Home insurance explained: Everything homeowners need to know

Home insurance is an ongoing cost tied to homeownership. Most Americans can't avoid it — mortgage lenders require coverage before closing a loan — and this type of coverage is typically imperative even if you don't have a loan on your home. Yet as insurance costs climb, many homeowners are unclear on what their policies cover and how much protection they truly need.

To cut through the confusion, we asked insurance experts to break down the essentials. Below, they share insights on coverage basics, policy exclusions, typical costs and ways to get affordable coverage.

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Home insurance explained: Everything homeowners need to know

Imagine flames tearing through your neighborhood. At that moment, the last thing you would want to do is frantically search through policy documents, wondering if you're covered. Learning the basics of home insurance now can prevent a crisis from becoming even more overwhelming.

What is home insurance?

Home insurance acts as a financial safety net for large losses that most homeowners couldn't afford to pay for on their own, according to Ashleigh Trent, personal lines director and co-founder of Tower Street Insurance. Your policy will typically pay to repair or replace your home and belongings if a fire, storm or theft causes damage. It may also cover medical and legal costs if someone gets hurt on your property.

Compare home insurance policies to find the right coverage today.

How does home insurance work?

Home insurance works in a relatively straightforward manner: You pay monthly or annual premiums to your insurance company. In return, when disaster strikes and you notify the insurance company, "[they] will investigate the incident, inspect the damage and pay for expenses [up to your policy's limit]," explains Belen Tokarski, president and COO of Mylo. But you must pay your deductible before insurance kicks in.

What does home insurance cover?

Here's what a standard home insurance policy typically includes, according to Tokarski:

• Dwelling coverage repairs or replaces your home if damaged by fire, storms or other covered events.
• Personal property coverage helps you replace your possessions, such as furniture, electronics and clothing.
• Other structures coverage covers detached structures such as garages, fences and sheds.
• Loss of use coverage pays for temporary housing if you can't live in your home during repairs.
• Personal liability coverage handles legal and medical costs if someone gets hurt on your property.

What doesn't home insurance cover?

While home insurance protects your property from many risks, exclusions exist. "Floods, earthquakes, mold, pests and wear and tear usually aren't covered," says Brent Thurman, owner of Keystone Insurance.

You'll generally need separate insurance for these items:

• Flood damage: You can get a separate flood insurance policy through the National Flood Insurance Program (NFIP).
• High-value belongings: A Valuable Articles Endorsement covers expensive jewelry, art and collectibles.
• Equipment breakdown: Equipment breakdown coverage protects appliances and home systems such as your furnace, air conditioner and refrigerator.
• Earthquake damage: Separate earthquake insurance may be worth getting if you live in an at-risk area.
• Regular maintenance: This is your responsibility, but a home warranty may help with some repair costs.

How much does home insurance cost?

Home insurance costs vary widely and depend heavily on your location, home value, construction type, roof age, credit score and local risks such as hurricanes or wildfires. For example, you might see higher insurance costs if you live somewhere that's prone to natural disasters.

Who needs home insurance?

Home insurance is mandatory for homeowners with a mortgage. But even after paying off your home, experts, including Trent, encourage keeping this type of coverage to protect such a large asset.

Who doesn't need home insurance?

You can technically skip home insurance if you've paid off your mortgage, but experts strongly advise against it. Trent warns that going without insurance is risky considering threats against a home from things like inclement weather. Unless you're wealthy enough to self-insure or own a low-value property, it's typically wise to buy home insurance.

How do you find inexpensive home insurance?

Industry professionals recommend these five ways to secure home insurance at the best possible rates:

• Shop around: Ask a broker to compare policies from several carriers to find the best combination of price and coverage.
• Conduct annual reviews: Don't automatically renew your policy. Instead, have your broker check for better options before expiration.
• Bundle policies: Combine your home and auto insurance with one company for potential discounts.
• Raise your deductible: A higher deductible often results in paying a lower monthly premium.
• Improve your home security: Installing safety features such as alarm systems and smoke detectors may qualify you for lower rates.

The bottom line

Home insurance protects your most valuable asset, so don't choose a policy based on price alone. Thurman advises working with an independent insurance agent. Beyond finding you the right coverage at a fair price, they'll explain your policy in layman's terms and answer questions you didn't even know to ask.