As a general matter, it is legal to live in part of your home and rent out other parts. You do have to comply with your local zoning law and also make sure your rental is properly registered with your municipality--contact your town or city clerk's office and/or building department to inquire into this.As to insurance: regular homeowner's insurance will NOT cover a rental. Homeowner's insurance covers when the insured resides in the home and does not rent out part or all of it. You need insurance specifically for rental units. Your insurer or insurance agent/broker can guide you in getting the correct insurance. Note that if you do not get the proper insurance and have some loss or damage, your insurer may deny the claim because you would have committed a material (important) misrepresentation by having regular homeowner's insurance and not notifying the insurer of the rental or seeking (and paying for) appropriate coverage.