Homeowners Insurance Guide: A Beginner's Overview

 Homeowners insurance (also known as home insurance) isn't a luxury; it's a necessity. That's not just because it protects your home and possessions against damage or theft. In this article, we'll walk you through the basics of homeowners insurance policies. Most mortgage companies require borrowers to have insurance coverage for the replacement cost of a property, which is the cost to rebuild it if it is completely destroyed. Your insurer will likely pay your settlement to both you and your lender if that happens. You don't even have to be a homeowner to need insurance. Many landlords require their

 tenants to maintain renters insurance coverage. Whether it's required or not, it's smart to have this kind of protection. KEY TAKEAWAYS Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others. Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value. Policy rates are largely determined by the insurer's risk that you'll file a claim;

 they assess this risk based on past claim history associated with the home, the neighborhood, and the home's condition. In shopping for a policy, get quotes from at least five companies, and definitely check with any insurer you already work with—current clients often get better deals. What a Homeowners Policy Provides Although they are infinitely customizable, a homeowners insurance policy has certain standard elements that provide what costs the insurer will cover. Each of the main coverage areas are

 discussed below. Damage to the Interior or Exterior of Your House In the event of damage due to fire, hurricanes, lightning, vandalism, or other covered disasters, your insurer will compensate you so your house can be repaired or even completely rebuilt. Destruction or mutilation from floods, earthquakes, and poor home maintenance is generally not covered, and you may require separate riders if you want that type of protection. Freestanding garages, sheds or other structures on the property may also need

 to be covered separately using the same guidelines as for the main house. Clothing, furniture, appliances, and most of the other contents of your home are covered if they're destroyed in an insured disaster. You can even get "off-premises" coverage, so you could file a claim for lost jewelry, say, no matter where in the world you lost it. There may be a limit on the amount your insurer will reimburse you, however. According to the Insurance Information Institute, most insurance companies will provi

de coverage for 50% to 70% of the amount of insurance you have on the structure of your home.1 For example, if your house is insured for $200,000, there would be up to about $140,000 worth of coverage for your possessions. If you own a lot of high-priced possessions (fine art or antiques, fine jewelry, designer clothes), you might want to pay extra to put them on an itemized schedule, purchase a rider to cover them, or even buy a separate policy. Personal Liability for Damage or Injuries Liability coverag

e protects you from lawsuits filed by others. This clause even includes your pets! So, if your dog bites your neighbor, Doris, no matter if the bite occurs at your place or hers, your insurer will pay her medical expenses. Alternatively, if your kid breaks her Ming vase, you can file a claim to reimburse her. If Doris slips on the broken vase pieces and successfully sues for pain and suffering or lost wages, you'll likely be covered for that, too, just as if someone had been injured on your property. Off-premi

ses liability coverage often doesn't apply for those with renters insurance. While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute. For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy. Hotel or House Renta

l While Your Home Is Being Rebuilt or Repaired It's unlikely, but if you do find yourself forced out of your home for a time, this will undoubtedly be the best coverage you ever purchased. This part of insurance coverage, known as additional living expenses, reimburses you for rent, hotel stays, restaurant meals, and other incidental costs you incur while waiting for your home to become habitable again. Before you book a suite at the Ritz-Carlton and order caviar from room service, however, keep in mind that policies impose strict daily and total limits. Of course, you can expand those daily limits if

 you're willing to pay more in coverage. Different Types of Homeowners Coverage All insurance is definitely not created equal. The least costly homeowners insurance will likely give you the least amount of coverage, and vice versa. In the U.S. there are several forms of homeowners insurance that have become standardized in the industry; they are designated HO-1 through HO-8 and offer various levels of protection depending on the needs of the homeowner and the type of residence being covered

. There are essentially three levels of coverage. Actual Cash Value Actual cash value (ACV) covers the cost of the house plus the value of your belongings after deducting depreciation (i.e., how much the items are currently worth, not how much you paid for them). Some policies may contain a recoverable depreciation clause, which allows the owners to claim the value of the depreciation along with the ACV. Replacement Cost Replacement value policies cover the actual cash value of your home and

 possessions without the deduction for depreciation, so you would be able to repair or rebuild your home up to the original value. Guaranteed (or Extended) Replacement Cost/Value The most comprehensive, this inflation-buffer policy pays for whatever it costs to repair or rebuild your home—even if it's more than your policy limit. Certain insurers offer an extended replacement, meaning it offers more coverage than you purchased, but there is a ceiling; typically, it is 20% to 25% higher than the limit. Some advisors feel all homeowners should buy guaranteed replacement value policies because you don't need just enough insurance to cover the value of your home, you need enough insurance to rebuild your home, preferably at current prices (which probably will have risen since you purchased or built). Guaranteed replacement value policies will absorb the increased replacement costs and provide the homeowner with a cushion if construction prices increase. What Isn't Covered by

 Homeowners Insurance? Homeowners insurance policies typically include coverage for a wide range of perils and events that can cause damage to your property or belongings. However, there are also several common exclusions, which are situations or events that are not covered by the standard policy. If you want coverage for many of these specific items, you'll likely need to buy separate or private coverage. There are several natural disaster occurrences that are not covered by standard coverage.

 Standard homeowners insurance usually doesn't cover damage caused by floods. Earthquake damage is typically excluded from standard homeowners insurance policies. While some policies include limited coverage for sudden and accidental sinkhole damage, extensive or gradual sinkhole damage is often excluded as well. There are some home repair and maintenance costs that are not covered. Many

 standard policies exclude damage from sewer or drain backups. Repairs or replacements due to the normal course of use are also generally not covered. Damage caused by termites, rodents, other pests, mold, and mildew may also be excluded, especially if prevention methods are not