Homeowners Insurance Policy

The Basics

The fact is, if you live in a home, you will likely need homeowner’s Insurance. This insurance is one of the most important forms of coverage you can obtain. 

Perhaps this is because, not only does it protect your most valuable asset (your home) against damage or theft but, it is often required. In fact, almost all mortgage companies will require you to have proof of insurance before ever extending a loan or financing. 

Usually, this insurance coverage must be on the full fair market value or purchase price of your home. In other words, there is no dodging this coverage as even those who do not own a home, may likely run into tenants requiring some form of renter’s insurance. Regardless of whether or not it is contractually required, this type of coverage is a wise option for all.

Key components

  • Protects against theft, damage, destruction, and personal liability
  • Varying types of coverage
  • Rates vary by risk and past claims
  • When shopping for a policy compare various insurers

What is Homeowners Insurance?

Homeowners insurance provides financial protection against all the unexpected that can occur to and within your home.This can extend all the way to the cost of your personal belongings, exterior home repairs, legal fees, and even hotel bills should your home become uninhabitable. 

This coverage is not legally required however, you may run into countless roadblocks without it. Most mortgage companies will require you to keep your home fully insured throughout, your entire mortgage term. 

What is Protected With Homeowners Insurance?

Homeowners insurance protects against many incidents and possibilities. Most coverage consists of several layers protecting in certain monetary amounts against specific perils. 

Some common incidents protected against include:

  • Fire damage
  • Wind damage
  • Hail damage
  • Water damage
  • Theft
  • Vandalism    

Standard Components of Homeowners Insurance 

Many of these policies can be easily customized to best fit your personal needs. However, the costs of these policies are usually made up of six standard components:

Exterior & interior coverage

Most policies will include coverage on damage to both the interior and exterior of your home. This means that damage accrued in the event of a fire, storm, disaster, vandalism, or other natural disaster is usually covered. Depending on the damage, insurers will pay you for the costs of necessary repairs and or a full rebuild price when needed.

Damage incurred from floods, maintenance neglect, or earthquakes is not usually built into most coverage however, can often be added on as a rider.

Free standing coverage 

 Any other free standing components such as a detached garage, shed, or mailbox may also require additional coverage.This can also extend to pools, fences, or detached basements.

Personal Property

Your clothing, furniture, appliances, and other personal property are usually covered. Meaning, if your personal belongings were damaged or lost in a disaster, your insurer will reimburse you.You can even take it a step further and add an “off premise rider” to protect against losing your jewelry or luggage anywhere you go. 

Different insurers will offer varying levels of dollar amount coverage for this however, most will provide 50% to 70% of the full insurance amount on your home.This means that if your home was insured for $300,000, you could receive up to $210,000 of coverage on your personal property.

Those who own many priceless items may consider paying more for additional coverage on their personal belongings. Some may even consider an entirely separate policy for their personal belongings. 

Personal Liability

This coverage protects you from legal claims made against you and even your pets. For example, if your dog bites someone and they later sue you, your insurer will reimburse you for all legal fees associated.The bite could have even occurred either on or off your property. 

Additionally, if someone suffers an injury on your property and later sues you, the same coverage will occur. The policies can offer anywhere from the low $100,000 in coverage to the recommended $300,000 or more. 

When determining personal liability coverage, only a couple hundred dollars more on your premium, can offer you extra coverage and up to $1 million in extra protection through an umbrella policy.

Hotel or home rentals

In the unusual event that you find yourself temporarily unable to inhabit your home, your policy will usually cover that too.This is often referred to as “additional living expenses” and reimburses you for hotel costs, dine out costs, and other fees accrued while unable to return home.

*You should note that most policies place daily limits on the dollar amount allowed for these occasions.*You also have the option to pay more to customize or increase this component. 

Medical payments

Covers the cost of medical bills due to minor injuries accrued on your property by non residents. This amount is usually between $1,000 to $5,000.

Umbrella Policy

A personal umbrella policy can help protect you against large liability claims. Once you have reached the limit on your personal property policy, an umbrella policy can bail you out. 

In the event that you were sued for an injury which occurred in your home but have reached your personal property limit, your umbrella policy will then cover you. If this happens, the policy would kick in and prevent you from paying out of pocket. 

Without this type of protection your retirement accounts and other assets could be at risk. 

Umbrella policies are typically capped between $1 million to $5 million in coverage.

Your umbrella policy may also cover:

  • Out of country incidents
  • Cost of an attorney
  • Low wages due to court appearances

Additional Coverage 

Most policies will allow for additional coverage where you see most fit.This can adjust or expand your coverage as needed.

Some common additions to your coverage may include:

  • Service line protection
  • Water back up coverage
  • Equipment breakdown

Varying Coverage & Reimbursement

Your level of coverage will vary by insurer and policy. Less expensive policies will usually offer less coverage while more costly policies tend to offer more. You will determine your ideal amount of coverage. 

While some components of homeowners insurance remain pretty standard, others will vary. How you are reimbursed in the event of a claim is one of those aspects. This amount and procedure may vary upon your individual policy.

However here in the U.S, reimbursement procedures tend to follow these three methods:

Cash Value

Actual Cash value protects the cost of the home in addition to the value of your belongings. Actual cash value will subtract depreciation and protects only the current value of your belongings versus the price you paid for them. 

Replacement Cost

A replacement cost policy will cover your home and belongings in full cash value without subtracting depreciation.This means that you can replace or rebuild your home/ belongings up to their original price.

Extended Replacement Cost Value 

This level of coverage will cover the full costs associated with rebuilding your home and then some. What does that mean? That your policy will cover the full costs of rebuilds or repairs, even if they exceed your purchased coverage amount. 

There are some limits to this type of coverage however, you can expect 20- 25% more coverage. This kind of coverage is ideal and therefore, most commonly recommended. 

The reason for this is that it allots you enough to rebuild your home at its current market value instead of its original purchase price. Because the value of your home will likely continue to rise, you want to ensure its rising value remains protected. 

What is Not Covered?

Homeowners insurance has you covered for countless disasters which could occur however,not all disasters are built-in. Most policies do not cover flood, sewer , or earthquake damage. Maintenance issues are typically also excluded.

Commonly deemed “maintenance” issues include:

  • Neglect
  • Pet damage
  • Natural wearing
  • Pest damage

Keep in mind that, you can always add on this type of coverage through an additional rider for an additional cost. This is especially recommended if you live in an area where these types of damages are common.

Different Types of Homeowners Insurance

The most common type of homeowner policy is an HO-3 policy however, there exist many other forms.

HO-3 policies will usually include:

  • Fire and lightning
  • Windstorms
  • Explosions
  • Riots 
  • Damage caused by aircraft
  • Damage caused by vehicles
  • Smoke
  • Vandalism
  • Theft
  • Volcanic damage
  • Falling object damage
  • Ice, snow or sleet weight damage
  • Accidental overflow of water 
  • Hot water heating system, an air conditioning or automatic fire-protective system 
  • Freezing of a plumbing or other household appliances
  • Accidental damage from electrical current

Other less common policies include:

  • HO-1 – The most basic and barebones policy
  • HO-2 – A broad form policy (limited coverage)
  • HO-3 – The most common policy 
  • HO-4 – Common amongst renters
  • HO-5 – The most extensive coverage for homeowners
  • HO-6 – Common for condo owners
  • HO-7 – Common for mobile or manufactured homes
  • HO-8 – Designed for special types of homes that do not meet other standards


This most basic form of homeowners insurance offers the least amount of coverage. 

HO-1 covers your home and personal belongings at their cash value against 10 events.

These 10 events include:

  • Explosion
  • Fire/ lightning
  • Theft
  • Falling objects
  • Riots
  • Wind/ hail damage
  • Vandalism
  • Vehicles
  • Smoke
  • Aircrafts


A step up from your basic HO-1 policy. HO-2 covers your home at its replacement value and your belongings at their actual cost.

Additionally, an HO-2 policy will protects you against 6 additional events which are as follows:

  • Water overflow or discharge
  • Freezing
  • Volcanoes
  • Artificially generated electric damage
  • Ice, snow, sleet weight
  • Tearing apart, cracking, burning, or bulging of built in appliances


More commonly known as renters insurance.Created in mind for those who lease homes, apartments, or condos. HO-4 will cover the same 16 events covered in a HO-3 policy.


This is the most robust form of homeowners coverage. Also commonly referred to as comprehensive form coverage. An HO-5 policy will be most similar to an HO-3 form however, it will differ in three main areas.

These areas are as follows:

  • Higher coverage limits
  • Coverage against all events for both dwelling and personal belongings
  • Dwelling and personal property replacements at full replacements cost


An HO-6 policy is designed for those who live in a condominium. Coverage amounts may vary and will correspond with your condo’s individual HOA insurance. 


HO-7 insurance is designed for those who live within mobile homes. This policy is essentially an HO-3 policy designed specifically for mobile homes.

The types of mobile homes which may be included in this policy include:

  • Modular Homes
  • Double Wides
  • Single Wides
  • Trailers
  • Sectional Homes
  • RVs


This type of coverage is also commonly referred to as Modified Coverage. Modified coverage is designed for all those who live within homes that do not qualify for coverage under HO-1 through HO-7.  This may sometimes be the case for those living in older homes deemed as a “risk”.

In terms of what is covered, these policies will only protect against the 10 basic events covered in an HO-1 policy. 

This policy is ideal for those who do not qualify for other forms of coverage and intend to keep their home as is. Those who wish to make upgrades on their older home may consider making upgrades which would allow them to qualify for HO-3 coverage. 

Homeowners and Business Properties

Your homeowner’s insurance policy may also protect your business property when located within your home. 

*You should note that, not every policy will include this type of coverage and restrictions may apply. 

If you are running and operating a business from your home, you may want to consider additional coverage options. Your current policy may allow for additional business coverage to be easily added on.

Discounts on Homeowners Insurance

Different companies may offer different incentives and discounts on your homeowners insurance.

Some commonly seen discount programs include:

  • Bundling discounts
  • Claim history discounts
  • New home discounts
  • Service discounts
  • Loyalty discounts
  • Autopay discounts

The best way to take advantage of discounts on your homeowners insurance is to work with a trusted agent. Your agent can help you shop the market and compare policy options and savings.

 An agent can also help provide you with information on important things to consider when obtaining homeowners insurance. 

Your home is your largest asset. You should aim to protect it but also be wise about how much it costs to do so. The key is to find a mix of the correct coverage and the ideal price for your needs. 

Learning all you need to know about homeowners insurance can help you make an informed decision on the best level and type of coverage for your needs.