Understanding Your Homeowners Insurance Policy
Your homeowners insurance policy includes rules and regulations you’ll use when disaster strikes. Understanding how it works is critical.
If you don’t understand your policy, you may believe things are covered when they are not. And you may not know what to do when the unexpected happens.
Key Facts
Key Facts
- In 2021, more than 5% of homeowners experienced a claim.[1]
- Homeowners insurance protects your home and belongings. It also reduces your liability and potential medical expenses.
- Floods and earthquakes are among the things that aren’t covered. It’s critical to know what is and isn’t covered by your policy.
- Get adequate coverage by understanding how you’re reimbursed and determining your risk tolerance.
Reading Your Homeowners Insurance Policy
More than 70% of homeowners don’t understand essential home insurance coverage.[2] If you’re one of them, reading your policy carefully could be very important. Doing so can help you understand what is and isn’t covered. And you’ll know how much your company will pay if a covered event takes place.
When you buy or renew a homeowners insurance policy, the company will send you a declarations page. It’s critical to review it to ensure that everything is accurate and you know what is covered.
A typical homeowners declaration page includes the following:[3]
- Policy period: This is when coverage begins and ends.
- Coverage: This outlines what is covered and how much is covered. Limits are included here.
- Deductible: This is the amount you’ll pay out of pocket when you file a claim. You must meet your deductible before insurance begins paying.
- Premium: This is how much you will pay for coverage, generally on a monthly or yearly basis.
What Your Homeowners Insurance Policy Covers
A typical homeowners insurance policy covers several different possessions. Understanding how these items are broken down and reimbursed is critical. This table can help:
Common Types of Homeowners Coverage
| Type | What Is Covered | Typical Coverage Amount |
| Dwelling | Damage to your home (such as your electrical wiring or plumbing) | 80% of its replacement value |
| Other Structures | Damage to structures not attached to your dwelling (such as sheds and garages) | 10% of the dwelling coverage amount |
| Personal Property | Damage or theft of items you own (such as furniture, appliances, and electronics) | Varies dramatically |
| Liability | Bills if you’re sued for an injury or damage that occurred on your property | $100,000 |
| Medical Coverage | Bills you’ll face if someone is injured on your property | $1,000 per person |
| Loss of Use | Expenses (such as rent) if you can’t live in your home due to damage | 20% of the dwelling coverage limit |
Types of Homeowners Insurance Policies
Your home insurance policy typically includes forms. They explain what is covered and what is not. The more things your policy covers, the more you’ll pay for it.
These are the five package forms your homeowners insurance policy might include:[5]
- HO-1: This basic form outlines your coverage against 11 basic perils, such as fire, smoke, hail, and theft.
- HO-2: This basic form outlines your coverage against 17 additional perils, such as falling objects, the weight of snow, and freezing of plumbing.
- HO-3: This form offers a broad level of coverage, and it’s the type most insurance companies use.
- HO-3 with HO-5: These two forms, when combined, cover everything that isn’t explicitly excluded. This is the broadest type of coverage available.
- HO-8: This form is typically used for homes that have extensively depreciated because they are older or damaged.
In addition to your form(s), your policy should explain exactly how you’ll be reimbursed after a covered event. These reimbursement types are common:
Actual Cash Value
If your policy uses an actual cash value, your insurance company will provide the amount of money you’ll need to pay for your home — after subtracting the decrease in value of your home due to age or use.
Replacement Cost
If your policy uses a replacement cost, your insurance company will provide the amount of money you’ll need to repair your home or replace your items at today’s prices.
Extended or Guaranteed Replacement Cost
An extended replacement cost helps to cover additional expenses associated with rebuilding your home. A guaranteed replacement cost pays the full cost of replacing your home after a disaster.
These additional protections can ensure you are made whole after something serious. But not all insurance companies offer them.
Homeowners Coverage Limits & Deductibles
Most homeowners insurance policies have coverage limits that cap how much the company will pay after a covered event. Raising those limits could ensure you lose less if something like a fire happens.
A deductible is the amount you’ll pay after a covered event. Unlike health insurance policies, you’re not required to pay a deductible upfront before the company pays. Instead, a deductible is typically deducted from your payout amount.
Raising your deductible can lower your homeowners insurance costs. However, some policies have higher deductibles for things like hurricanes, earthquakes, and wind damage.
Finding the right balance between coverage and deductible isn’t always easy. Look for a plan with a regular fee you can afford and a deductible that won’t break you if you must file a claim.
Common Homeowners Policy Exclusions
Most homeowners insurance policies have exclusions — or things the plan will not cover unless you buy another product or rider.
Common homeowners insurance exclusions include the following:[4]
- Earthquake
- Collapse
- Flood
- Water damage like mold, fungus, or wet rot
- Wear and tear
- Mechanical breakdown
- Smog or smoke from industrial or agricultural work
- Rust
- Corrosion
- Dry rot
- Damage due to the earth settling or shrinking
- Bird or insect infestation
If your area is typically hit with earthquakes or flooding, additional policies may be wise to help you protect your home or possessions. And if you have many possessions, you may need additional protections for them.
Talk to your insurance agent about your home, neighborhood, and possessions. Together, you can decide which additional protections you can afford and need.
Reviewing & Updating Your Homeowners Policy
You’re likely prepared to review your homeowners insurance when you’re shopping for a new one. But you should examine the documents carefully before renewing your policy. Make any changes to your plan now, before a major storm or known event comes to your neighborhood.
Consider contacting your insurance agent during the following circumstances, as they might necessitate a policy update:
- After a home renovation or major improvement
- After a major purchase, such as a new computer
- After you’ve heard about an uptick in crime in your neighborhood
Filing a Claim
You will also contact your agent when you’ve been through a covered event, such as a fire, theft, or windstorm. Ask for the proper paperwork to file your claim, and fill it out as completely as possible. Your agent will review the documents, send an appraiser (if needed), and start the claims process.
Frequently Asked Questions About Homeowners Insurance Policies
We’ve compiled some of the most frequently asked questions about homeowners policies.
Understanding your coverage, including what is covered and at what level, is the most important aspect of your insurance policy. Many people are surprised after an event to learn that things they thought were covered under their policy actually aren’t.
Coverage of 80% of your home’s dwelling is typical. But you may choose a higher level — or a smaller one — depending on your budget and goals.
It depends. Most policies don’t cover water damage from storm floodwaters. But they might cover things like damage from a pipe that suddenly broke or water intrusion from a window broken by a falling tree limb. The specifics of your policy will dictate coverage for water damage.
Typically, insect damage is not covered by homeowners insurance.
It depends on the cause of the loss. If it’s caused by theft, you might have coverage. But if you lost it through neglect, it might not be without a separate policy.
There is generally a cap on coverage for jewelry, however, and it’s usually in the lower range of $1,500 or so. You can get a floater policy added to your homeowners insurance policy to cover jewelry at a higher rate and with more flexibility on coverage. You can also purchase a standalone jewelry insurance policy to cover the full worth of your jewelry.
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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Facts + Statistics: Homeowners and Renters Insurance. Insurance and Information Institute.
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72% of Homeowners Don’t Understand Essential Home Insurance Coverage. (May 2023). Forbes.
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Understanding Your Homeowners Insurance Declarations Page. Maryland Insurance Administration.
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Homeowners Insurance Guide. (April 2017). Pennsylvania Insurance Department.
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Insurance Forms. Alabama Department of Insurance.
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A Brief Guide on How to Insure Jewelry. (September 2023). Forbes.