What is homeowners insurance and how does it work?

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Homeowners insurance protects your finances from home damage. When you purchase a home insurance policy, you are entering into an agreement with an insurance company. You agree to pay your premium in exchange for the insurance company paying for certain covered perils. Understanding your home insurance policy can help you better prepare for unexpected damage and help you feel more confident and comfortable with your coverage if you have to file a claim.

What is homeowners insurance?

Homeowners insurance is financial protection that you purchase from an insurance provider. It helps pay for damages if a covered disaster or other damaging event affects your home.

A standard insurance policy protects you in a variety of ways:

  • Home’s structure and belongings: Home insurance offers financial protection for the structure of a home as well as any belongings in the home in the case of a covered event.
  • Additional living expenses: Homeowners insurance generally covers additional living expenses you incur while repairs are being done — meaning should you need to stay in a hotel and dine out, your policy might cover those additional expenses.
  • Liability protection: A standard homeowners insurance policy comes with liability protection. This means should someone get hurt while on your property or if you are found at fault for damage to someone else’s property, your liability coverage might step in to help pay for their expenses.

There are many types of homeowners insurance. If you have a mortgage or other type of home loan, you will more likely have to carry an HO-3 policy, which is the most common type of home insurance. HO-3 policies include, on average:

  • Dwelling coverage
  • Other structures coverage
  • Personal property coverage
  • Liability
  • Medical payments
  • Additional living expenses

Each policy type comes with different covered perils. Understanding what perils — such as fire, water damage and burglary — your policy is designed to cover is an important step in your financial planning. Policies that cover more perils will generally cost more, but they will also provide you financial protection from a greater number of circumstances.

How does homeowners insurance work?

Your homeowners insurance journey can be broken down into several steps, each with its own specific set of considerations. Understanding each step could help you understand how your policy works.

Obtaining quotes

Homeowners insurance is not difficult to obtain, but there are some things you should know as you evaluate companies.

First, you may want to research several homeowners insurance companies to find which carriers best fit your needs. As you evaluate each provider, you may want to think about how the company’s discounts and coverages fit with your situation. To review customer service, you can look to J.D. Power’s numerous studies, and AM Best can help you evaluate an insurance provider’s financial strength. Once you have chosen several companies that could fit your needs, you can contact each one to get quotes. You can often do this online, by phone or by visiting a local agency.

During the quote process, ask about each company’s discounts. Taking advantage of home insurance discounts, which often include savings for home alarm systems, bundling policies and being claims-free, is one of the easiest ways to lower your premium.

Purchasing a policy

Once you have chosen the company you feel is best for you, your family and your home, you can purchase your policy. You may need to sign an application and make a payment before it is set in place.

Most providers offer different payment options, such as paying annually or quarterly. If you have a mortgage on your home, you may not need to make a payment. Your premium may be included in your monthly mortgage payment, held in your escrow account and disbursed to your insurance company at each renewal.

If you have a current policy and are switching to a new company, you should let your mortgage servicer know about the change. Your new insurance company will likely send documentation to the mortgage company, but advising your loan servicer about the change ahead of time allows them to note your file and prepare for receiving documents and an invoice from a new insurance company.

Maintaining a policy

Once you have a policy in place, maintaining it is relatively simple. You will need to make premium payments or, if your coverage is paid from your escrow account, make sure that the premium gets paid by your mortgage company. If you make any changes to your home or lifestyle, like updating your roof, renovating a room or getting a dog, you should notify your insurance carrier to make sure that your policy still properly covers you.

Filing a claim

If the unexpected happens and your home sustains damage, you may need to file a claim. You can typically file claims online, through a mobile app or with an agent in person or over the phone. You can expect questions regarding some general information like where the damage is, what kind of damage you have and when it occurred. Before sending any payout, a request to submit pictures of your home’s damaged portions or to allow a claims adjuster to inspect the damage is generally standard. Once you initiate the claims process, your insurance provider will determine the next steps.

Is homeowners insurance required?

No states legally require homeowners insurance. However, if you have a mortgage, your lender will most likely require you to have it. Homeowners insurance protects your lender from the possibility that you may not be able to pay off your loan if your home is destroyed.

However, even if you do not have a mortgage, homeowners insurance may be a good idea. Most financial advisors recommend that every homeowner purchase a policy. If your home is suddenly damaged or destroyed by a covered peril, your home insurance can help pay for the cost to repair or rebuild so that you do not have to shoulder those costs out of pocket.

How much does a home insurance policy cost?

The average cost of homeowners insurance in the United States is $1,312 per year for $250,000 in dwelling coverage. However, there are multiple variables that influence the cost of homeowners insurance, which means that your premium could differ from the national average. Some of these factors include:

  • Your state and ZIP code: One of the biggest factors when it comes to how much you pay for home insurance is where you live. Each state and even each ZIP code has a unique profile regarding the likelihood of certain claims, which can impact your premium.
  • Construction of home: How your house is constructed can affect your premium in a few ways. Some construction types are more resistant to certain types of damage, like wind or fire, which can lower your premium. However, some types of building materials are more expensive to repair, which could increase your premium.
  • Age of home: Newer homes are generally less likely to experience damage from a variety of causes, such as weather or plumbing issues. Additionally, the building materials used in older homes may not conform to modern building standards, meaning additional work may be needed to repair or replace them. Expenses to update materials could drive costs up.
  • Distance to nearest fire station: The closer you are to a fire station, the faster authorities are likely to get you in an emergency. This means that the emergency responders are likely to be able to put a fire out faster than if you live farther away, which could minimize damage.
  • Deductible: Your deductible is the amount you agree to pay out of pocket if you file a claim. Choosing a higher deductible means that the insurance company will pay less if you file a claim (because you agree to pay more), so your premium is generally lowered accordingly.
  • Coverage options levels: In general, the higher your coverage levels, the more you will pay for insurance. Similarly, the more optional coverages you choose to add to your policy, the more you will likely pay.
  • Credit score: In most states, your credit score affects your home insurance premium, as homeowners with lower credit are statistically more likely to file a claim than homeowners with higher credit scores. However, not all states allow credit to be used as a rating factor.
  • Claim history: If you have filed a homeowners claim within the last three to five years, your premiums may be higher. Even if you change insurance companies, your new carrier can see your past claims and may charge you accordingly.

Another factor that influences the cost of homeowners insurance is which company you choose. Insurance companies weigh each pricing variable differently. One company may weigh your claim history more heavily than another, for example. Shopping around and getting quotes from several carriers might help you find the coverage you need at a competitive price.

Frequently asked questions

How much homeowners insurance do I need?

Your coverage level will depend on your personal situation. Your dwelling coverage is based on the replacement value of your home, so more expensive homes need more coverage. Several other coverages — other structures coverage, personal property coverage and loss of use coverage — are typically percentages of your dwelling number. The level of personal liability coverage that you choose is also based on individual circumstances; most agents recommend higher levels if you have a pool, trampoline or host guests often. Working with a licensed agent could help you choose appropriate coverage levels.

How fast do insurance companies process claims?

Most home insurance companies seek to settle claims within 30 days, but the actual payout time will vary based on the claim itself. If a claim involves injuries or catastrophic situations where numerous homes were damaged, payouts may take longer.

Should you work with a national or local provider?

Both national and regional providers have advantages and drawbacks. Reviewing each company’s coverages, discounts, policy features and third-party reviews might help you choose the provider that is best for you. Getting quotes from both types of providers could help you see which best fits your needs.

What will homeowners insurance not cover?

Each type of home insurance policy covers different perils, but there are some things that standard policies do not cover. Damage caused by flooding is typically excluded and can be obtained by purchasing a flood insurance policy, although a few companies offer flood coverage as an endorsement. Similarly, earthquake damage is also typically excluded, but it can commonly be added as an endorsement unless you live in a high-risk area. In that case, you may need a separate policy.

Written by
Cate Deventer
Insurance Writer & Editor
Cate Deventer is a writer, editor and insurance professional with nearly a decade of experience in the insurance industry as a licensed insurance agent.
Edited by
Insurance Editor