May 11, 2022


Do Not Go Bankrupt: Homeowners

Photo by Daniel Tausis on Unsplash

Purchasing homeowners insurance is one of the most important decisions you can make as a property owner, but it can also be one of the most confusing. It was designed to protect you in case of damage to your home or assets inside your home. But what does the homeowner's insurance policy actually cover?

Unless you're an insurance expert, it's hard to know what your policy covers and what it doesn't. If you don't have homeowners insurance, you'll have to pay for any repairs and replacement costs out of your own pocket. This may result in bankruptcy.

This article explains the different types of homeowners insurance coverages and what each one means for you. By the end of this article, you’ll be more confident when selecting the right homeowners' insurance policy for your needs. So let's jump into the ins and outs of your homeowner's insurance.

What Does Homeowners Insurance Cover?

Home insurance is one of the most significant insurance policies you can get to safeguard your family. The right homeowners insurance coverage will help rebuild your property if it's damaged or destroyed. It also covers you if a guest or family member suffers an accident on your property.

The typical homeowners insurance policy is intended to safeguard you from financial catastrophe caused by a variety of life's common yet unanticipated events.

This includes damage from:

  • Hail storms
  • Fires
  • Plumbing leaks
  • Burst pipes
  • Falling tree branches
  • Vandalism
  • Theft

In addition, it helps protect you if you're sued for causing damage to someone else's property.

Why Should You Have Homeowners Insurance?

Even if you don't live in an area prone to natural disasters, it's still a good idea to have homeowners insurance. This is because you cannot predict when a disaster will strike that could damage or destroy your home and belongings in a matter of minutes. 

So even if you think you don't need homeowners insurance, think again.

Is Homeowners Insurance Required?

Homeowner insurance is no longer required by law. Suppose you want to buy a house and decide to have a mortgage. In that case, your lender may request homeowners insurance to safeguard their investment against harm.

Private condo associations frequently require insurance. Even if you don't have a mortgage and your property is damaged, you may not be able to afford repairs without insurance.

How Much Does Homeowners Insurance Cost?

In 2021 the average annual premium of homeowners insurance in the U.S was just over $1,200 per year, according to the National Association of Insurance Commissioners (NAIC). This is consistent with homes with dwelling coverage between $300,000 to $400,000.

Homeowners insurance might be pricer if you live in an area that has high construction costs. You can save some money when you have both an auto and homeowners insurance policy with the same company. This means that you are considered a "multi-policy" customer and should receive a discount on your premiums.

What Categories Are Typically Covered By Homeowners Insurance?

Homeowners insurance typically covers 6 different insurance types.

The scope of coverage can vary depending on the company but are often called home-related coverage, personal liability, and medical payment insurance.

Let's examine the type of property coverage a typical homeowner has:

Coverage Category


Minimum Recommend Coverage

Dwelling or Property Coverage

This is the actual structures’ coverage of your home. If your house is destroyed, insurance will pay to repair or rebuild it.

To restore and rebuild your home from the bottom up

Personal Property

It assists you in covering the expenses of any personal belongings that are damaged or destroyed. It can help you pay for the repairs or replacement costs.

50% of dwelling coverage

Loss Of Use

Suppose your home is damaged and you must relocate away while the repairs are made. In that case, this coverage will pay for any additional living expenses. This coverage may even cover your food and transportation expenses.

20% of dwelling coverage

Other Structures

Structures that are not your home, like a garage or shed, are often covered by homeowners insurance. If they are damaged, the insurance company may help pay to repair or replace them.

15% of dwelling coverage

Personal Liability

Personal liability insurance is a type of insurance that helps in the event someone sues you for damage you or someone in your household caused to another person's property.


Medical coverage

This will cover the medical expenses of someone who is harmed on your property or inside your house (for example someone falls down your stairs).


Different Coverage Types

There are different coverage types depending on the type of property you are insuring.

Here is a list of the most common coverage types.

HO-1 Insurance - Basic From Policy

With homeowners coverage level 1 (HO-1), your home and personal belongings are covered at their actual cash value, meaning that if they're damaged or lost, you'll receive only what they're worth at the time of the incident.

It only covers your home and belongings against these named perils:

  • Fire or lightning
  • Windstorm
  • Explosion
  • Riot or civil Commotion
  • Aircraft damage
  • Vehicle damage
  • Smoke damage
  • Vandalism
  • Theft

HO-2 Insurance - Broad Form Policy

A small step up from HO-1, It covers the dwelling at its replacement cost and personal property at its actual cash value. 

It protects against six additional named perils including:

  • Weight of ice, snow, or sleet damage
  • Accidental cracks to air conditioning systems
  • Unexpected release of water or steam from appliances or systems connected to plumbing
  • Freezing of appliances or plumbing systems
  • Sudden damage caused by a power surge
  • Volcanoes

HO-3 Insurance - Special Form Policy

The most frequently purchased type of homeowners insurance is an HO-3 policy, often known as a "special form." It provides a reasonable balance between coverage and price.

This policy covers the structures on your property under an "open perils" basis. This means that insurance will cover any claims, except for those expressly prohibited by the policy.

HO-4 Insurance - Renters Policy

Most people know this as renters insurance, and it's comparable to the HO-3 house policy, except that it does not cover the physical structure.

When a home is rented, the owner is responsible for insurance and maintenance. Renters insurance helps protect the personal belongings and liability of the tenant.

HO-5 Insurance - Comprehensive Policy

It is comparable to an HO-3 policy but has greater coverage. It's not as popular as an HO-3, possibly because it's more expensive.

This insurance covers everything you own, including your home and buildings, as well as your personal items, on an "open perils" basis.

HO-6 Insurance - Condominium Policy

This sort of coverage is only available to those who live in condominiums. An HO-6 insurance policy will cover the inside of your unit, such as wiring and plumbing. In contrast, some policies also cover fixtures and appliances. Condominium associations have insurance that covers the building structure and common areas.

HO-7 is for mobile homes, and HO-8 is for homes that do not meet the guidelines to be covered by the above policies.

What Are Open Perils?

A "peril" is something that is covered by your insurance policy. As opposed to a hazard, a peril is anything that causes or might result in a loss.

An "open perils" policy is the most comprehensive and means that the insurance will cover any claims, with the exception of those specifically prohibited.

Theft is a type of peril, which means that if your tablet is stolen at a restaurant, your insurance should cover the loss (minus your deductible).

Suppose your laptop is ruined by a flood in your condo, and your insurance does not specifically prohibit it. In that case, your home insurance should approve your claim automatically.

What Is The Main Difference Between Homeowners Insurance Policies?

The main differences are based on how much you want your homeowners insurance to protect and what you are willing to pay out pocket yourself.

Here is a simplified example in the event your home is destroyed by fire:

  • Policy A: Just Rebuilds your home
  • Policy B: Rebuilds your home and pays for temporary housing while you wait for your home to be rebuilt
  • Policy C: Rebuild your home, pay for temporary housing, and replace all your personal belongings

How Much Is Deductible?

The deductible is the amount of money you agree to pay before the insurance company pays 

out your claim. Many insurance companies typically let you select between $500 to $2,000 as your deductible.

Getting a higher deductible can lower your premium. Still, you will pay more out of pocket after theft, damage, or destruction has occurred.

The Types Of Reimbursement

If your house is damaged or destroyed in a fire your insurance company that insures you isn't going to just give you a check for the amount stated on the policy.

The reimbursement could vary depending on how much it costs to rebuild and which coverage you selected. A lot of it goes directly to contractors who will rebuild your property.

The main difference between these policies is the payout amount in the event that your home is damaged or destroyed.

Replacement Cost Coverage

This is the  most common type of policy and usually the lowest cost. Suppose your house or belongings are damaged, and you meet all of the other requirements. In that case, you may be compensated for their replacement cost rather than the cash value.

Replacement cost coverage pays to repair your property with similar quality materials. However, the payout will not exceed the coverage limits for dwelling.

Actual Cash Value Policy

This reimburses you for what your home or property is worth when it's damaged or destroyed minus depreciation. This approach is not used for residential structures but is typical for personal possessions.

This is the case for anything more than a few years old; you'll most likely receive a tiny fraction of the cost of new ones.

Guaranteed Replacement Cost Coverage

Reimburses the full policy limit regardless of the actual cash value. This may be an excellent choice if you're afraid your property will depreciate after it's finished and you’re worried that you won't have enough coverage in the future.

Guaranteed replacement cost is the most expensive choice but guarantees that your insurance policy limit will always be enough to cover replacement costs.

Replacement Cost Minus Depreciation Coverage

Reimburses you for the policy limit minus depreciation. The question of whether or not to purchase coverage that will pay whatever it takes to rebuild your house, even if the expense exceeds your policy limits, is one of the most important ones you'll face.

This option is most effective when purchasing a home and financing the mortgage because the majority of your cash will go toward repaying the loan. In this case, if insurance coverage isn't enough to cover replacement costs, it might require you to pay with your own money to finish repairs.

What Does Homeowners Insurance Not Cover?

If you have homeowners insurance, it may not cover certain instances. The coverage primarily covers the most common items.

Some events specifically not covered are:

  • War
  • Sewer backup
  • Earthquakes
  • Landslides
  • Sinkholes
  • Infestation of animals or bugs
  • Mold
  • General wear and tear

What Will Personal Property Coverage Not Cover?

Typically, high-value goods are not included in homeowners' personal home packages.

For example, if your musical instrument, laptop, or fine art is stolen or destroyed by fire, it may not be covered. If you have high-value jewelry stolen from your home safe, the insurer will likely not reimburse you for their full value.

Electronics and appliances are another common exclusion to a homeowners insurance policy. This implies you won't be able to claim for damage to TVs or stereos caused by a power surge.

Homeowners insurance policy typically only covers personal belongings that you take from place to place with you. Suppose you have a garden that you maintain. In that case, it will probably not be covered if it's damaged or destroyed by fire, vandalism, or other causes.

What Will Dwelling Coverage Not Cover?

In many cases, standard homeowners insurance does not cover damage caused by flooding. Flood insurance is available through The National Flood Insurance Program or NFIP and a few other private insurers.

What Is Missing With Loss Of Use Coverage?

Your loss coverage will help you pay for temporary housing. Still, it's not guaranteed that your monthly mortgage payments will be covered.

What Will Personal Liability Coverage Not Cover?

Suppose someone is on your property without permission and is harmed due to an accident. In that case, the liability coverage of homeowners insurance may cover the costs. However, this may vary from one insurance company to another.

Expanding Your Coverage

Homeowners insurance does not always fit everyone's needs and has limitations on the coverage it provides. In some instances, you must pay additional costs to ensure that all of your dwelling belongings are adequately protected.

Extra Replacement Protection Coverage

This is a rider that you may purchase separately from your homeowners insurance policy. It provides additional coverage if your home needs to be replaced due to a covered loss.

Your dwelling coverage is by far the most essential component of your insurance policy. That way, even if your house is destroyed, your policy should pay for the repair or rebuilding. But because there is a maximum limit on dwelling coverage, that's not always what happens.

The replacement cost for your property coverage may be higher than the existing policy limit due to increased cost of building materials or inflation.

If a disaster happens and you have extended replacement cost on dwelling coverage, you will have an additional amount of money to pay for rebuilding or repair expenses. In general, the additional coverage is up to 25% more than the total policy.


  • 10% additional replacement cost protection coverage on a plan
  • $500,000 of dwelling coverage
  • Coverage increases up to $550,000 in rebuilding costs

Schedule Personal Property (Not Available In All States)

Depending on your carrier, this coverage is either a separate policy or an endorsement attached to your homeowner's insurance policy. It covers valuables that would be expensive to replace in the event of loss, damage, or destruction. They may require an appraisal.

Personal article floaters can be used to ensure a variety of unique items, such as:

  • Jewelry
  • Cameras
  • Musical Instruments
  • High-end electronics
  • Antiques
  • Rare collectibles

Additional coverage extras include:

  • Flood Insurance. It covers damage caused by flood hazards. Get pricing quotes through
  • Earthquake Insurance. If you live in California, you can get more information at
  • Water Backup of Sewer Insurance. It covers damage caused by water backing up into your home through the sewer.

Homeowners Insurance Coverages Explained - FAQ

See the most asked questions

How Do I Get Homeowners Insurance?

If you watch TV, you're bound to run into a few insurance commercials starring your favorite celebrity. You can buy a policy directly from an insurance company or purchase it through an agent.

You can also compare policies and prices online using insurance websites. This is an excellent way to find the best coverage at the best price.

Here is a list of the 8 most popular insurance companies in America:

What Should I Look For When Buying House Insurance?

When buying homeowners insurance, it's important to understand what is and isn't covered. Most policies offer coverage for damage to your home and its contents, as well as liability protection in case someone gets hurt while on your property.

However, there may be restrictions on what the policy will pay for, so reading the fine print is important. You may also need to purchase additional coverage if you want full protection for your belongings.

When shopping for homeowners insurance, it's essential to compare policies and rates from several different companies. That way, you can find the right coverage at a price you can afford.

The Bottom Line When it Comes to Homeowners Insurance

Homeowners insurance may be purchased by several means. Most insurance sites offer good starting points and typically contain extensive coverage options and standard and supplementary coverage information.

When looking for homeowners insurance, remember that the coverage you receive will depend on your policy. Make sure to analyze your situation closely and compare policies so that you can find the most comprehensive and suitable insurance for your needs.

Most of all, make sure you have the right coverage that will protect you and your family. This will help you avoid suffering a financial loss if your home is damaged or destroyed.

About the Author

As a native Washingtonian, Carlos Reyes’ journey in the real estate industry began more than 15 years ago when he started an online real estate company. Since then, he’s helped more than 700 individuals and families as a real estate broker achieve their real estate goals across Virginia, Maryland and Washington, DC.

Carlos now helps real estate agents grow their business by teaching business fundamentals, execution, and leadership.

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