A Beginner's Guide to Buying Homeowners Insurance

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Main takeaways

• Homeowners insurance protects your home and belongings from storms, theft, accidents and more.

• Coverage is divided into key categories: dwelling, other structures, personal property, loss of use, liability, and medical payments, each with adjustable limits.

• Flood damage isn’t included in standard policies, so separate flood insurance may be necessary depending on your location.

• Shop carefully and understand your policy to make sure you’re getting solid coverage at a reasonable price.

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Buying a home is one of life’s most exciting milestones, but it can also be one of its biggest financial stressors. What would happen if a major weather event happened to tear through the neighborhood, or your property became the target of a burglar?

That’s where homeowners insurance comes in. Having a solid policy in place can save you from costly repairs and replacements, so you can enjoy your new home without worrying about a worst-case scenario.

Whether you’re a first-time buyer or re-evaluating your current plan, understanding homeowners insurance can help you make smart choices. Here’s what you need to know to keep your investment, and everything in it, safe.

What is homeowners insurance?

Homeowners insurance provides financial protection for your home and any belongings within it, should you experience a storm, accident, theft or other “loss” covered by your policy. It typically also covers your financial liability if someone is injured on your property, reimbursing the homeowner for medical expenses or legal costs. Essentially, it’s a way to safeguard your home and financial health from unexpected events that could otherwise be financially devastating.

Here’s how it works. When you experience an event such as storm damage or a burglary, you file a claim with your insurance company. If the insurer determines that the loss is covered by your policy, it will reimburse you for damages, up to the allowed limits—but only after you pay any deductible that may be in place. 

For most homeowners, taking out a homeowners policy isn’t a choice, since mortgage providers generally require you to have coverage in order to get a home loan. But it’s protection you’d want to have anyway. The last thing you need after buying a home is the added expense of making major repairs or paying to replace costly possessions.

What’s covered by a homeowners policy?

Most homeowners insurance policies cover multiple types of loss. Your policy will outline the maximum amount of coverage that applies to each of these categories.

Dwelling coverage

This is the part of your policy that reimburses you for damage to the home itself—including floors, walls and roofs—as well as permanently installed features like cabinets and built-in appliances. Should your home experience damage from a covered loss such as wind, fire, lightning or hail, dwelling coverage helps you pay for necessary repairs or, if necessary, the rebuilding of your home.

Other structures

Structures on your property that are not directly attached to your home—such as sheds, detached garages and fences—are covered under this section of your policy. Let the insurer know of any outside structures you have when applying for coverage in order to ensure you have the protection you need.

Personal property

The personal property section of your policy covers items like clothing, electronics and furniture that are damaged or stolen as the result of a covered incident. Your policy reimburses you for these items, even if the event occurred outside the home. Most homeowners policies won’t cover the full replacement value for high-priced items like art or jewelry, so you may want to consider a separate personal articles policy to obtain the protection you need.

Loss of use

Your policy may also cover indirect costs that you assume when your home is damaged.

These include:

• Temporary housing

• Additional food costs (e.g. restaurants, cooking supplies)

• Additional fuel expenses

• Pet boarding

The homeowners policy pays for the amount above and beyond what you would normally spend on these categories. For example, if you normally spend $300 a month on food but spend $500 because you have to eat at restaurants, the policy would cover the $200 difference.

Liability protection

Liability protection acts as a safeguard if someone is injured on your property and the insurance company finds that you caused or contributed to the accident. The policy will pay for any covered medical expenses, as well as related pain and suffering, lost wages or funeral costs. Liability coverage only pertains to people who do not live in your home.

Medical payments

In addition, homeowners insurance pays the medical bills associated with less costly injuries to a visitor—even if it’s not your fault. Paying out for these more minor accidents can sometimes help you avoid being on the hook for bigger liability claims, or even lawsuits, at a later date.

How much coverage does the policy provide?

Your policy will outline a specific coverage limit for each category of coverage. You can generally adjust these limits based on your needs. Raising your limit increases the premium you pay, but will provide a stronger safety net should you experience a loss.

Dwelling coverage

When you apply for coverage, your insurer will typically recommend a dwelling coverage limit based on the cost to rebuild a comparable home in your area. While their recommendation is based on a wealth of real estate data, you can also consult a local real estate firm or homebuilders association to make sure you have the protection you need. You may want to opt-in for inflation protection—if your insurer offers it—in order to make sure your coverage adjusts to rising material and labor costs over time.

Other structures

Often, the coverage limit for other structures on your property will default to a certain percentage of your dwelling coverage. For example, if you have $250,000 in dwelling protection, your policy might provide $25,000 in coverage for non-connected structures such as gazebos and sheds. If the amount doesn’t cover the full replacement value of those detached structures, however, you can ask to increase your ceiling.

Personal property

Many home insurance policies have a total coverage limit for your personal property, but there may be “sub-limits” for specific categories of property. These may include:

• Cash

• Precious metals

• Jewelry

• Firearms

• Furs

• Silverware

If your base policy does not provide enough coverage for a particular category, you can ask your insurer to "schedule" certain items. Essentially, you’re buying separate coverage for those items, whether it’s expensive jewelry or prized musical instruments, at an additional cost.

Loss of use

Insurers will often set your loss of use coverage at 20% to 30% of your dwelling coverage limit. If you have $250,000 in dwelling protection, that means you would have a $50,000 to $75,000 cap on loss-of-use claims.

Liability protection

Liability protection limits can default to as little as $100,000 per occurrence. However, for a small increase in your premium, you may want to ask for a coverage limit of $300,000 to $500,000 to ensure you’re adequately protected. For maximum risk avoidance, you can also purchase a separate umbrella policy, which gives you even higher limits.

Medical payments

Because medical payments coverage is designed for smaller injuries, the standard minimum is only $1,000. You can usually boost that ceiling to as much as $5,000, for a small added cost.

Do you need flood insurance?

Flood damage is not included in a standard homeowners policy, but you can purchase separate coverage through FEMA’s National Flood Insurance Program.

Mortgage lenders sometimes require you to take out this additional coverage if you live in an area that’s prone to flooding. However, you may want to consider flood protection, even if it’s not mandated by your bank. According to the NFIP, roughly 40% of the claims they pay out are in areas that are not considered “high-risk.”

You can go to the NFIP website to find local insurance providers who sell this coverage. The median annual cost of flood insurance is $786, according to 2023 data from FEMA. However, that can vary widely based on your home’s value, the level of risk in your area and other factors.

Tips for buying a homeowners policy

• Understand your deductible. As with most insurance products, you have to pay a certain amount out of pocket for a claim before receiving reimbursement. A lower deductible means your insurance will kick in faster, but also increases the cost of your premium.

• Make sure you have enough coverage. Having sufficient coverage limits on your homeowners insurance is crucial because it ensures you're fully protected if disaster strikes. Make sure you evaluate the limits for each section of your policy, rather than always going with the default amount.

• Research insurance companies. Shopping around can help you snag a competitive rate on your policy, but price isn’t everything. Stick with companies that have a strong financial rating from agencies like AM Best and Moody’s. Also, check online to see if the insurer gets good reviews for customer service and paying out claims.

• Consider bundling. You can usually get a discount when you purchase home and auto insurance with the same company. You may want to get a quote on both of these policies at the same time to see if it yields a better rate.

The upshot

Buying homeowners insurance means that you’re financially protected, even if you experience potential disasters like fire, theft or extreme weather events. Understanding your policy limits, deductibles and exclusions can help ensure you get the coverage you need at an affordable price.