How to read a home insurance policy

Homeownership is a significant achievement and comes with the responsibility of maintaining your property, part of which involves ensuring that you won’t incur large costs from losses associated with your home in the future. The best way to financially protect your property and assets is by buying home insurance. Home insurance is an important part of any homeowner’s financial plan, and knowing how to read and understand your coverage is an integral step. Home insurance policies may seem complex, but they don’t have to be. Bankrate’s highly experienced insurance editorial team can help you understand the details of your policy. Knowing how to read a home insurance policy can help you choose the appropriate coverage and evaluate your policy as your needs change.

How to read and understand your home insurance policy

The declarations page is the most important page when trying to understand your homeowners insurance policy. It’s generally a single page or two at most. It will have information related to your policy, such as the insurance company’s name, your name, property address, coverage amounts, deductibles, endorsements and annual premium.

The policy jacket, or policy form, is included with the declarations page, and it goes into even more detail with policy language, such as exclusions and conditions, as well as definitions of important terms. It’s helpful to read the policy jacket first so you understand the terms you will see on the declarations page.

The parts of a homeowner insurance policy

A homeowners insurance policy includes a variety of coverage types, each one with its own monetary coverage limit. The central element is dwelling coverage, and many other standard coverage options are usually a percentage of this dwelling coverage amount. However, depending on your carrier, you may be able to increase some of these limits or add other endorsements to further personalize your policy.

Knowing what to look for on your policy’s declarations page can be vital if you have to file a claim. If you have endorsements, or add-ons, such as coverage for electronics, high-value items or an earthquake endorsement, you’ll also need to understand the scope of these coverage options. If you have a separate policy for more robust coverage, like a flood policy, knowing what to look for in your policy documents can help you understand your other policy coverages.

Here are common coverage types found in your policy documents and what they cover.

Replacement cost value versus actual cash value

For dwelling and personal property coverage, either replacement cost or actual cash value applies. With replacement cost value, the home or personal property would be covered for the cost to replace what is damaged in a covered loss at the time of the claim, without depreciation. Actual cash value considers depreciation when determining your claim payout amount. Some insurance companies automatically include replacement cost for dwelling and personal property coverage, while other companies require it be added as an endorsement.

What is a home insurance declarations page?

A homeowners insurance declarations page is a snapshot of the home insurance policy. It includes vital information about the insurance company and policy, including the named insured, property location and the selected coverage. Coverage limits, deductibles, endorsements, policy number and policy term, are also listed on the declarations page. If you have a mortgage, the company will be listed to show its insurable interest in the property. A mortgagee clause on the home insurance policy also shows who the insurance company is billing if insurance is paid via escrow, so it’s important that info is correct in the policy documents.

By reviewing your declarations page, you can see how you and your home are insured from covered losses. The elements included in the homeowners declarations page are:

• Policy number: The unique number identifying your policy. This number is used in all transactions, including filing and tracking a claim.
• Property address: The location of the insured property, which may or may not be the same as the mailing address.
• Policy period: The dates listed are the start and end dates of the policy term. Most home insurance policies automatically renew, but you should contact your property insurer if you receive a nonrenewal notice.
• Named insured: The person or people with an insurable interest in the home and the holder of the insurance policy.
• Coverage types and limits: The specific coverage types included in the home insurance policy or selected by the named insured.
• Premium: The total amount of money you’re responsible for paying, whether directly or through an escrow account, over the policy’s term length to ensure it remains active.
• Home insurance discounts: The list of discounts you’ve qualified for and have added to the policy will be shown on your home insurance insurance declarations page.
• Endorsements: Also referred to as riders, listed endorsements are provisions that add or modify your insurance policy’s coverage.
• Deductible: The fixed amount of money you would pay out of pocket for damage to your home while your insurance covers the rest (up to your coverage limits). A higher deductible usually results in a lower premium, since you’d be taking on more financial responsibility.
• Replacement cost value or actual cash value: The pre-established way your policy is designed to pay out. Replacement cost is the cost associated with repairing or replacing your property or personal belongings at today’s prices, without depreciation factored. The actual cash value is the cost of replacement after factoring depreciation.

Home insurance policy exclusions

A policy exclusion on your homeowners insurance indicates a loss or scenario that is specifically not covered. Policy exclusions are detailed in the policy jacket and can differ by company and policy type.

Most homeowners insurance policies exclude the following perils:

• Normal wear and tear
• Construction defects
• Foundation failure
• Pet and animal damage
• Earth movement
• Intentional loss
• Nuclear hazard
• Mechanical breakdown
• Mold and fungus

Damage from a flood is also not typically covered under a home insurance policy. Some carriers may offer flood insurance separately or you can purchase it directly from the National Flood Insurance Program (NFIP). Earthquakes (categorized under earth movement) are also typically excluded from home insurance policies. However, if you live in an earthquake-prone area, you may be able to buy a separate earthquake insurance policy or, depending on your carrier, you could add an endorsement to your policy.

Frequently asked questions

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    What are the different types of home insurance policies?

    There are several types of home insurance policies. The most basic home insurance policy is an HO-1, which provides coverage on the structure of your home. An HO-2 is a step above the HO-1, as it covers your home and personal belongings for named perils. The most common type of homeowners insurance is the HO-3, which covers your home and detached structure on an open perils basis, and your personal property by named perils. HO-3 policies also cover liability, additional living expenses and medical payments.

    All in, there are eight types of property insurance policies that provide coverage for various circumstances such as renters insurance covered by HO-4s, more robust home coverage covered by HO-5s, condos covered by HO-6s, mobile or manufactured homes covered by HO-7s and older homes covered by HO-8s.

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    How do I find the best home insurance company?

    The best home insurance company offers the coverage you need to adequately protect your home, personal belongings and your personal liability. If you are not sure what the best homeowners insurance company is for you, consider getting several home insurance quotes to compare options.
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    Do I need to change my home insurance policy?

    While coverage needs may vary for every homeowner, it’s a good idea to check your home insurance policy at least once a year to make sure it still fits your needs and the coverage limits are adequate, especially due to inflation. If you’ve made any major changes to your house — like getting a new roof, adding an extension or updating your utility system — you should let your insurance agent or company know so your policy coverage can be adjusted accordingly, if needed.
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    What are the ‘perils’ my home insurance protects against?

    The most common causes of home damage (also called insurance perils), such as fire, wind, theft, the weight of snow and ice, vandalism, explosions and freezing pipes, are generally covered under a homeowners insurance policy. However, two major exclusions are flooding and earthquake coverage. If you need or want this type of coverage, you’ll need an endorsement or separate policy to cover the costs associated with these perils.