Homeowners Insurance Guide: A Beginner's Overview

 Homeowners insurance (also known as home insurance) isn't a luxury; it's a necessity. And not just because it protects your home and possessions against damage or theft. Virtually all mortgage companies require borrowers to have insurance coverage for the full or fair value of a property (usually the purchase price) and won't make a loan or finance a residential real estate transaction without proof of it.

You don't even have to own your home to need insurance; many landlords require their tenants to maintain renter's insurance coverage. But whether it's required or not, it's smart to have this kind of protection. We'll walk you through the basics of homeowners insurance policies.

KEY TAKEAWAYS

• Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others.
• Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value.
• Policy rates are largely determined by the insurer's risk that you'll file a claim; they assess this risk based on past claim history associated with the home, the neighborhood, and the home's condition.
• In shopping for a policy, get quotes from at least five companies, and definitely check with any insurer you already work with—current clients often get better deals.

What a Homeowner's Policy Provides

Although they are infinitely customizable, a homeowner's insurance policy has certain standard elements that provide what costs the insurer will cover.

Damage to the Interior or Exterior of Your House

In the event of damage due to fire, hurricanes, lightning, vandalism or other covered disasters, your insurer will compensate you so your house can be repaired or even completely rebuilt. Destruction or mutilation from floods, earthquakes, and poor home maintenance is generally not covered and you may require separate riders if you want that type of protection. Freestanding garages, sheds or other structures on the property may also need to be covered separately using the same guidelines as for the main house. 

Clothing, furniture, appliances, and most of the other contents of your home are covered if they're destroyed in an insured disaster. You can even get "off-premises" coverage, so you could file a claim for lost jewelry, say, no matter where in the world you lost it. There may be a limit on the amount your insurer will reimburse you, however. According to the Insurance Information Institute, most insurance companies will provide coverage for 50% to 70% of the amount of insurance you have on the structure of your home.1 For example, if your house is insured for $200,000, there would be up to about $140,000 worth of coverage for your possessions.

If you own a lot of high-priced possessions (fine art or antiques, fine jewelry, designer clothes), you might want to pay extra to put them on an itemized schedule, purchase a rider to cover them, or even buy a separate policy.