What is homeowners insurance & how does it work?

Homeowners insurance is financial protection for your home, personal belongings, and assets in the event of a disaster or accident involving your home or property.

Pat Howard 1600

By

Pat Howard

Pat Howard

Senior Editor & Licensed Home Insurance Expert

Pat Howard is a senior editor and licensed home insurance agent at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

Expert reviewed

Expert reviewed

This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.

Learn more about oureditorial review process.

By

Michael Reynolds, CSRIC®, AIF®, CFT-I™

Michael Reynolds, CSRIC®, AIF®, CFT-I™

Financial Advisor

Michael Reynolds, CSRIC®, AIF®, CFT-I™, is a financial advisor, principal and founder of Elevation Financial, host of the weekly personal finance podcast Wealth Redefined®, and a member of the Financial Review Council at Policygenius.

Updated|4 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

What is homeowners insurance?

Homeowners insurance is a form of property insurance that pays for damage to your home and personal belongings from unexpected events, like a fire, weather disaster, or break-in. It also offers financial protection against all of your assets if someone is hurt or their property is damaged and you’re found legally responsible.

Without homeowners insurance, you’d be left paying for repairs or the replacement of your things out of your own pocket. And in the event you’re held liable for an accident on your property, all of your financial assets (home, retirement funds, savings, cars) would be on the line if they take you to court to recoup their losses.

Ready to shop home insurance?

Start calculator

What does homeowners insurance cover?

Standard home insurance policies cover your home, belongings, and assets from the following types of damage or perils.

  • Fire

  • Lightning

  • Smoke

  • Wind

  • Hail

  • Theft

  • Explosion

  • Weight of snow or ice

  • Power surges

  • Vandalism

You might also be covered for incidents like dog bites, tree removal, mold, water damage, foundations issues, or roof leaks depending on how the damage occurred and your policy’s coverage levels.

What does homeowners insurance not cover?

Standard home insurance policies won’t cover you for damage caused by any of the following:

  • Earthquakes

  • Flooding

  • Pests

  • Routine wear and tear or age

  • Intentional acts of arson or vandalism

However, you might be able to take out separate insurance policies or add on extra coverage to your standard policy to cover your home against earthquakes or flooding.

→ Take a deeper dive into what is and isn’t covered by home insurance

You can add even more coverage add-ons to your policy

Many insurers allow you to add on additional coverages to your policy for an extra fee — called endorsements. This might include coverage for your home business or protection against water backup damage in your home.

→ Learn more about homeowners insurance endorsements

How does homeowners insurance work? 

Home insurance works by paying a monthly or annual premium — aka insurance payment — to your insurance company. Premiums are generally paid directly from you to the insurance company or as part of your monthly mortgage payment. 

A standard homeowners insurance policy is made up of the following six coverages, which all cover different things. Each coverage type comes with a limit of liability, or the maximum amount the insurer will pay out for a loss. 

Coverage typeWhat it covers
DwellingCovers the cost of damage to the structure of your house and any attached structures, like your garage or patio
Other structuresCovers the cost of damage to structures that aren’t attached to your home, such as a guest house or fence
Personal propertyPays to repair or replace your personal belongings in case of damage or theft
Additional living expensesPays for relocation expenses, restaurant meals, and temporary lodging while your home is being repaired or rebuilt
Personal liabilityCovers you and your assets from expensive lawsuits if you’re held liable for another person’s injury or property damage
Medical paymentsPays for guests’ medical expenses, regardless of who is at fault

How much does homeowners insurance cost?

The average cost of homeowners insurance in the U.S. is $1,899 a year or $158 a month, according to our analysis of 2022 home insurance rate data from across the country. 

Your homeowners insurance company will look at multiple factors when determining the cost of your policy, including:

  • Location. If you live in an area at high risk of natural disasters or property theft, you’ll likely pay higher rates.

  • Home construction type. If your home is constructed with materials that are more prone to damage or expensive to replace, like a log home or a house with antique features, that can also increase your home insurance costs.

  • Age of your home. Older homes generally cost more to insure than newer homes.

  • Deductible. The higher you set your policy deductible, the lower your home insurance rates will be. 

  • Credit score. The higher your credit score, the lower your rates will be — since insurers see you as less likely to file a claim.

  • Claims history. The more claims you’ve filed in the past, the more you’ll pay for home insurance.

  • Risks on your property: Insurance companies view pools, trampolines, and certain breeds of dogs as high risk since guests are more likely to get injured while at your home. If you own any of these, you’ll likely see higher rates.

→ Learn about the cost of homeowners insurance in each state

What are the different types of home insurance policies?

There are several types of homeowners insurance policies designed for everyone from homeowners, to renters, to condo owners, and more. The most common type of home insurance policy is an HO-3 policy — which is designed for homeowners looking to cover their home and belongings from the most common types of damage or loss.

Type of home insurance policyWho it’s designed for
HO-1 policyHomeowners looking for the most limited coverage
HO-2 policyHomeowners looking for slightly better coverage than an HO-1 policy
HO-3 policyThe most common type of policy — designed for homeowners looking to cover their home and belongings from most types of damage or loss
HO-4 policyRenters
HO-5 policyThe second most common type of policy — designed for homeowners looking for the most comprehensive coverage available
HO-6 policyCondo owners
HO-7 policyMobile or manufactured homeowners
HO-8 policyHomeowners with older or high-risk homes

→ Visit our homeowners insurance learn center for more tips

How do homeowners insurance claims work?

When your home or belongings are damaged in a covered incident, you can file a home insurance claim to pay for repairs or their replacement.

Filing a claim is how you put your home insurance policy to work — you’ll show your home insurance company evidence that your home or belongings were damaged or vandalized, and they’ll determine the value of your loss and then reimburse you.

The amount your insurance company reimburses you on a claim will depend on the level of homeowners insurance policy you have. 

Coverage level for claimsHow it works
Actual cash valueCheapest level of coverage — pays for the depreciated value of your home and belongings
Replacement costSlightly more expensive — pays for the value of your home and belongings without deducting for depreciation
Extended replacement costEven more expensive — increases your policy limits by 20% to 50%
Guaranteed replacement costMost expensive level of coverage — pays out whatever it costs to rebuild your home

If your house is damaged in a bad storm, or a guest is injured on your property and files a lawsuit, you can file a claim with your insurance provider who will pay out for the incident if it's covered. 

→ Learn more about how to file a homeowners insurance claim

Don’t forget about your policy deductible

Before paying you for a claim, your insurance company will require that you meet your policy deductible. This is the amount you’re responsible for paying on each claim before your insurance kicks in. 

For example, if your insurance deductible is $2,000 and you file a claim for $10,000 in damage — your claim reimbursement check will total $8,000.

Is homeowners insurance required?

Although homeowners insurance is not required by law, most lenders require proof of homeowners insurance before extending you a loan. If your home is in a high-risk floodplain, your lender may also require you to buy flood insurance

To give yourself time to compare rates and coverage options, start shopping around for home insurance at least three weeks before your closing date. 

Why is homeowners insurance so important?

Homeowners insurance is so important because it provides financial protection against one of your most expensive purchases: your home. It also covers items beyond your home — including your personal belongings and all of your assets should you be sued for damages. And let’s not forget most mortgage companies require you to purchase home insurance before you can even take out a home loan. 

Ready to shop home insurance?

Start calculator

How to get homeowners insurance

Homeowners insurance can be purchased through a specific company or through an insurance marketplace like Policygenius that offers policies from multiple companies.

The benefit of shopping through Policygenius is our team of licensed insurance experts will send you quotes from multiple companies to ensure you’ve found the best home insurance company for your needs at the best rates. And the best part? They’ll handle all of the paperwork for you.

You can shop for homeowners insurance in six easy steps:

  1. Learn about how much coverage you need

  2. Get familiar with home insurance policy lingo

  3. Gather information about your home

  4. Compare home insurance quotes through Policygenius

  5. Choose your policy

  6. Finalize your policy details

→ Learn more about the six steps to buying homeowners insurance

Frequently asked questions

What is the difference between homeowners insurance and mortgage insurance?

Homeowners insurance offers financial protection for the homeowner (aka the borrower of a home loan) in the event of damage to their home or belongings. Meanwhile, mortgage insurance protects the mortgage lender in the event that the borrower doesn’t make their mortgage payments on time. You can learn more with our guide to mortgage insurance vs. homeowners insurance.

What is the difference between homeowners insurance and property insurance?

Property insurance is a catch-all term that includes all different types of personal property protection or liability coverage for property owners. Homeowners insurance is a type of property insurance policy, as is flood insurance, earthquake insurance, and renters insurance.

How does homeowners insurance work for a condo?

If you own a condo, you’ll need to purchase an HO-6 condo insurance policy. The amount of condo insurance you need generally depends on your HOA’s master policy. Master policies usually include some amount of structural coverage for each individual unit. For that reason, condos generally don’t need as much dwelling coverage as single-family homes.

How can I save money on home insurance?

Most home insurance companies offer a slew of discounts for things like bundling your home and car insurance policies, installing security systems in your home, going three or more years without a claim, and more. You can check out our guide to home insurance discounts for a complete list of ways to save.