Homeowners insurance can't stop fires, lawsuits, or other events that put your property at risk, but it can protect you from the financial burdens they cause. Getting the right coverage helps to ensure that one of your biggest investments — your home — remains intact in a variety of unfortunate situations.

But how does homeowners insurance work and where can you find the best policy for your needs? Whether you're a first-time homebuyer or a current homeowner looking for a refresher, this guide will walk you through all you need to know about homeowners insurance.

What does home insurance typically cover?

Homeowners insurance policies help protect your home and personal property against a variety of risks. Here's a closer look at the types of coverage and causes of damage that are often included.

Standard homeowners insurance coverage

Homeowners insurance policies typically offer six main types of coverage — dwelling, other structures, personal property, additional living expenses, personal liability, and medical payments.

If you need more than the base homeowners insurance coverage, insurers typically offer endorsements (also known as riders) that you can add to your policy for an additional fee. For example, common endorsements include coverage for earthquakes, floods, high-value personal items, home daycares, home businesses, umbrella liability, or sewer/water backups.¹

Covered perils

The property damage portion of a homeowners insurance policy covers damages caused by qualifying events, referred to as “perils”. However, the perils covered will depend on the type of policy you choose. Insurers typically offer three standard policy options with varying levels of protection: HO-2, HO-3, and HO-5.

HO-2 broad form (named perils)

An HO-2 policy covers damages to your buildings and personal property if they're caused by specific perils named in the policy. Commonly covered perils include:

• Weather (e.g. lightning, windstorm, hail, snow, ice, sleet, freezing, volcanic eruption)
• External forces (e.g. falling objects, explosions, aircraft, fire)
• Human activities (e.g. vandalism, malicious mischief, theft, riot, civil commotion)
• Other (e.g., glass breakage)

HO-3 special form

An HO-3 policy offers more extensive protection, protecting your buildings from any peril not specifically excluded in your policy. However, personal property losses are only covered when caused by named perils (usually those listed above).²

HO-5 comprehensive form (open perils)

An HO-5 policy offers the most comprehensive and expensive protection. It protects your buildings and personal property against losses from any peril not specifically excluded in your policy.³

What isn't typically covered by home insurance?

While homeowners insurance offers broad protection, damage from the following events is often excluded:^4,5

• Floods
• Earthquakes
• Mudslides and landslides
• Sinkholes
• Pests
• Water damage from sewer leaks or drain backups
• Losses due to leaving the house vacant for 60 days or more
• Mold
• Normal wear and tear
• Acts of war
• Neglect
• Intentional inflicted damage
• Tidal waves
• Nuclear hazards

These exclusions are standard across many policies, but you may be able to get coverage for some of them through an endorsement or rider. That said, additional coverage options vary by insurer.

How does homeowners insurance work?

Homeowners insurance works like most other types of insurance, involving premiums, claims, deductibles, coverage limits, and settlements.

Premiums

To enroll in a homeowners insurance policy and keep your coverage active, you need to pay premiums. The cost is based on a variety of factors, such as your location, coverage limits, home characteristics, insurance score, discounts, and deductible amount.⁶ If you own your home outright, you'll pay premiums directly to your insurer. On the other hand, if you have a mortgage, you'll typically pay premiums through an escrow account as part of your monthly mortgage payment. Your mortgage lender will then pay your insurance company on your behalf⁷.

If you need more than the base homeowners insurance coverage, insurers typically offer endorsements (also known as riders) that you can add to your policy for an additional fee. For example, common endorsements include coverage for earthquakes, floods, high-value personal items, home daycares, home businesses, umbrella liability, or sewer/water backups.

Claims and deductibles

In the event of a loss due to a covered peril or accident, you can file a claim with your insurer. Afterward, an insurance adjuster will typically visit your home and assess the damage. Based on the assessment, your insurance company will estimate the repair costs and review your policy's coverage. If the claim is covered, you'll need to pay your deductible and then your insurer will cover the remaining approved expenses, up to any applicable policy limits.⁸

Settlements

When it comes to settlements, insurers often offer three coverage options⁹:

• Actual Cash Value: Covers the cost to replace your lost home and possessions, minus a depreciation deduction (least expensive).
• Replacement Cost: Covers the cost to replace your home and possession, without a depreciation deduction.
• Guaranteed/Extended Replacement Cost: Offers a guaranteed replacement of your home as it was before the damage, even if it exceeds your policy limit (most expensive).

Your insurance company will calculate your settlement check based on your chosen coverage method and any applicable coverage limits.

Key considerations when choosing a homeowners insurance policy

Settlements

Choosing a homeowners insurance policy involves striking a balance between comprehensive coverage and affordability. To help you find the right fit, here's a checklist of the key factors to consider as you compare coverage options:

• Premium Costs: Check the cost to keep the coverage in place per year and month.
• Discounts: Look for discounts, such as those for bundling multiple policies, improving your home security, and sticking with your insurer long-term.¹⁰
• Deductibles: Review deductible options and consider if you'd rather pay a higher deductible for lower premiums, or vice versa.
• Coverage: Review each insurer's coverage types and limits to see if they provide enough protection.
• Perils: Review the perils an insurer includes to evaluate if the coverage is comprehensive and competitive.
• Exclusions: Pay close attention to what's not covered and whether additional riders may be needed.
• Additional Coverage Options: Explore the available riders/endorsements to see what's available and if it meets your needs.¹¹
• Technology: Consider how easy it is to apply, get coverage, manage your policy, and file claims through the insurer's platform.
• Customer Satisfaction: Use resources like J.D. Power ratings and Trustpilot to gauge the satisfaction levels of past customers.

Common mistakes to avoid

What else should you know before getting coverage? Here are three common mistakes that could leave you at risk.

Underinsuring your home

While it may be tempting to reduce dwelling or property coverage to save on premiums, doing so can leave you vulnerable in the event of a total loss. For example, if a fire consumes your house and your settlement isn't enough to fully replace your home and possessions, the financial strain can make an already difficult situation much worse. The common rule of thumb is to insure at least 100% of your home's full replacement cost.

Not updating your policy

Another common mistake is to “set and forget” a homeowners insurance policy. Your coverage should evolve as your life and home do. For example, if you renovate your home, you'll want to update your coverage limits to reflect the new higher value. Failing to do so could leave you unable to fully replace your property with your settlement check in the event of a loss.

Not reading your policy

A homeowners insurance policy isn't exactly a riveting read, but it is important to fully understand the fine print. If you overlook an exclusion or limit, you could get caught off guard without coverage after a loss. With such high stakes, it's worth reviewing potential policies carefully. If you'd like help from an expert, you can consult with an InsureMe Advisor.

The bottom line on homeowners insurance

Homeowners insurance is an essential safeguard that protects your home and personal property. In the event of damage due to a covered cause, it can cover the costs of repairing or replacing what's lost, up to your policy coverage limits. Additionally, it provides personal liability and medical payment protection if you cause accidental damage to others or their property, up to your policy coverage limits. Overall, it's a way for homeowners to protect one of the biggest investments they'll likely make in their lifetimes — their homes and belongings.

Want help finding the best homeowners insurance policy for your needs? Contact an InsureMe Advisor today!