How Does Homeowners Insurance Work?
Of all American homeowners, 88% have homeowners insurance.[1] But many of these people don’t understand how their policies work or whether they have enough coverage. Digging into the details can help you ensure you’re protected.
What Is Homeowners Insurance?
How will you pay for repairs or replacements if your home or possessions are ruined in a fire, storm, or accident? A homeowners insurance policy can help.
Many people consider them safety measures. Your mortgage company may consider them so critical that you must provide proof of coverage.
Summary
Homeowners insurance offers financial protection after an incident damages your home or property.[1] A standard policy ensures your home and belongings after a covered event, such as a fire.
Key Information About Homeowners Insurance
This table includes critical information you should know about homeowners insurance. We’ll cover all of these topics in detail below.
Homeowners Insurance at a Glance
| What is it? | Homeowners insurance covers your home and belongings if they’re damaged in something like a fire. |
| How does it work? | You sign an agreement with an insurance company and settle on the types of incidents that will be covered and how much you’ll pay in a deductible. |
| Are there different types? | Yes. There are eight different types of homeowners insurance policies. |
| Is it required? | Many mortgage companies require their clients to hold homeowners insurance. But most states don’t require everyone to have them. |
| Average cost | About $1,300 per year |
How Does Homeowners Insurance Work?
Homeowners insurance is a critical protection for your home and possessions. Several companies are ready and willing to offer a plan that’s tailored to you, your home, and your lifestyle.
Assessment & Premium
A consultation kicks off the process. You tell your potential agent about your estate, offering proof of worth when you can. A recent mortgage statement or tax statement may help, but your company may provide an independent insurance assessment.
Your insurance company will offer a list of situations considered covered, and you’ll discuss your premium (fee to keep the policy intact) and deductible (amount you’ll pay for a claim). Consumers can negotiate and find an arrangement that fits their budget.
This table can help you understand how your choices and personal factors can increase or decrease your premium.
| Higher Premium | Lower Premium |
| High-risk area | Safe area with few risks |
| High claim history | Low claim history |
| Poor credit | Excellent credit |
| Low deductible | High deductible |
Types of Payments
After a claim, your insurance company issues payment based on the coverage type specified in your homeowners insurance policy. The following three types exist:
Cash Value
Your policy covers the amount of money you’ll need to pay for the replacement of your home or belongings, after subtracting the decrease in your home due to age or use.
Replacement Cost
Your policy covers the amount you’ll need to repair or replace your home at today’s prices.
Extended or Guaranteed
These additional policies can cover additional rebuilding expenses and pay the full cost of replacing your home after a disaster. Not all companies offer these plans.
Different Types of Homeowners Insurance
There are eight different types of homeowners insurance policies. They’re typically referred to by the form the insurance company uses to create them.
The most common version is HO-3, which covers typical perils like fires. Other forms offer more expansive coverage, or they’re made for people who live in condos or mobile homes.
Understanding Your Homeowners Insurance Policy
Reading your policy closely and understanding what is (and isn’t) covered is a critical part of being a responsible homeowner. A careful review could indicate coverage gaps that put your financial future at risk.
What Does Homeowners Insurance Typically Cover?
A standard homeowners insurance policy covers your home’s structure if it’s damaged by a fire, hail, lightning, or other issues listed by your insurance provider. Your personal belongings are covered too. Your policy may also cover you against some types of liability.
What Is Not Covered by Homeowners Insurance?
Most homeowners insurance policies have exclusions, which are items that are not covered by your plan. Typical exclusions include the following:
- Earthquake
- Flooding
- Landslides
- Mold
- Wear and tear
- Maintenance issues
- Infestation
Is Homeowners Insurance Required?
You’re not legally obligated to hold a valid homeowners insurance policy.[4] However, your mortgage company may require coverage to ensure they protect their investment in your home.
A homeowners insurance policy is a good investment, even if you’re not required to get it. Coverage can protect you if something unthinkable happens to your home or possessions.
How Much Can You Expect to Pay for Homeowners Insurance?
On average, Americans pay about $1,300 yearly in homeowners insurance premiums.[3] However, the cost of homeowners insurance can vary widely due to factors that aren’t always under a homeowner’s control.
Your policy may be more (or less) expensive due to these factors:[5]
- Where you live
- Age of your home
- Type of building (brick vs. wood, for example)
- Value of your home
- Choice of deductibles
- Availability of discounts
- Your credit score
How much does homeowners insurance cost?
Summary
Americans pay an average of $1,300 in yearly premiums for homeowners insurance.[3]
Filing a Homeowners Insurance Claim
Your homeowners insurance policy should include detailed instructions about filing a claim, including deadlines.
Typically, filing a homeowners insurance claim is as easy as contacting the company and filling out the required paperwork. Several steps will follow before your claim is paid, but the initiation process should be relatively simple.
Claim Payment & Processing Time
The more complex and expensive the damage, the longer your insurance company will need to process your claim.
For example, if a fire burns through 50% of your home, your company may send an adjuster to examine the damage. You may negotiate multiple times to find the right fee. But if a branch comes through your front door and breaks it, no adjuster (or multiple negotiations) may be required.
No matter how large or small the claim, documenting property damage matters. Homeowners who can provide detailed lists of what they had, what they lost, and what it was worth can dramatically speed up the process. Keep receipts, emails, and detailed notes about the process, including information on any phone conversations you have.
How Your Deductible Works & Impact on Payment
Your deductible is a cost-sharing arrangement between you and your insurance company. The insurance company subtracts the cost of your deductible when issuing payment for any claim.
After a $10,000 claim with a $1,000 deductible, the insurance company pays $9,000. You pay the rest to your contractor or replace what you lost.
Finding a Homeowners Insurance Policy
Most major insurance companies have websites readily available with a search. Examine each provider carefully, and ensure they offer policies in your area. If they do, schedule a meeting with an agent.
Your insurance agent should take the time to discuss your home, your possessions, and your financial health. A written estimate should provide all the details you need, and you should examine it carefully.
Visit several companies and scrutinize them side by side. Don’t be tempted to hire the first person you meet. Take your time to make an informed decision when buying homeowners insurance. You want to feel good about the one you hire.
How to Save on Your Homeowners Policy
The following tips can help you ensure you don’t pay more for insurance than you should:[6]
- Get quotes from several companies rather than choosing the first option immediately.
- Ask for a higher deductible.
- Bundle your home and car policies with the same provider.
- Ask about improvements, such as retrofitting or adding security elements, that might lower your cost.
- Ask providers about ways to save on your homeowners insurance plan.
Frequently Asked Questions About Homeowners Insurance
We’ve compiled some of the most frequently asked questions about homeowners insurance.
No, homeowners insurance typically isn’t tax deductible.
You can. If you find another provider you prefer, you can follow the cancellation policies listed in your policy and switch to someone new.
It depends. Examine your policy carefully and watch for information about the plan’s terms. And remember that skipping a payment could render your policy invalid.
All insurance companies use sophisticated risk models to determine the probability that you’ll file an expensive claim. That information helps them set a rate that offers you protection while ensuring they don’t lose money.
Reviewed by Kristopher Kane
Kristopher Kane is a career freelance writer with over 15 years of experience and a broad portfolio encompassing various topics within the insurance industry. He has written for both B2B communication and consumer-level customer engagement.
Sources
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Homeowners Perception of Weather Risks. (2023). Insurance Information Institute.
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What Is Homeowners Insurance? Insurance Information Institute.
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Average Premiums for Homeowners Insurance in the United States from 2001 to 2020. (August 2023). Statista.
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Can I Own a Home Without Homeowners Insurance? Insurance Information Institute.
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Understanding What Affects the Cost of Insurance. New York State.
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12 Ways to Lower Your Homeowners Insurance Costs. Insurance Information Institute.