Common Homeowners Insurance Questions and Answers

Homeowners insurance protects your home and personal belongings from covered perils such as fire, burglary, and severe weather.

When evaluating coverage, there is typically a lot to consider, including what is and isn't covered, how much protection you require, how your rate is determined, and how to save money on insurance premiums.

What Amount of Homeowners Insurance Do I Require?

The amount of homeowners insurance you require is proportional to the cost of replacing your home. You may cover your home and possessions for either actual cash value (ACV) or replacement cost.

Actual cash value or ACV is the cost to replace the structure minus depreciation due to age and wear. The ACV compensates you for a portion of the loss, but not enough to entirely repair or replace the damage. For instance, suppose you purchased an $800 television five years ago, which is destroyed in a house fire. If you have ACV, your insurer will pay you the current value of the television. If they determine that your television is worth 40% of its original value, they will pay you $320.

Replacement cost is the expense associated with restoring, replacing, or repairing the damage with similar materials. You are reimbursed for the cost to repair or replace your property at the current market value; depreciation is irrelevant. Although the replacement cost may exceed the initial purchase price of the property, there is a maximum amount that your insurance will cover.

If you insure your home for less than 80 percent of its replacement cost, you may not be compensated for a loss. Some insurers require you to get full replacement cost coverage.

How Much Liability Coverage Do I Require?

Liability protection protects against bodily injury and property damage claims for which you are legally accountable. Personal liability and associated court fees are covered in addition to your home's liability coverage. The majority of homeowner's insurance policies include $300,000 in liability coverage. An umbrella policy, which often extends the coverage of your other property and casualty insurance, can give between $1 million and $10 million in additional liability protection.

Is There a Deductible on Homeowners Insurance?

The majority of home insurance policies include a deductible. A deductible is a fixed financial amount or percentage that must be paid before an insurer would pay a claim. For example, if you file a $10,000 claim and your policy has a $500 deductible, you only have to pay $500. In contrast, your insurer pays the rest of $9,500 (provided the claim is specifically for a covered situation and claim limits do not apply).

Is Homeowner's Insurance a Legal Requirement?

The law does not mandate that you insure your home or personal belongings. However, if you finance your home, your mortgage lender will need you to obtain homeowner's insurance to safeguard their financial interest in the property. If your policy is canceled, lapses, or does not meet your lender's requirements, your lender will purchase a new policy and pay for it with escrow funds. This is known as "force-placed" insurance.