Insurance

Understanding your homeowners insurance

Educational guide · Updated 2026

Homeowners insurance is required by your lender, but most buyers never read what it actually covers until they need it. Knowing the main parts of a policy — and the common gaps — helps you buy the right amount of coverage rather than just the cheapest.

What a typical policy covers on a $400,000 home

Dwelling coverage: $400,000 (rebuilding cost, not market value). Personal property: $200,000 (50% of dwelling). Liability: $100,000–$300,000. Loss of use: $80,000 (20% of dwelling). Annual premium: roughly $1,200–$2,400 depending on location, home age, and claims history. Note: flood and earthquake are almost always excluded and require separate policies.

The main coverage types

Dwelling covers the structure of your home itself. Other structures covers detached things like a garage or fence. Personal property covers your belongings. Liability protects you if someone is injured on your property or you damage someone else's. Loss of use helps with living expenses if your home becomes uninhabitable after a covered event.

Replacement cost vs. actual cash value

This distinction matters a lot. Replacement cost pays to replace damaged items at today's prices. Actual cash value pays the depreciated value — what a used item is worth now. Replacement cost coverage costs more but pays far better when you actually file a claim.

The big gaps: flood and earthquake

Standard homeowners policies typically do not cover flood or earthquake damage. These require separate policies. Flood insurance is especially important — many buyers assume they're covered and discover otherwise only after a loss. If your property is in or near a flood zone, this is not optional protection to skip.

How to buy the right amount

Insure the dwelling for what it would cost to rebuild, not its market price or what you paid — those are different numbers. Consider your deductible carefully (a higher deductible lowers your premium but raises your out-of-pocket on a claim), and ask specifically about flood and other exclusions for your area before assuming you're covered.

Frequently asked questions

Is homeowners insurance required?

If you have a mortgage, yes — lenders require it. If you own outright, it's not legally required but strongly recommended.

Does homeowners insurance cover flood damage?

Standard policies do not. Flood insurance must be purchased separately through the National Flood Insurance Program (NFIP) or a private insurer.

How much dwelling coverage do I need?

Base it on the replacement cost to rebuild — not the market value of your home. A local insurance agent or online calculator can estimate this.

This article is educational and general in nature. Terms, costs, and rules vary by lender, provider, state, and your individual situation. Confirm details with a licensed professional.