The basics of homeowners insurance

Homeowners insurance is essential, so it’s important to understand how it works and how to get it

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Homeowners insurance can help cover the cost of repairing your home if it’s damaged. Learn more about homeowners insurance basics. (Shutterstock)

Homeowners insurance is a product you never want to use, but will certainly be glad to have if you do. This type of insurance helps pay to repair or replace your home and property if it’s damaged in an unexpected event, like a fire, accident, or crime. If you have a mortgage, you’re likely required to have a policy, but homeowners insurance is a good idea even if it’s not mandatory. 

Let’s go over how homeowners insurance works, the different types of policies, and how to get a quote.

With Credible, you can easily compare homeowners insurance quotes from top insurance carriers.

What is homeowners insurance?

Homeowners insurance is a policy that helps to restore, rebuild, or replace your home and property should they suffer damage in an unforeseen circumstance, called a peril. Your homeowners insurance policy has other coverage features as well, including paying to cover your legal expenses if someone injures themselves while on your property, or if you’re sued.

Like most types of insurance, you pay a monthly or annual premium to an insurance company for your policy — some carriers even let you pay quarterly or semiannually. If your home or property is damaged, you file a claim to receive a payout.

If you have a mortgage, you may not realize that you’re paying a homeowners insurance premium. In most cases, lenders require you to pay for homeowners insurance as part of your monthly mortgage payment. The lender holds the money in an escrow account and handles the payment for you.

Types of homeowners insurance policies

The type of homeowners insurance policy you need depends on the type of home you live in and how broad you’d like your coverage to be. Keep in mind, the more coverage you have in your policy, the more expensive your premium tends to be. 

Here are the eight basic types of homeowners insurance:

HO-1: Basic form

Basic form is a type of bare-bones homeowners insurance policy. These policies are relatively uncommon, with insurance companies generally offering more comprehensive policies. With HO-1, you’ll only be covered if your home or property is damaged in a limited number of events, including:

  • Fire or lightning
  • Windstorm or hail
  • Vandalism
  • Theft
  • Damage from vehicles or aircraft
  • Explosions
  • Riots

HO-2: Broad form

Broad form offers more coverage than basic form. With HO-2, you receive coverage for everything included in HO-1, plus a few other common ways your home can be damaged. The additional covered perils include:

  • Building collapse
  • Freezing, leaking, or burst plumbing pipes
  • Freezing or leaking HVAC or appliances
  • The weight of ice, snow, or sleet accumulation
  • Falling objects

HO-3: Special form

This type of policy is the most common form of homeowners insurance. The two previous types of policies only cover a certain set of circumstances. HO-3 covers all types of perils, except for cases that are spelled out as exclusions. Common exclusions are earthquakes, flooding, and nuclear accidents.

HO-4: Tenants Broad form

These policies cover people who rent their homes rather than own them. Under tenants broad form insurance, only your belongings are covered. Your landlord will likely have a homeowners insurance policy that covers the structure of the home. An HO-4 policy covers you for the same perils as HO-2 policies.

HO-5: Comprehensive form

HO-5 policies represent the broadest type of coverage, but are also among the most expensive. You’re covered for all perils except for those specifically excluded, but the exclusions on HO-5 policies are fewer and more narrow than other policies. Exclusions usually include floods and earthquakes.

HO-6: Special Condominium form

If you own a condo unit, you’ll want to have an HO-6 policy. This insurance primarily covers your belongings but also protects the interior of the unit. The policies don’t cover the structure of the building, which is usually owned by the condominium association.

HO-7: Mobile Home form

This type of insurance is specifically for mobile homes and similar homes. An HO-7 policy will typically cover the structure of the building, your property and belongings, and any legal liability that arises if someone injures themselves while on your property. 

HO-8: Modified Coverage form

HO-8 policies are generally used to cover older homes. In these cases, the cost to replace the home would be more than the home is actually worth. Like HO-1 and HO-2 policies, this type of insurance generally only covers perils spelled out in the policy.

 What does homeowners insurance cover?

A standard homeowners insurance policy offers a variety of different coverages. Depending on the circumstances or how your home and property are damaged, you may need to draw on different elements of your homeowners insurance policy. Typical policies include:

  • Dwelling coverage — This coverage, often known as Coverage A, pays to repair or replace the house itself if it’s damaged. While shopping for a homeowners insurance policy, you often decide on your coverage amount based on how much dwelling coverage you need. You can choose the amount you’d like to carry, but you generally want a coverage limit of at least 80% of what it would cost to completely rebuild your home. You should strongly consider having a high enough limit to rebuild your home from the ground up should it be completely destroyed.
  • Other structures coverage — Coverage B pays to repair or replace other buildings on your property, like a garage, gazebo, or shed. In general, your coverage limit for other structures will be 10% of the limit on your Coverage A.
  • Personal property coverage — This coverage, called Coverage C, pays to replace the things you own inside your home, like your furniture, clothes, and other belongings. Your personal property coverage limit will generally be 50% of your dwelling coverage limit. However, you can also negotiate a separate limit when shopping for a policy depending on the value of your belongings.
  • Loss of use coverage — This type of coverage, known as Coverage D, helps to cover additional living expenses you run into if you need to move out of your home while it’s repaired or replaced — like rooms in a hotel, meals out, or storage space. Your Coverage D limit will generally be set at 20% of your dwelling coverage.
  • Liability coverage — Liability coverage, or Coverage E, pays for your defense and any damages assessed to you if you’re found legally responsible for someone injured on your property. Standard homeowners insurance policies often include at least $100,000 in liability coverage, but higher amounts — between $300,00 and $500,000 — are typically recommended.
  • Medical payments coverage — This type of coverage, known as Coverage F, provides a relatively small amount of money to pay for the medical bills of someone injured while on your property. This coverage may pay out between $1,000 and $5,000.

Visit Credible to compare homeowners insurance quotes from various insurance carriers.

Different levels of coverage

The dollar amount of coverage isn’t the only thing to consider when shopping for a homeowners insurance policy. Policies with the same coverage limits may have different levels of coverage, which dictate how your claim is handled. 

Here’s an explanation for some of the more common levels of coverage. The following generally refer to dwelling coverage and personal property coverage:

  • Actual cash value — With this method, insurers pay claims based on what it would cost to replace the damaged materials, subtracting an amount in depreciation. The older your property is, the more it’ll be reduced in value for the purposes of your claim. If your roof was damaged, the insurer will take into account the age of the materials. So, if your roof is 15 years old and the materials are designed to last for 20 years, the amount you receive will be roughly 25% of the cost of the roof. That’s because your roof is determined to have just one-fourth of its useful life remaining.
  • Replacement cost — This level of coverage is more comprehensive and will usually pay out more than a policy paying claims based on actual cash value. With the replacement cost method, the insurer pays out based on the cost to fully repair or replace the property that’s damaged with similar materials. This is regardless of its age — if that same 15-year-old roof was damaged, you’d receive the full cost of replacing it from your insurance company. However, to get this level of coverage, you’ll generally pay more in premiums on your policy. You also must generally buy the replacement materials and file a receipt to be reimbursed.
  • Extended replacement cost — With extended replacement cost coverage, you have a little more protection. If the actual replacement cost of whatever is damaged exceeds your coverage limit by a relatively small amount, you’ll still receive enough money to cover the cost. To qualify, the replacement cost generally needs to be within about 20% and 25% above your limits.
  • Guaranteed replacement cost — This takes extended replacement cost coverage even further, and represents the most complete coverage you can get. This coverage level will pay the replacement cost of what’s damaged regardless of the coverage limits of your policy (up to a specified maximum). You may not be able to buy this coverage level if you have an older home.

What homeowners insurance doesn’t cover

Any homeowners insurance policy you buy will have certain exclusions — things that aren’t covered. These can be different from policy to policy, so check the "Exclusions" section on your policy for a full outline of what isn’t covered. However, some standard exclusions are common to most policies, including damages caused by: 

  • Flood
  • Earthquake
  • Poor home maintenance
  • Sewer backups

Harm to your pets usually isn’t covered, and neither is damage to your car.

How much does homeowners insurance cost?

The amount you’ll pay for homeowners insurance will depend on the level of coverage you need, additional coverages you buy, and where you live. Nationwide, the average annual premium for homeowners insurance policies is $1,278 per year, or $106.50 per month, according to data from the National Association of Insurance Commissioners

Factors that affect the amount you’ll pay include:

  • Location — People who live in parts of the country more prone to natural disasters will generally pay higher premiums than people in areas that don’t experience them as regularly. Even within a region, your costs can vary depending on your location.
  • Deductible When you file a claim, you generally must pay a portion of the repair cost before insurance kicks in to cover the rest. This is called your deductible. The lower your deductible, the less you have to pay out of pocket, but the higher your premium cost tends to be.
  • Amount of insurance coverage You’ll generally buy a policy with a dwelling coverage limit high enough to cover the value of your home. The higher the value of your home, the higher the coverage limit you’ll need — and the more expensive your premium will be.
  • Age of your home — Older homes tend to be more expensive to insure than newer ones.
  • Your claim history Insurers will try to gauge your risk by looking at how often you’ve filed insurance claims in the past, often using a Comprehensive Loss Underwriting Exchange report. These reports collect data for the past seven years of auto and property insurance claims. People who have filed numerous claims may be considered a higher risk and need to pay more in premiums.

How to get a homeowners insurance quote

Shopping around can help you get the best homeowners insurance policy for you at the lowest cost. To do that, you’ll need to get quotes from multiple insurers. Here’s how to get a homeowners insurance quote:

1. Figure out the coverage you need

Estimate how much it would cost to completely rebuild your home and replace everything that’s inside. You can ask an insurance agent to help you come up with this figure. The replacement cost of your home is a good starting point to determine the coverage limits you need on your policy. 

2. Look into home insurance companies

Do some research on insurance companies. You can use a resource like Consumer Reports, which rates and reviews insurance companies. You may also be able to get a list of insurers in your area from your state’s department of insurance.

3. Get quotes from each company and compare them

Get a rate quote for the coverage limit you determined in Step 1 from each company on your list. Make sure the rate quote you receive includes the coverage limits, your deductible, and the monthly or annual premium you’d pay. As you compare one quote to another, you want coverage limits, deductibles, and other features to be similar. 

Credible makes it easy to quickly compare homeowners insurance quotes from different insurance carriers.