Homeowners insurance

Also called home insurance, hazard insurance

A policy that covers damage to a home and belongings and protects owners against liability for injuries or damage to others.

What it means

A standard homeowners policy bundles several coverages: the dwelling, other structures such as fences or sheds, personal property, liability if someone is hurt or their property damaged, and additional living expenses if the home becomes unlivable. Mortgage lenders require it, often paying premiums through escrow.

Policies cover listed or broad perils, but common exclusions include floods and earthquakes, which require separate coverage, and wear and tear. Replacement-cost coverage pays to rebuild or replace without deducting for age, while actual cash value subtracts depreciation. Each claim is reduced by the deductible. Terms and prices vary by insurer and state.

Example

Suppose a kitchen fire causes $40,000 of covered damage and the policy has a $2,500 deductible. The insurer pays $37,500 toward repairs, and the homeowner pays the first $2,500.

How it’s used

Buying a home with a mortgage
Protecting against fire, theft and storms
Liability protection for guests

Strengths and weaknesses

Strengths

Protects what is often a household’s largest asset
Includes liability and temporary living expense coverage
Required by lenders, so it also enables home buying

Weaknesses

Floods and earthquakes typically need separate policies
Premiums can rise after claims or in high-risk areas
Coverage limits on valuables may be low without extra riders

Good to know

Reviewing the dwelling limit against current rebuilding costs helps avoid being underinsured after construction prices rise.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.