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How Does Home Insurance Work? 

Written by Alyssa DiCrasto

Reviewed by Rob Deming

Last updated: July 31, 2023

How Does Home Insurance Work?

Homeownership comes with a number of risks. For example, a thief could break in and steal your personal items, or a natural disaster could cause major structural damage to your house. If you own a home, having homeowners insurance to protect against these risks and others is extremely beneficial. Not to mention, home insurance is often required by mortgage lenders. 

In this guide, we’ll answer some common questions about homeowners insurance, like how does home insurance work, how does a home insurance claim work, and how are home insurance rates calculated. We’ll also explain how homeowners insurance differs from renters insurance. 

How does home insurance work?

Whether you’re a new homeowner or have owned a home for many years, it’s important to understand how home insurance works. You should familiarize yourself with common terminology, like deductibles and coverage limits, and understand the process for filing claims and getting reimbursed for the damages. 

Here are some important things you should know about home insurance. 

How does an insurance claim work?

Home insurance is a contract between you and your insurance provider. In exchange for a premium, the insurance company agrees to reimburse you for covered losses, like weather damage, break-ins, vandalism, fires, smoke damage, sudden and accidental water damage, and other issues that can damage your house or personal items. 

If you experience a loss that is covered under the terms of your policy, you file a claim with your insurance provider. An adjuster will review your claim and investigate the loss. They’ll also determine how much money you’re owed based on the damages, your coverage limits, and other policy-related factors. 

Once the claim has been investigated and approved, the insurance company gives you a settlement to pay for the damages. Typically, a homeowners insurance claim causes your premium to increase after the policy renewal period. 

How does home insurance work with a mortgage?

If you have a mortgage on your house, your lender probably requires you to carry homeowners insurance. Having home insurance protects you as the homeowner, but it’s also financial protection for the lender. If your home gets damaged or destroyed in a covered loss, your insurance company helps you pay for it, so there’s less risk that you’ll default on your loan. 

In most cases, the settlement check from your insurance company will have your name on it, and your mortgage company’s name. The mortgage company might even hold onto the settlement check and disperse the money to you as the repairs are made. It’s a good idea to ask your lender about their process for handling claims in case you find yourself in this situation. 

However, your lender should only get the settlement check for dwelling-related claims. If you’re receiving money for personal use, like additional living expenses, you will receive the funds directly. That’s your money to spend on temporary living costs, like hotel bills or restaurant meals while your house gets repaired. 

Many homeowners pay their home insurance premium in an escrow account that’s managed by their mortgage lender. Using an escrow account ensures that your home insurance premium is paid on-time every month. Some lenders also require homeowners to pay their annual home insurance premium upfront and in full, which guarantees coverage for one year. 

How does a home insurance deductible work?

Most home insurance policies have a deductible, which you’re required to pay out-of-pocket every time you file a claim. When you receive a settlement check from your insurance company, it will include the total amount of reimbursement you’re entitled to, minus your deductible.

You get to choose your own deductible when you purchase home insurance. According to Liberty Mutual, homeowners insurance deductibles typically range from $100 to $5,000, with the average deductible being $1,000. The higher your deductible is, the lower your insurance premium will be. The caveat is that having a higher deductible results in lower claim payouts. 

How are home insurance rates calculated?

How are home insurance rates calculated? 

Home insurance rates are unique to each individual. When you apply for a home insurance policy, the insurance company looks at a variety of factors to calculate your personalized rate. 

Some of the factors that impact the cost of home insurance include: 

  • Your location 
  • The size of your home 
  • The age of your home 
  • Your marital status 
  • Your insurance claim history 
  • Your home’s proximity to a fire station 
  • The materials used to build your home

There are also policy-related factors that impact your premium. These include your chosen coverage limits and deductibles, endorsements, discounts, and your insurance company.

Getting quotes from several home insurance companies can help you find the most affordable policy for your situation.  

How does renters insurance work?

If you rent an apartment or house, you’ll need to get renters insurance. Renters insurance provides similar coverage to homeowners insurance, but it doesn’t cover the physical structure of the building. Renters insurance covers your personal items, personal liability, medical payments, and additional living expenses.  

If you have an insured loss, you can file a claim with your renters insurance company and get reimbursed for the damages. Like home insurance, renters insurance also has a coverage limit and deductible that comes out of your claim payouts. Filing renters insurance claims usually causes your premium to go up.  

Who needs renters insurance?

Renters insurance isn’t legally required. However, it’s sometimes required by landlords as part of your lease agreement.  

Even if your landlord doesn’t require renters insurance, all renters can benefit from renters insurance, since your landlord’s insurance policy won’t provide any coverage for tenants and their belongings. Renters insurance is also very inexpensive, so you can probably find a policy that fits your budget. 

How does a home and auto bundle work?

Most insurance companies offer home and auto insurance bundles. Bundling means that you purchase your home insurance and car insurance from the same company. Policy bundling usually results in a discount on one of the insurance premiums.  

When you get a home and auto insurance bundle, you still have two individual policies. If something happens to your house or your car, you can file a claim with your insurance company and get reimbursed for the damages. The main benefit of bundling is that it can help you save money, compared to buying each policy from a different insurer. 

You can take our short quiz to see how much you can expect to pay for bundled home and auto insurance. 


How does homeowners insurance protect you?

Home insurance provides financial protection against certain losses, like structural damage caused by a windstorm, or stolen personal belongings. If you experience an insured loss, the insurance company provides a payout that can be used to fix your home, replace personal items, or pay for temporary living expenses.

What does home insurance include?

Home insurance covers your dwelling and personal items against certain losses. It also covers your personal liability, medical payments, and additional living expenses. Most insurers also sell endorsements that can fill gaps in your basic policy, such as valuable items coverage.

What is the 80% rule in insurance?

The 80% rule in insurance says that your insurance company will only pay to rebuild your home after a covered loss if your dwelling insurance limit is at least 80% of your home’s replacement cost value. Without this much insurance coverage, your insurer might only pay the difference between your coverage limit and the value equal to 80% of your home’s replacement cost.

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