Guide to Home Insurance

Every property owner should have homeowners insurance coverage. Lenders require it -- and even when not required, it provides important protection for properties and the assets contained within. Here's what property owners should know about home insurance coverage.

Why do you need homeowners insurance?

Homeowners insurance pays to repair or replace a home when a covered event occurs. Most people couldn't afford to pay out of pocket to rebuild their entire house after a fire, hail damage, or other disasters. Insurance pays the bills in these circumstances.

Because mortgage lenders have a legal interest in properties, which serve as collateral to guarantee loans, lenders also require home insurance.

Homeowners also have the option to add optional coverage including liability insurance and personal property coverage. Without liability home insurance, an owner could be personally responsible for covering legal bills and losses victims incur after injury. And without personal property coverage, homeowners would have to pay to replace all their possessions after a loss. Buying these types of home insurance is important for those who can't afford to cover these costs on their own.

What are the basic components of a homeowners insurance policy?

Homeowners insurance policies typically include the following types of coverage.

Hazard insurance

Hazard insurance pays for covered losses, such as those resulting from:

• Wind
• Fire
• Hail
• Smoke
• Vandalism
• Civil commotion

Depending on the specifics of each policy, homeowners should generally have coverage for their home as well as for other structures on the property, such as a shed.

Hazard insurance may exclude specific types of damage, such as losses from a flood or a sinkhole. For properties susceptible to these risks, purchasing optional additional homeowners insurance coverage may be advisable.

Loss of use

Loss of use is a type of homeowners insurance that pays for alternative living accommodations after a home is damaged. For example, this type of home insurance might pay for a rental house while a covered property is being rebuilt after a fire.

Personal property coverage

Personal property coverage pays for a policyholder's possessions. Typically, these possessions are covered even when away from the home. A computer that's stolen out of a car may be covered.

Personal property coverage usually imposes limits on the amount the home insurance company will pay for specific kinds of property. For example, a homeowners insurance policy might cover a maximum of $1,500 worth of jewelry regardless of whether the property owner had a valuable jewel collection.

Liability coverage

Liability coverage protects against loss resulting from injuries sustained on the property. If a homeowner is sued after a visitor falls down the stairs, home insurance could pay the bills. The homeowners insurance would cover legal costs. It could also pay for medical expenses, lost wages, and the victim's pain and suffering.

What are the typical coverage levels?

When buying homeowners insurance, policyholders must choose between market value or replacement coverage. They will also need to determine how much liability protection they want and decide how much personal property damage coverage to buy.

It's not a good idea to try to save money by buying too little coverage. Instead, make sure to have sufficient protection. And get multiple homeowners insurance quotes to reduce costs. Homeowners can also shop around for homeowners insurance discounts to lower premiums.

Replacement value coverage

Replacement value coverage pays to rebuild the home as it stands. After covered damage, the policyholder is reimbursed based on the cost of materials, labor, and cleanup. The insurer covers repayment costs up to policy limits. Homeowners first have to cover the homeowners insurance deductibles. That's the amount paid out of pocket before insurance kicks in.

In many cases, it costs more to rebuild a home than the house is worth. In that case, replacement value homeowners insurance is important. It is common for replacement value policies to be more expensive. But shop around with different homeowners insurance companies to see if that's the case.

Market value coverage

Market value coverage reimburses policyholders based on the market value of the home. That depends on the desirability of the location and the current housing market. It's possible that a market value homeowners insurance policy wouldn't provide enough money to rebuild the home after a loss occurs.

Personal property protection

Personal property protection is usually sold based on a percentage of the policy's value. Often, that percentage is between 20% and 50%. If a homeowner has $500,000 in dwelling coverage and the property owner chooses to buy personal property coverage equaling 20% of that amount, they'd have protection for up to $100,000 of their possessions.

That would be the maximum payout. The actual payout would depend on the value of lost items and whether the policyholder chose replacement coverage or market value coverage. With replacement value coverage, the policyholder would receive the money to replace the lost property. Market value coverage would provide a payout equaling the current (likely reduced) value of the property on the open market.

Liability insurance

Liability homeowners insurance policies come with a set monetary limit. For example, policyholders may be able to buy anywhere from $50,000 in liability coverage to $500,000 or more. The insurer will pay out damages up to that amount when a covered loss occurs.

Optional coverage options within most policies

No homeowners insurance is required by law. However, most lenders require hazard policies only. Optional coverages include the following:

Liability coverage

As mentioned above, liability insurance pays for losses after an injury in the home. It could pay out if:

• A homeowner's dog bites someone
• If a victim drowns in the homeowner's unsecured pool
• If someone trips and falls due to poorly maintained tile

Loss of use

This type of homeowners insurance pays for replacement accommodations when a home is being rebuilt or repaired after a covered loss.

Personal property

Personal property coverage pays to replace the policyholder's personal items. This home insurance can pay out no matter where the property is lost or stolen. Homeowners can choose between two different coverage types.

• Covered peril. This pays only for losses resulting from specified causes, such as theft or hail damage.
• Open peril. This protects against all perils if they aren't excluded.

See our picks for the best homeowners insurance to start shopping for a policy that's right for you.