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Owning a home is a large financial investment. As with any major asset, protecting your investment against both common and uncommon financial risks is usually accomplished through an insurance policy. Homeowners insurance is a comprehensive policy that protects not only the physical structure, but also the items inside it.
If you purchase a home by securing a mortgage on your property, your mortgage company will require you to carry insurance for the replacement value on your home.
Since the mortgage company has also invested in your property, it has a vested interest in making sure damages are repaired when a disaster occurs.
For this reason, mortgage companies require their customers to maintain certain minimum levels of homeowners insurance for the duration of the loan.
How Homeowners Insurance Works
Homeowners insurance pays to repair or replace your home and belongings if something bad happens, like a fire or theft. To secure the assurance of this financial compensation, you’ll pay a yearly premium — usually set up through escrow or paid out yearly or monthly — to your insurance company.
Your policy will also come with a deductible (typically around $500 or $1,000) that you must pay out of pocket before the insurer will cut you a check. Choosing a higher deductible means you’ll have lower premiums, but it also puts you on the hook for a bigger out-of-pocket payment in the event of a claim.
What Does Homeowners Insurance Cover?
Homeowners insurance provides financial protection against losses that can occur from accidents, theft, or some specified disasters. Most standard homeowners policies provide several layers of protection for damages that can occur during a protected claim. The primary layer covers the costs to repair or replace your home if it’s damaged during an event covered by the policy. Other layers provide financial protection for additional structures or personal items on your property, increased expenses that might accrue as a result of a covered loss, or legal expenses resulting from incidents that occurred on your property.
Within these layers, all homeowners insurance policies cover six important areas:
- Your dwelling, i.e., the main structure of the home
- Other structures, like detached garages, sheds, and guest houses
- Personal belongings stored inside your home or on your property
- Loss of use, meaning alternate lodging while your home is under repair
- Personal liability in case someone is injured on your property and sues
- Medical payments for anyone injured on your property or by your pets
What Homeowners Insurance Doesn’t Pay For
While homeowners coverage protects your home against many kinds of unexpected damage, there are some things that are specifically excluded from your policy.
Most homeowners insurance doesn’t cover damage caused by pests, including insects, birds, or rodents. While storm damage is generally covered, other natural disasters such as earthquakes and floods are not.
Your policy also won’t cover normal wear and tear or damages resulting from improper care of your home, such as mold decay or burst water pipes.
Fortunately, for damages that aren’t covered by your homeowners policy, there are other ways to get coverage.
- For earthquakes, most providers offer a separate insurance policy for this or as an add-on to your existing homeowners policy.
- For floods, you can also get separate insurance from FEMA or a private provider, or check with your homeowners carrier to see if it offers an additional rider for flood protection.
- For pests, pest control companies offer contract services. While you won’t get payments for existing or future occurrences of damage from pests, you can at least take preventative care to reduce the risk of pests and damage from taking place.
For wear and tear, home warranties are a great way to pay for the replacement of household appliances that break down over time.
How Much Does Homeowners Insurance Cost?
The Insurance Information Institute (III) reports that the average cost of a standard homeowners policy in 2017 was $1,211 per year, which was only a slight (1.6%) increase from the previous year.
Geographic location played a major role in the total policy cost; Average premiums in Oregon were $677 per year, while premiums in Louisiana were nearly 350% higher at an average of $1,968 annually.
In addition to physical location, the price of a policy can vary based on the deductible, the size of your home and materials used in it (since those contribute to replacement costs), and the safety features available.
Smoke detectors and burglar alarms can help reduce your monthly premiums, as well as bundling your policy with other types of policies, such as auto or life insurance.