The Basics Behind Homeowners Insurance
By: Staff

Homeowners insurance protects your home and possessions from losses caused by fire, theft, vandalism and other misfortunes. It also provides liability protection for you and your family members from accidents you cause or that occur on your property. This protection covers what is probably your most valuable asset, your home.

Most homeowners insurance policies are divided into two parts -- property protection and liability protection. Property protection includes four sections:

1. Dwelling—Covers the structure of your home including the fixtures. If you own your home and have a mortgage, your lender requires that you have some amount of hazard insurance on your home. This protects the lender’s investment in your home’s structure. Coverage amount should be at least equal to the cost to rebuild your home with current construction prices not the price you paid for the home.
2. Other structures—Covers detached structures like garages, guesthouses, sheds, fences, driveways and other similar items.
3. Personal property—Covers the contents of your home and other items you and your family members own. Typical coverage is 50% to 70% of your dwelling coverage. You can purchase additional riders for expensive items.
4. Loss-of-Use—Covers costs for normal living expenses if you can’t live in your home while it’s being repaired after a covered peril. Typical coverage is about 20% of the insurance on your house.

The liability protection part of a homeowners insurance policy includes coverage for personal liability and medical payments. The personal liability coverage protects you if someone sues you as a result of an accident that occurred on your property or that you caused elsewhere. This covers legal expenses and damages. The medical payments coverage applies to medical expenses for persons injured on your property who do not live with you.

Homeowners insurance policies offer two options for insuring your property—actual cash value and replacement cost. With actual cash value policies, you can only receive compensation for the depreciated price of what you lost when you file a claim. With replacement cost policies, you get money to replace what you lost at current prices. Replacement cost policies are slightly more expensive than actual cash value policies, but make a huge difference when you have to file a claim. For example, if your computer is stolen from your home, an actual cash value policy would only pay for what the computer is worth now, not the cost to replace the computer with a new one.

You can purchase a guaranteed replacement cost policy to cover your home’s structure in the event that rebuilding costs more than your policy limit. If your house were to be destroyed by a tornado, for example, with a guaranteed replacement cost provision, your homeowners insurance would pay to have your home rebuilt as it was, regardless of your policy limit.

Homeowners insurance policies do not cover all the possible perils your home might face. Most policies cover at least 10 named threats including fire/lightening, windstorm/hail, explosion, riot, damage from aircraft, damage from vehicles, smoke, vandalism, theft and volcanic eruption. Broad homeowner policies (HO-2) cover additional perils and a special policy (HO-3) covers all perils except those specifically excluded.

Standard homeowners insurance does not cover floods, earthquakes, war, nuclear accidents, landslides, mudslides, sinkholes and damage due to lack of maintenance. You can purchase additional insurance to cover some of these perils including floods and earthquakes.

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