insurance agent, who can help you find a policy that fits your needs and your budget.

You may find it cost-effective to buy from a company that you already do business with. For example, you might purchase homeowners and auto insurance policies together. Some insurers offer discounts for these types of bundled policies. There are other ways to save money, too. High-deductible policies, for example, can lower your annual costs, but always make sure you're not sacrificing necessary coverage just to save money.

When you find the right policy, be sure to read the details of your coverage carefully to understand its limits. If you're lucky, you won't ever need to use your homeowners insurance policy. But, if you do incur a loss, contact your insurer immediately and file a claim as soon as you can. The right homeowners policy can help better protect you and your family from significant financial loss.