Buying a home is one of the biggest financial decisions you’ll ever make. Right behind that comes choosing the right homeowners insurance—a decision that can either protect your investment or leave you scrambling to cover thousands of dollars in unexpected costs.
Most people purchase homeowners insurance because their mortgage lender requires it. But there’s a lot more to this essential policy than simply checking a box. From understanding what’s actually covered to avoiding common coverage gaps, getting homeowners insurance right can make all the difference when disaster strikes.
This guide breaks down everything you need to know about homeowners insurance, including what to look for, what to avoid, and how to ensure you’re adequately protected without overpaying.
Understanding the Basics: What Does Homeowners Insurance Actually Cover?
A standard homeowners insurance policy typically includes four essential types of coverage:
Coverage for Your Home’s Structure
This protects the physical structure of your house if it’s damaged or destroyed by covered perils like fire, lightning, hail, or windstorms. According to the Insurance Information Institute, most policies also cover detached structures such as garages, tool sheds, or gazebos—generally for about 10 percent of the amount of insurance you have on your home’s structure.
Coverage for Your Personal Property
Your furniture, clothing, electronics, and other belongings are typically covered at 50 to 70 percent of the insurance amount on your home’s structure. If you insure your home for $300,000, your personal property coverage would range from $150,000 to $210,000.
The Insurance Information Institute notes that personal belongings are covered anywhere in the world, though some companies limit off-premises coverage to 10 percent of your total possessions amount. You also have up to $500 of coverage for unauthorized credit card use.
Liability Protection
This covers you if someone is injured on your property or if you (or a family member) accidentally damage someone else’s property. Liability limits generally start at about $100,000, but higher limits are available and often advisable.
Additional Living Expenses
If your home becomes uninhabitable due to a covered disaster, this coverage pays for hotel bills, restaurant meals, and other costs above your usual living expenses while your home is being repaired or rebuilt.
The Coverage Gaps You Need to Know About
One of the biggest mistakes homeowners make is assuming their policy covers everything. It doesn’t. Understanding these common exclusions can save you from devastating financial loss.
Flood Damage Is Not Covered
This bears repeating: standard homeowners insurance does not cover flood damage. According to FEMA, “Most homeowners insurance does not cover flood damage. Flood insurance is a separate policy that can cover buildings, the contents in a building, or both.”
Water damage from burst pipes or a leaking roof is typically covered. But damage from ground water, rain runoff, or snow melt is not. If you live anywhere near a body of water, in a low-lying area, or even in what’s considered a “moderate” flood zone, you need flood insurance through the National Flood Insurance Program (NFIP) or a private insurer.
Earthquakes Require Separate Coverage
Earthquake damage isn’t covered by standard policies either. If you live near fault lines—including lesser-known ones like the New Madrid fault that runs through the Midwest—you’ll need to purchase an earthquake endorsement or separate policy.
Other Common Exclusions
The National Association of Insurance Commissioners identifies several other important exclusions:
- Mold: Policies often exclude coverage for mold damage
- Pest infestations: Damage from termites, rats, or other pests isn’t covered
- Wear and tear: Routine deterioration, foundation settling, and maintenance issues are your responsibility
- Business property: If you run a business from home, your business inventory and equipment likely aren’t covered—and failing to disclose a home business could result in a cancelled policy
Replacement Cost vs. Actual Cash Value: A Critical Distinction
How your insurer pays claims makes an enormous difference in how much you’ll receive after a loss. There are two main approaches:
Actual Cash Value (ACV)
According to the NAIC, “Actual Cash Value coverage pays the costs to repair or replace the damaged or destroyed home, minus a deduction reflecting the home’s age and wear and tear (depreciation).”
Here’s an example: Let’s say you have $10,000 worth of damage to your home. With ACV coverage, your insurer would consider your home’s age and condition when calculating the payout. After accounting for depreciation and subtracting your deductible, you might receive only $6,000 or $7,000.
Replacement Cost Value (RCV)
The NAIC explains that “Replacement Cost Value coverage pays the cost to repair or replace the damaged or destroyed home, with materials of like kind and quality.” Using the same $10,000 damage scenario, RCV coverage would pay the full $10,000 (minus your deductible) to actually repair or replace the damage.
For a family with $10,000 in damage and replacement cost coverage, the policy pays $10,000 to repair the home, minus their deductible. With actual cash value coverage, the payout would be significantly less after accounting for depreciation.
While RCV coverage costs more upfront, it provides substantially better protection. Many RCV policies only pay actual cash value initially, then reimburse the remaining amount once repairs are completed.
How Much Coverage Do You Actually Need?
Here’s a crucial point many homeowners miss: you should insure your home for its replacement cost, not its purchase price or market value.
Market value includes the land your home sits on and fluctuates with the real estate market. Replacement cost is what it would actually take to rebuild your home from the ground up using similar materials and quality.
The NAIC recommends contacting local builders or real estate agents to estimate average new construction costs per square foot in your community. Then multiply that by your home’s square footage to arrive at a baseline replacement cost figure.
Keep in mind that older homes with unique features or materials may cost even more to rebuild. Building codes may have changed since your home was built, requiring updates that increase reconstruction costs.
Smart Shopping Strategies
Get at Least Three Quotes
The NAIC’s homeowner shopping guide explicitly states: “It’s a good idea to get at least three quotes before you buy insurance.”
Don’t just accept the first policy offered or automatically use your lender’s recommendation. Premiums can vary significantly between insurers for identical coverage.
Understand Your Deductible Options
Your deductible is what you pay out-of-pocket before insurance kicks in. Higher deductibles lower your premium, but make sure you choose an amount you can comfortably afford if you need to file a claim.
Some policies have multiple deductibles—one for general claims, another for wind/hail damage, and sometimes a separate percentage-based deductible for hurricanes. Ask about all applicable deductibles before buying.
Ask About Available Discounts
Many insurers offer discounts for:
- Bundling home and auto insurance
- Installing deadbolt locks, smoke detectors, or security systems
- Having a newer roof or updated electrical, plumbing, and heating systems
- Being claim-free for a certain period
- Being a long-term customer
Consider These Optional Coverages
Standard policies often have sub-limits on certain items. For example, the Insurance Information Institute notes that jewelry theft is typically limited to just $500, and firearms or computers may be limited to $1,000.
Optional endorsements to consider include:
- Scheduled personal property: Covers jewelry, art, collectibles, and other valuables for their full appraised value
- Sewer and drain backup: Standard policies often exclude this common source of water damage
- Equipment breakdown: Covers failure of home systems like HVAC, water heaters, or well pumps
- Ordinance or law coverage: Pays the extra cost to bring your home up to current building codes during repairs or reconstruction
What You Need to Provide When Shopping
Insurance agents will ask detailed questions about your home to calculate your premium and ensure adequate coverage. Be prepared with information about:
- Year your home was built and when major systems (roof, HVAC, plumbing, electrical) were last updated
- Square footage of living space
- Construction type (frame, brick, stucco)
- Number and type of bathrooms and kitchen finishes
- Safety features (smoke detectors, carbon monoxide detectors, security systems)
- Distance to fire hydrant and fire department
- Any swimming pools, trampolines, or other features
- Dog breeds (some insurers exclude certain breeds from liability coverage)
- Home-based business activities
The more accurate your information, the more precise your quote will be—and the fewer surprises you’ll face down the road.
Avoiding the Biggest Mistakes
Don’t Underinsure
Insuring your home for less than its replacement cost is a recipe for disaster. If your home is destroyed and you’re underinsured, you’ll have to pay the difference out-of-pocket—potentially tens or even hundreds of thousands of dollars.
Many policies include an “80 percent rule,” requiring you to insure for at least 80 percent of your home’s replacement value to receive full coverage on partial losses.
Don’t Skip the Home Inventory
The NAIC recommends creating a detailed home inventory to determine how much personal property coverage you need and to streamline the claims process if disaster strikes.
- Group possessions by room or category
- Include purchases like jewelry and electronics as well as everyday items
- Document model and serial numbers
- Keep receipts and appraisal documents
- Photograph or videotape each item
- Store your inventory somewhere safe—a cloud service, fireproof box, or off-site location
Don’t Let Your Coverage Lapse
If your coverage lapses, your mortgage lender will likely purchase a policy on your behalf—at a much higher cost and with minimal coverage that only protects the lender’s interest, not yours.
Don’t Forget to Review Annually
Your coverage needs change over time. Remodels, additions, new purchases, and inflation all affect how much insurance you need. Review your policy annually and after any major life changes.
According to the NAIC shopping guide, “Check with your insurance agent at least once a year to make sure your policy provides adequate coverage. The addition of a room, new insulation or remodeling add value to your home and therefore may increase replacement cost.”
Understanding Your Policy Documents
When you purchase homeowners insurance, you’ll receive a declarations page outlining your specific coverage details. This page includes:
- Policy period (when coverage begins and ends)
- Coverage limits for dwelling, personal property, liability, and additional living expenses
- All applicable deductibles
- Any endorsements or optional coverages
- Applicable discounts
- Total premium
Read this document carefully. Make sure you understand what’s covered, what’s excluded, and how much you’ll pay out-of-pocket for different types of claims.
The Bottom Line
Homeowners insurance is too important to treat as an afterthought. Taking time to understand your coverage options, shopping around for the best rates, and ensuring you’re adequately protected can save you thousands of dollars and enormous headaches when the unexpected happens.
Remember these key takeaways:
- Insure for replacement cost, not market value
- Standard policies don’t cover floods or earthquakes—buy separate coverage if needed
- Get at least three quotes before buying
- Review your policy annually and update as needed
- Create and maintain a detailed home inventory
- Consider optional coverages for high-value items and common exclusions
Your home is likely your biggest asset. Protect it properly. If you have questions about your specific situation, contact your state’s department of insurance or speak with a licensed insurance agent who can help you navigate your options and find the coverage that’s right for you.