What is Homeowners Insurance?

Homeowners insurance provides coverage in case a disaster damages your home or personal belongings. It can also pay out when you’re held responsible for an accident or unintentional injury. Homeowner’s insurance generally covers damage due to fire, wind or snow, but it won’t cover floods or earthquakes. However, flood insurance and earthquake insurance are available to purchase separately, and in hurricane-prone states, you may also need or want windstorm insurance.

Homeowners insurance isn’t the same as mortgage insurance, which you may be required to buy if you put less than 20% down on your home loan. (FHA and other federal loans may also require mortgage insurance, regardless of your down payment amount.) If you default on your loan, mortgage insurance will help reimburse your lender.

Homeowners insurance has four main functions:

• Repair your house, yard, and other structures.
• Repair or replace your personal belongings.
• Pay for you to live elsewhere while your house is being repaired.
• Cover personal liability if you’re held legally responsible for damage or injury to someone else – so long as it is not intentional damage or injury.

Homeowners insurance comes in several types, called “policy forms.” Some types provide more expansive coverage than others, so it’s worthwhile to know the difference. Although details can differ by state and company, these policies are fairly standard.

Most popular: HO-3 insurance

HO-3 insurance policies are by far the most common. If you have a mortgage, your lender is likely to require at least this level of coverage. HO-3 insurance policies generally cover damage to your home from any cause except those the policy specifically excludes, such as an earthquake or flood. However, where it concerns your belongings, HO-3 insurance typically covers only damage from the perils listed in your policy.

Broadest coverage: HO-5 insurance

An HO-5 insurance policy provides the most extensive homeowners coverage. It pays for damage to your home and belongings from all causes except those the policy excludes by name. It’s typically available only for well-maintained homes in low-risk areas, and not all insurers offer it.

You need enough homeowners insurance to cover the cost of rebuilding your home if it is destroyed. Your home insurance agent or insurer should be able to help you calculate the replacement cost. The average cost of homeowners insurance is $1,784 a year, according to a Nerd Wallet analysis. But prices can depend on your location and the amount of coverage you buy. In most states, your credit score can also be a factor.

Homeowners insurance coverage isn’t required by law, but if you have a mortgage, a lender will likely require you to insure the home to protect its investment. Even if you don’t have a mortgage, home insurance is almost always a wise purchase as your home is more than just a roof over your head. It may be your most valuable asset — and one you likely can’t afford to replace out-of-pocket if disaster strikes. That is why protecting your place with the right homeowner’s insurance coverage is important.