Homeowners Insurance Explained: Everything You Need To Know

Homeowners insurance can provide financial support or reimbursement if your home, belongings or other types of property are damaged, destroyed or otherwise lost due to a covered peril, like fire or theft. It can also shield you from liability lawsuits and cover additional living expenses if your house becomes uninhabitable because of a covered peril.

Keep reading for more information about how home insurance works, including what types of coverage are available, how much you can expect to pay for a policy and when you may be required to have homeowners insurance.

On This Page

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  What Is Homeowners Insurance?

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  How Does Home Insurance Work?

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  Is Homeowners Insurance Required?

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  How Much Home Insurance Do I Need?

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  How To Get Homeowners Insurance

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  FAQs

What Is Homeowners Insurance?

Homeowners insurance is a personal lines insurance policy that provides a safety net to keep you from having to bear the full financial burden whenever a sudden and unexpected accident — known as a peril — impacts your property. It also provides coverage in case you are held personally liable for a physical injury or financial loss that someone else experiences.

Depending on the type of policy you have, your home and/or belongings may be covered on an open peril or named peril basis. Open peril policies cover all sources of property damage except for those explicitly listed in the policy as exclusions. Common home insurance exclusions include wear and tear, floods and earthquakes.

Conversely, named peril policies will only cover property damage caused by perils that are specifically mentioned in the policy. In general, the following 16 sources of damage are included as named perils:^[1]

How Does Home Insurance Work?

If you experience a covered loss, your homeowners insurance company will reimburse you up to your policy’s coverage limits. For example, if you have $250,000 worth of coverage for your home, then that is the maximum amount of money you could receive for a claim involving damage to the structure of your house.

As a result, if a fire burns down your house and it would cost you $300,000 to buy a new home, you would have to pay $50,000 out of pocket.

Keep in mind that you may have to make a minimum out-of-pocket contribution toward your home insurance claim, known as a deductible. The deductible is usually subtracted from your insurance payout, and it helps determine when it would make sense to file a claim. For example, if you have a $1,000 deductible, there would be no purpose in filing a claim for $800 worth of property damage.

If any of your belongings are impacted by a covered peril, a standard policy will reimburse you at their actual cash value (ACV) minus your deductible. ACV coverage accounts for depreciation factors, like age or wear and tear, so your insurance settlement may not be enough to replace the items after a total loss. Homeowners willing to pay a higher premium can upgrade to replacement cost value (RCV) coverage, which entitles the homeowner to a check that would replace the insured property at today’s market value.

Homeowners Insurance Coverages

A standard homeowners insurance policy includes the following six coverage types:

• Dwelling: Dwelling insurance covers your house and any structures directly attached to it, such as porches or carports. Most policies provide dwelling coverage on an open peril basis.
• Other structures: Structures on your property that are not directly attached to your home — including sheds, fences and, in some cases, swimming pools — are insured by other structures coverage. Usually, other structures on your property are insured against the same perils as your home.
• Personal property: Personal property insurance provides coverage for your belongings, such as furniture, clothing and electronics. This coverage applies even to items stored outside of your home, though the coverage limit for off-premises claims may be set as low as 10% of the overall personal property coverage limit.^[2] Unlike your home, your possessions are generally insured on a named peril basis.
• Loss of use: If a covered peril damages your home so severely that you cannot safely stay there, loss of use coverage can take care of additional living expenses that exceed your typical daily living costs while you wait for your home to be repaired. Covered expenses could include hotel stays, laundromat services, restaurant meals and more.
• Personal liability: Personal liability insurance can cover medical bills and lost wages or property repairs if you are responsible for injuring a guest or neighbor or damaging their property. It can also cover your legal expenses if someone sues you over a bodily injury or property damage claim.
• Medical payments: After a guest is injured on your property, medical payments coverage can step in to pay for medical treatments regardless of whether you are held personally liable for the injury. However, you should note that medical payments coverage has lower coverage limits than personal liability coverage, so it is best used to discourage costly lawsuits due to minor injuries.

In addition, you will generally have the option to add extra coverage types to your home insurance policy. Examples of common homeowners insurance endorsements include scheduled personal property coverage, home-based business insurance, sewer backup and sump pump overflow coverage and identity theft insurance.^[3]

Homeowners Insurance Types

There are eight different types of home insurance forms that differ in regard to the types of properties they cover and the level of coverage they provide. See the following table for an overview of the different types of homeowners policies.^[4]

HO-3 coverage is the most common homeowners insurance form by a substantial margin, accounting for more than 78% of policies covering owner-occupied houses as of 2021.^[5] Conversely, many insurance companies do not even offer HO-1 insurance because there is little demand for policies that provide such minimal coverage.^[6]

Homeowners Insurance Costs

As of February 2025, the average cost of homeowners insurance across the United States is $2,258 per year for a policy that includes $300,000 worth of dwelling coverage. That said, premiums can vary based on factors like your ZIP code, the age and size of your home, the condition of your roof, your insurance claims history and your policy details. In most states, insurers are also allowed to use a credit-based insurance score to determine your rates.^[7]

Homeowners Insurance Claims

Whenever you experience a loss covered by your homeowners insurance policy, you need to take the following steps to file a home insurance claim:

1. Call 911 and ask the responding officers to file a police report if your claim is the result of a crime, such as theft or vandalism.
2. Initiate your insurance company’s claims process and request a home visit with an insurance adjuster.
3. Document the damage to your property by taking pictures or filming videos with your phone.
4. Prevent your property from incurring additional damage by performing emergency repairs, if needed.
5. Inform your mortgage lender about the property damage and the insurance claim.
6. Present relevant evidence to your insurance carrier’s adjuster, including pictures and videos, police reports, repair estimates and home inventories.
7. Keep track of receipts and documents that are important to your claim, such as repair bills.
8. Pay attention to the status of your claim so you can take care of any problems that come up and fill out paperwork as soon as possible.
9. Use your insurance payout to finish paying for repairs or, if you believe you have received an unfair settlement, contact a public adjuster or lawyer who can independently assess your claim and give you further guidance.

Is Homeowners Insurance Required?

Homeowners are not legally required to have home insurance in any state. However, if you have a mortgage, your lender will most likely require you to purchase a home insurance policy.^[8] If you don’t meet your lender’s insurance requirements, they may buy a force-placed insurance policy on your behalf, which usually carries a higher-than-average premium and offers subpar coverage.

While you aren’t obligated to maintain home insurance once your house is paid off, it’s still a wise investment since it ensures your largest asset is covered in case of a disaster.

How Much Home Insurance Do I Need?

The amount of home insurance you need may vary depending on your circumstances, but in general, you’ll want enough dwelling coverage to fully replace your home in the event of a total loss. It’s a good idea to regularly update your dwelling coverage limit to keep up with inflation or purchase guaranteed replacement cost coverage, which comes with no coverage limit and instead pays out whatever it will cost to replace your home.

The limits for other homeowners coverage types are often set at a percentage of your dwelling coverage limit. For example, your other structures coverage is usually equal to 10% of your dwelling coverage, while the threshold is 50% to 70% for personal property coverage and 20% for loss of use coverage.^[2][9] Meanwhile, you’ll likely want at least $300,000 in personal liability coverage and $1,000 in medical payments coverage.^[9][10]

Finally, you may need to consider purchasing additional coverages, depending on the perils you are exposed to. For example, you may need to invest in flood insurance or earthquake insurance if you live in an area with a high exposure to these perils because they are not covered by standard home insurance.

How To Get Homeowners Insurance

As you shop around for home insurance, you should be sure to collect at least three to five quotes because different insurance companies have different underwriting standards, potentially leading to different rates for the policy you need. Of course, it can be tedious to individually contact several insurance carriers to give them your information and request quotes.

That’s why you should take the easy way out, and let SmartFinancial comparison shop for you. All you have to do is answer a few questions about yourself and the type of coverage you need, and then we’ll connect you with an agent who can help you find the insurance policy you’re looking for at the best possible price. Begin the questionnaire and start comparing home insurance quotes for free in as little as a few minutes!