Insurance companies also call the shots about the type of damage they’ll cover. Check out the list below to see what incidents and disasters they’re willing to pay out for—some of them may surprise you.
Incidents Standard Coverage Will Pay For
- Water pipe bursting (such as a washing machine hose)
- Fire (including a kitchen fire)
- Tornado
- Lightning
- Wind
- Hail
- Falling tree
- Wildfire
- Vandalism
- Falling satellite debris (yep)
As you can see, it’s a decent list. If you find yourself with grapefruit-sized holes in your roof from a hailstorm, you don’t need to worry about paying for a new roof. But there are other calamities you won’t be able to count on your standard policy to cover.
What does home insurance not cover?
While home insurance will cover damage from many disasters, sadly it will not cover everything.
Incidents Standard Coverage Will Not Pay For
- Power failure
- Water damage from floods and sewer backups
- Hurricanes (flooding and sometimes wind damage)
- Neglect
- Earth movement, like sinkholes (most states) and earthquakes
- Ordinance of law, such as eminent domain or repairs/rebuilding to local code/ordinances
- Shrinking, settling or expansion of structure, including foundation or patios/pavement, etc.
- Intentional destruction (No, you can’t set fire to your house to get a new one. That’s called arson, and it’s frowned on in most places.)
- Vermin (rodents, birds or insects)
- Pet damage (If your Bengal uses the sofa as a scratching post, you’ll have to replace that on your own dime.)
- Smog, dry rot, rust and sometimes mold
- Wear and tear
- War or nuclear hazard
The exclusions clause of any policy will tell you the whole list of events your policy won’t cover. Always look at your policy to see what you’re still on the hook for.
If you live in a place like California that’s earthquake prone or next to the Mississippi River that floods regularly, you’ll need to get special insurance to cover damage from those kinds of events. Earthquake, sinkhole and flood insurance are all available separately (unless you live in Florida or Tennessee where companies are mandated to provide sinkhole insurance).
Personal Property That’s Not Covered
Earlier we said home insurance covers personal property. But there are some things you might think fit in that category that it doesn’t cover.
Home insurance won’t cover your car if it’s damaged or stolen or your expensive boat or watercraft. It also won’t cover your high-value items, like jewelry, fine art and collectibles (that are actually worth something—so it will cover your Beanie Babies, but not your rare comic book collection).
If you own anything with a big price tag, like furs, firearms or the crown jewels, you may want to look into what’s called scheduling, which means you insure these items individually for specific amounts.
Different Types of Coverage
Not all policies are the same, of course. You can choose different types of coverage that change the way the insurance companies pay out for damage. Those options can also affect your premiums—the amount you pay for your homeowners insurance.
Actual Cash Value
We talked about this in the personal property section. It sounds like what it is. Basically, ACV factors in depreciation. When Larry’s house gets burnt to a crisp because he tried to deep fry the Thanksgiving turkey inside, the insurance company will give him the current market value of his stuff (think about how much a used TV costs versus a new one and you’ll get the picture). Most homeowners policies include replacement cost coverage for your dwelling and actual cash value (ACV) coverage for your personal property.
Replacement Cost
Definitely a step above ACV, replacement cost coverage will give you the money to replace your home and belongings at whatever the current cost is—up to the policy limit.
Extended Replacement Cost
A variation on replacement cost coverage, extended replacement cost coverage pays to replace your home up to the policy limit plus an extra percentage of the policy limit in case it turns out to cost more than you thought.
Check out this example: Michelle bought a $350,000 extended replacement cost policy to cover her $350,000 ranch-style house several years ago. Squirrels nesting in her walls chew up the electrical and her house burns down.
Due to a worker shortage, construction costs recently skyrocketed, and now it will cost $490,000 to rebuild her sweet ranch. But she has an extended replacement cost policy which will add 40% of the original $350,000 limit on top of her payout, so she’ll get $490,000 total. Michelle’s covered!
While this kind of policy is more expensive, it could be helpful if you live in an area where building costs are rapidly increasing.
Guaranteed Replacement Cost
This is the El Primo of homeowners policies. No depreciation. No limit. If your house and all its contents get destroyed by a falling satellite (or, you know, something else a little less likely), the insurance company will pay. If the rebuild is $100,000, insurance will cover it. If the rebuild is $890,000, insurance will cover it. This is usually what people think of when they imagine home insurance, and in an ideal world it’s what we’d recommend, but this kind of policy is hard to find and very expensive, so if you do find it, make sure it’s worth the extra cost by talking through your options with an independent insurance agent.
Different Types of Policies
There are basically eight different types of home insurance policies, often named HO-1, HO-2, etc., all the way to HO-8. Ranging from low coverage to high coverage to renters coverage and beyond, they also scale in price.
HO-1 and HO-2
Most insurance companies don’t sell HO-1 and HO-2 to single-family homeowners because they’re too basic. So let’s move on and take a look at the popular HO policies.
HO-3
This is the most common type of policy homeowners select. It provides the standard level of coverage for your dwelling and personal property. Your personal property is also protected up to a limit (usually 50% of your dwelling coverage).
HO-4
This is renters insurance. It covers everything the renter owns and offers personal liability coverage in case anyone is injured on the property.
HO-5
These policies offer the highest levels of coverage, like full replacement cost for your personal property and structure.
HO-6
This is condo insurance. It covers your unit’s walls, floors and ceilings plus everything else a typical HO-3 policy covers, like liability and personal property.
HO-7
If you live in a mobile home, modular home or manufactured home you’ll need one of these policies. Coverage usually only applies when your home is not moving. If you get in a crash while you’re moving your mobile home, that’s a different deal.
HO-8
Do you love the Instagram page Cheap Old Houses? Well, if you bought one of those beauties (or an expensive one), you might need one of these policies. Since historic homes often have special building requirements and features that are pricier than your three-bedroom, two-bath cinder-block deals (it’ll cost a pretty penny to replace those Georgian columns), this policy is designed to help with the extra expense. It also provides the other typical coverages like liability and personal property.
How Much Is Home Insurance?
In 2021, homeowners paid an average of $1,398 in annual premiums for home insurance.1 But keep in mind, individual costs can vary a lot because so many factors go into the price.
What affects home insurance rates?
The actual cost of your home insurance will depend on things like your deductible, size of the house and the kind of coverage you want.
Where you live also makes a difference. You’ll pay a higher premium if you live in tornado alley (Oklahoma has the highest home insurance rates in the U.S.). But if you don’t mind the sky-high cost of living in Hawaii, you can save some dough on home insurance there because they have the cheapest average.
Construction costs will also impact your insurance rates or quote. And that price tag varies by region. While home insurance companies can calculate an approximate replacement cost for you, it’s a good idea to verify their estimate with a real quote from a professional contractor.
Your insurance quotes will also come in lower if you increase your deductible. A higher deductible means less risk for the insurance company. But don’t choose a higher deductible than you can afford to pay just to save on premiums.
Factors That Affect Home Insurance Rates
Factor Rate Low Deductible High Deductible Small House Large House Area with high crime Area with infrequent natural disasters Actual cash value (ACV) policy with basic coverage Replacement cost (RCV) policy
Your claim history directly impacts your rate as well. If you have a record of filing lots of claims, insurance companies will give you a higher quote because they think you’re likely to file a lot of claims with them as well—and that’s a higher risk for them.
Ramsey pro tip: Don’t file a claim for small stuff you can cover with your emergency fund.
Whether you have actual cash value (ACV) or replacement cost (RCV) coverage will also change your rate. ACV coverage is cheaper than replacement cost because it costs insurance companies less. That doesn’t mean you want it though. Carefully consider what you can afford and if you can, go for replacement cost coverage—because actually replacing your stuff is kind of the point of insurance.
Ways to Save on Home Insurance
Every homeowner needs insurance, but nobody wants to pay more than they have to. The good news is you can find ways to save some cash when buying insurance.
