Homeowners Insurance: Protect Against the Unexpected

Home Ownership Costs, Mortgage Process, Mortgages
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When you buy a home, chances are the first thing on your mind isn’t the notion that a visitor might slip and fall in your kitchen and sue you. But it’s for just that type of scenario, among others, that it’s important to get homeowners insurance. (Not to mention your mortgage lender will generally require it.)

Finding the right insurance can be tricky because of the variety of policies available. Different types of policies will have different terms, conditions and exclusions. For instance, you might expect stolen valuables to be automatically replaced under a general policy, but, depending on your particular policy, that may not be the case. Here’s how to make sure you’re fully covered for the risks associated with owning a home.

What’s covered in homeowners insurance?

To know how much coverage to buy, you’ll need an estimate of how much it would cost to replace your home (not including the land value) and a detailed inventory of your personal items. A basic home insurance policy typically provides four areas of coverage:

  • The structure of your home: In the event that a natural disaster such as a wildfire damages or destroys your home, your policy will generally cover the cost to repair or rebuild it, as long as you’ve bought enough coverage. (Specifically, you’re covered for damage to both your house and structures attached to your house. This includes damage to plumbing, electrical wiring, heating and permanently installed air-conditioning systems.) Other natural disasters, such as flooding, are not included, so pay attention to exclusions.
  • Personal belongings: If any of your personal belongings are stolen, you can receive a payout between 50% and 75% of your home’s value to replace those items. (You’re also generally covered if your possessions are damaged — or if they’re not on your property but with, say, your child at college.) Policy limits might not be high enough to cover some valuables, such as jewelry, art and electronics. Policyholders should also pay attention to whether their insurance compensates them for new replacement items (“replacement cost”) or for their depreciated value (“actual cash value”).
  • Liability protection: Should an accident occur in your house or on your property, you could be held liable for damages and injuries. Homeowners insurance typically covers between $100,000 and $300,000 for lawsuits or expenses resulting from an accident such as a mail carrier slipping on your driveway.
  • Displacement: If you’re unable to live in your house because a fire or other disaster has rendered it uninhabitable, your insurance will cover your additional living expenses. Most insurance companies will cap these expenses at 20% of your policy limits and require that it be used within one year of the disaster.

What’s not covered?

Most insurance policies will cover damages and stolen goods that result from a fire, theft, lightning, explosions, vandalism and riots. But for other perils, you’ll have to find extra coverage through a separate policy.

For example, you’ll have to purchase separate policies for flood and earthquake insurance. Earthquake insurance premiums vary depending on what kind of house you have and where you live. Homeowners in low-risk areas may pay a few hundred dollars a year for earthquake insurance, while California homeowners may pay thousands.

Your insurance company may also refuse to pay out for damages caused by poor maintenance, termites, sinkholes, sewer backups, identity theft or running a business from your home. Other exclusions include war, nuclear spills and acts of terrorism.

Be aware that insurance policies may also have limits for valuables including jewelry, damage from mold or liability costs for dog bites or injuries from the use of swimming pools or trampolines. To get extra coverage for your valuables, consider a floater policy, which covers property that’s considered easily movable, such as jewelry. To increase liability coverage, you’ll want to buy what’s called an umbrella policy, which can cover you for $1 million or more.

How to find quality insurers

Start your comparison shopping for home insurance by first deciding exactly what you want covered and the size of the policy you’d like, so you can make an apples-to-apples comparison of prices and services. You can look up insurers in your state and customer complaints at your state insurance department here. For more information, you can check out an insurer’s ratings in Moody’s, Standard & Poor’s or A.M. Best.

House insurance premiums will fluctuate wildly even within the same ZIP code for the same insurer. Many factors affect your rates, including your age, marital status, what kind of house you have and even how close you live to a fire hydrant; and companies give different weights for each risk. So it’s best to research a few companies before choosing.

It’s also a good idea to periodically review your insurance policy and adjust it as your financial situation changes. You may find that you can save by raising your deductible, for example, or investing in a renovation that will make your home more eco-friendly.

You’re covered

Insurance is something you hate to buy but love to have when you need it. And it doesn’t require much more than just occasional attention. Once you wade through the choices and get your coverage in place, you’ll have a good feeling that your biggest purchase is protected.

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