## Understanding Home Insurance Policies

Homeowners insurance is vital for protecting one of your most significant investments—your home. This type of property insurance safeguards against losses and damages to your residence, covering everything from your belongings to liability for accidents occurring on your property.

Policies typically manage a range of incidents, including damage to both the interior and exterior of your home, as well as loss or damage to personal assets. Understanding these essentials ensures you're prepared to protect your home effectively, navigate claims, and make informed decisions about your policy coverage, including any additional riders for high-value items or protections against specific risks like natural disasters.

### Key Takeaways

*   Homeowners insurance is a type of property insurance that covers damage to your home, furnishings, and certain personal belongings, while also offering liability protection against accidents occurring on your property.
*   Standard homeowners insurance policies typically do not cover damages from natural disasters such as floods or earthquakes; special coverage may be required for properties in high-risk areas.
*   The cost of a homeowners insurance policy can vary significantly based on factors like location, coverage limits, and the condition of the home, with the national average being around $1,300 per year.
*   Homeowners insurance differs from both [home warranties](https://www.investopedia.com/the-best-home-warranties-11690942) and mortgage insurance, as it covers structural and personal property damages, while home warranties cover system and appliance repairs and mortgage insurance protects the lender.

#### Home Insurance

## How Homeowners Insurance Protects Your Home

[Homeowners insurance](https://www.investopedia.com/insurance/homeowners-insurance-guide/) generally covers four types of incidents: interior and exterior damage, loss or damage of personal belongings, and injury on the property. When a claim is made on any of these incidents, the homeowner will typically be required to pay a [deductible](https://www.investopedia.com/terms/d/deductible.asp).

Insurers offer riders to increase coverage for specific events, cover valuable items, or [lower deductibles](https://www.investopedia.com/terms/b/buyback-deductible.asp), often at an extra cost.

Insurers typically depreciate the property's value based on factors like age and condition, then deduct this from the [replacement cost](https://www.investopedia.com/what-is-guaranteed-replacement-cost-insurance-8685331) to determine the [actual cash value (ACV)](https://www.investopedia.com/terms/a/actual-cash-value.asp) paid to the homeowner.

> **Tip**
>
> You can get a recoverable depreciation clause added to your contract that will pay you the depreciation value along with the replacement cost.

For example, say a claim is made to an insurer for [interior water damage](https://www.investopedia.com/live-in-one-of-these-states-dont-make-this-costly-ac-mistake-before-vacation-11774536) that has occurred in a home. A claims adjuster estimates the cost to bring the property back to livable conditions to be $10,000. If the claim is approved, the homeowner is informed of the amount of their deductible, say $4,000, according to the policy agreement.

In this case, the insurance company will issue a payment for the excess cost of $6,000. The higher the deductible on an insurance contract, the lower the monthly or annual premium on a homeowners insurance policy.

### Exploring Liability Limits in Homeowners Insurance

Every homeowner's insurance policy has a [liability limit](https://www.investopedia.com/terms/a/aggregate-limit-liability.asp) that determines the amount of coverage you have. The standard limits are usually $100,000, but you can often choose a higher limit. The liability limit sets how much of the coverage goes toward repairing or replacing property, belongings, and covering living expenses during repairs.

[Acts of war](https://www.investopedia.com/terms/w/war-risk-insurance.asp) or [acts of God](https://www.investopedia.com/terms/a/act-god.asp), such as earthquakes or floods, are typically excluded from standard homeowners insurance policies. If you live in an area prone to these natural disasters, you may need special coverage to insure your property against floods or earthquakes. Some states offer [Fair Access to Insurance Requirements (FAIR)](https://www.investopedia.com/what-is-fair-plan-insurance-8685586) plans, providing basic coverage for structures in high-risk areas.

> **Important**
>
> Most basic homeowners insurance policies cover events such as hurricanes and tornadoes.

## Why Homeowners Insurance Is Essential for Mortgages

When you apply for a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp), you're usually required to provide proof of insurance on the property before the bank will loan you funds. The property insurance can be acquired separately or by the lending bank.

If you want to get your own insurance policy, you can compare multiple offers and pick the plan that works best for your needs. If you don't have your property covered from loss or damages, the bank may get one for you at an extra cost.

Homeowners insurance payments are often included in your monthly mortgage. The lending bank that receives the payment allocates the portion for insurance coverage to an [escrow account](https://www.investopedia.com/mortgage/escrow-process-requirements/). Once the insurance bill comes due, the amount owed is settled from this escrow account.

## Comparing Homeowners Insurance and Home Warranties

Homeowners insurance is different from a home warranty. A home warranty is a contract that provides for repairs or replacements of home systems and appliances such as ovens, water heaters, washers/dryers, and pools.

These contracts usually expire after a certain period (usually 12 months) and are not mandatory for a homeowner to buy to qualify for a mortgage. A home warranty covers issues and problems that result from poor maintenance or inevitable wear-and-tear on items—situations in which homeowners insurance doesn't apply.

## Key Differences Between Homeowners and Mortgage Insurance

A homeowners insurance policy also differs from mortgage insurance. Mortgage insurance is typically required by the bank or mortgage company for homebuyers making a down payment of less than 20% of the cost of the property.

The Federal Home Administration also requires it of those taking out an FHA loan. It's an extra fee that can be figured into the regular mortgage payments or may be a lump sum charged when the mortgage is issued.

Some homeowner policies include a [mortgagee clause](https://www.investopedia.com/mortgagee-clause-definition-5221668). The clause covers and pays the lender in case your home is lost or irreparably damaged during the time you have a mortgage on it.

Mortgage insurance covers the lender for taking on the extra risk of a home buyer who doesn't meet the usual mortgage requirements. If the buyer should default on payments, the mortgage insurance would compensate the lender. Basically, while [both deal with residences](https://www.investopedia.com/homeowners-insurance-vs-mortgage-insurance-5221665), homeowners insurance protects the homeowner while mortgage insurance protects the mortgage lender.

## What Does Homeowners Insurance Cover?

Homeowners insurance [often covers](https://www.investopedia.com/financial-edge/1211/what-is-and-isnt-covered-by-homeowners-insurance.aspx) damage to your home, other structures, and personal property, as well as liability for injuries. It typically includes events like fire, lightning, high winds, and vandalism. However, coverages vary widely among insurance companies and states, so read the fine print carefully to ensure you understand what is and isn't covered.

## Does Homeowners Insurance Cover Floods?

Flooding caused by internal problems (such as a leaking bathroom pipe) is typically covered by homeowners insurance. However, if the damage is caused by a natural cause outside the home, such as flash flooding, a basic policy will not usually cover the loss. Often, you can purchase supplemental [flood insurance](https://www.investopedia.com/terms/f/flood-insurance.asp) at an additional cost to cover flood damage. Also, most policies do not cover damage from earthquakes and other types of natural and man-made catastrophes.

## How Much Does Home Insurance Typically Cost?

The average national premium for home insurance is around $1,300 yearly, but individual rates vary widely based on location, coverage, credit score, and other factors. While location is one of the most important factors, insurers also look at the condition of your home, how old it is, and the history of previous claims.

## The Bottom Line

Homeowners insurance covers a variety of damages to your home and other assets at your residence. While most policies provide several basic coverages, the [types of losses that are insured](https://www.investopedia.com/types-of-homeowners-insurance-8620754) can vary widely across the industry. To find the most affordable home insurance for your situation, consider getting [home insurance quotes](https://www.investopedia.com/getting-the-best-quotes-on-homeowners-insurance-5074643) from several insurance providers.

> **Article Sources**
>
> 1.  Maryland Insurance Administration. "A Consumer Guide to Homeowners Insurance."
>     
> 2.  Healthcare.gov. "[Deductible](https://www.healthcare.gov/glossary/deductible/)."
>     
> 3.  National Association of Insurance Commissioners. "[Homeowners Insurance](https://content.naic.org/cipr-topics/homeowners-insurance)."
>     
> 4.  Consumer Financial Protection Bureau. "[FHA Loans](https://www.consumerfinance.gov/owning-a-home/loan-options/fha-loans/)."
>     
> 5.  The National Flood Insurance Program. "[Flood Insurance](https://www.fema.gov/flood-insurance)."