If you’re like many Americans, your home is the single largest purchase you’ll ever make–and one you likely can’t afford to replace if disaster strikes.
That’s why homeowners insurance can be a wise investment. This type of insurance will compensate you if an event covered under your policy damages or destroys your home or personal items.
It will also cover you in certain instances if you injure someone else or cause property damage.
Although having homeowners insurance isn’t required by law, mortgage lenders often require you to insure your home until you’ve paid the loan in full.
Choosing the right coverage for your home–and understanding exactly what is (and what isn’t) covered–can be confusing though.
Some policies cover more than others, and how much coverage you need will depend on your circumstances, as well as your risk tolerance.
Here’s what you need to know about the options available for protecting your home.
What Does Homeowners Insurance Typically Cover?
Most standard homeowners insurance policies include six different kinds of important coverage.
• Dwelling: This covers the physical structure of the home itself, including its foundation, walls, and roof, as well as structures attached to the home such as a front porch.
• Other structures on your property: This covers things that aren’t attached to the main home structure, like garages and fences.
• Personal property: This includes personal items including clothing, furniture, and everything else that you put inside your home.
• Additional living expenses: This provides funds to pay for temporary living expenses, such as hotel costs and restaurant meals, while your home is being repaired or rebuilt.
• Liability coverage: This protects you against lawsuits and damages you or your family cause to other people or their property.
• Medical coverage: This is offered to foot the bills incurred by somebody who is injured on your property, whether it’s your fault or theirs.
What Type of Events Does Homeowners Insurance Cover?
The most common type of homeowners insurance policy on the market is called HO-3 insurance.
This insurance includes coverage of 16 specifically named perils, but it may also offer “open peril” coverage, which means that anything that damages your dwelling that is not specifically excluded in the paperwork will be covered by the policy. (This coverage generally does not extend to your personal property, however.)
The 16 named perils typically include:
• Fire or lightning
• Windstorms or hail
• Damage caused by aircraft
• Damage caused by vehicles
• Volcanic eruptions
• Falling objects
• Damage due to the weight of ice, snow or sleet
• Water or steam overflow from plumbing, HVAC systems, internal sprinklers and other appliances
• Damage due the “sudden and accidental tearing apart,cracking, burning, or bulging” of an HVAC, water-heating, or fire-protective system
• Freezing of pipes and other household appliances
• Damage due to a power surge
What Isn’t Covered by Homeowners Insurance?
Homeowners insurance typically covers most scenarios where a loss could occur. However, some events are generally excluded from policies. These often include:
• Earthquakes, landslides and sinkholes
• Infestations by birds, vermin, fungus or mold
• Wear and tear or neglect
• Nuclear hazard
• Government action (including war)
• Power failure
What if you live in a flood or hurricane area? Or an area with a history of earthquakes? You may want to consider a rider (which is supplementary coverage to an existing policy) for these or an extra policy for earthquake insurance or flood insurance.
Home insurance policies also typically set special limits on the amount of reimbursement you can receive in categories such as artwork, jewelry, appliances, tools, electronics, clothing, cash, and firearms.
If you own something particularly valuable, such as fine art painting or piece of expensive jewelry, you might want to purchase a rider that you will be reimbursed in full for it.
What Should I look for in a Homeowners Insurance Policy?
Homeowners insurance companies typically offer three different reimbursement models or levels of coverage.
Which one you choose can be an important decision. That’s because it will impact how you will be reimbursed in the event your home is damaged or burglarized, and also the cost of your premiums.
These are the most common homeowners policy options, listed from least to most costly.
Actual Cash Value
Actual cash value typically covers the cost of the house plus the value of your belongings after deducting depreciation (i.e., how much the items are currently worth, not how much you paid for them). If your five-year-old TV was stolen, for instance, you would not likely get reimbursed for the cost of a brand-new one.
Replacement Cost Value
Replacement value policies generally cover the actual cash value of your home and possessions without the deduction for depreciation, so you would likely be able to repair or rebuild your home and re-buy your possessions up to the original value.
Extended Replacement Cost Value
This coverage will typically pay out more than the original value of your home and belongings, up to a specified limit, if it actually costs more to fix your home and/or replace your possessions.
The limit can be a dollar amount or a percentage, such as 25% above your dwelling coverage amount. This gives you a cushion if rebuilding is more expensive than you expected.
Guaranteed Replacement Cost Value
Guaranteed Replacement Cost is the most comprehensive coverage. This inflation-buffer policy pays for whatever it costs to repair or rebuild your home and replace your possessions—even if it’s more than your policy limit.
This type of coverage can be ideal since you typically don’t need just enough insurance to cover the value of your home, you will likely need enough insurance to rebuild your home, preferably at current prices.
Understanding Homeowners Insurance Deductibles
Homeowners policies typically include an insurance deductible — the amount you’re required to cover before your insurer starts paying.
The deductible can be a flat dollar amount, such as $500 or $1,000. Or, it might be a percentage, such as 1 or 2 percent of the home’s insured value.
When you receive a claim check, an insurer typically subtracts your deductible amount from the total claim.
For instance, if you have a $1,000 deductible and your insurer approves a claim for $8,000 in repairs, the insurer would likely pay $7,000 and you would be responsible for the remaining $1,000.
Choosing a higher deductible will usually reduce your premium. However, you would likely have to shoulder more of the financial burden should you need to file a claim.
A lower deductible, on the other hand, means you might have a higher premium but your insurer would likely pick up a greater portion of the tab after an incident.
Of the many types of insurance coverage out there on the market, homeowners insurance is one of the most important–it literally protects the roof over your head, which very well might also be your most valuable asset.
Homeowners insurance covers damage to your home and its contents. It also typically reimburses you for losses due to theft and pays out if visitors to your property are injured.
Your policy may also pay for living expenses, such as a hotel stay, if your home becomes uninhabitable.
In some cases, you can get additional policies or riders for events not covered by your regular home insurance, such as flooding, as well as extra coverage for any highly valuable possessions.
Because choosing the right homeowners insurance company and right amount of coverage can be overwhelming, SoFi has partnered with Lemonade to help bring customizable and affordable homeowners insurance to our members.
Prices start as low as $25 per month, and Lemonade gives back leftover money to charities of your choice.
SoFi offers customers the opportunity to reach the following Insurance Agents:
Home & Renters: Lemonade Insurance Agency (LIA) is acting as the agent of Lemonade Insurance Company in selling this insurance policy, in which it receives compensation based on the premiums for the insurance policies it sells.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.