What Homeowners Insurance Actually Covers (and How Much You Should Have)

While Los Angeles County continues to battle devastating wildfires, you may be wondering about the safety of your own home. More specifically, how are you covered when the unthinkable happens?

Unfortunately, insurance doesn’t function like a gas or electric company; even in the face of disaster, insurers aren’t obligated to service your home. And while homeowners insurance isn’t legally mandated, choosing to forgo protection in an attempt to save money could prove to be one of the most expensive decisions a homeowner can make.

Homeowners insurance is a crucial financial protection for your home and belongings, but many homeowners don’t fully understand their coverage. Let’s take a look at how exactly homeowners insurance works so that you can make informed decisions about your coverage.

What homeowners insurance covers

The main categories of homeowners insurance are structure protections, personal property, liability protection, and additional living expenses.

Structure protection

Your policy’s dwelling coverage protects the physical structure of your home from covered perils. This includes:

When it comes to costs, the coverage should be enough to rebuild your home entirely at current construction costs, not the market value or purchase price.

Personal property

This coverage protects your belongings inside the home, typically including:

Furniture
Electronics
Clothing
Appliances
Other personal items

Most policies cover personal property at 50 to 70% of your dwelling coverage. High-value items like jewelry, art, or collectibles often need additional coverage through riders or endorsements.

Liability protection

This crucial coverage protects you if someone is injured on your property or if you accidentally damage someone else’s property. It typically covers:

Most experts recommend at least $300,000 in liability coverage, though many suggest $500,000 or more.

Additional living expenses (ALE)

If your home becomes uninhabitable due to a covered loss, ALE coverage pays for:

Temporary housing
Additional food costs
Pet boarding
Other necessary expenses

What’s not covered by homeowners insurance

Unfortunately, homeowners insurance is not all-encompassing. There are standard exclusions to consider. Most policies don’t cover:

Flood damage (requires separate flood insurance)
Earthquake damage (requires separate coverage)
Normal wear and tear
Pest infestations
Mold (unless resulting from a covered water damage event)
Sewer backup (unless you add specific coverage)
Business-related liability

How much coverage you need

Understand that how much your home is worth is a different number than what your insurance covers. Your home’s market value includes land value and location premium, while insurance should cover rebuilding costs only. To get an idea of how much coverage you need, use these factors.

Dwelling coverage

Calculate needed coverage based on:

Local construction costs per square foot
Your home’s size and features
Special materials or craftsmanship
Local building code requirements

Add 10-20% buffer for unexpected costs or construction price increases.

Contents coverage

To determine adequate coverage:

Create a home inventory with photos and receipts
Consider replacement cost vs. actual cash value coverage
Identify high-value items needing separate coverage
Account for seasonal items and stored belongings

Money-saving tips

Like I mentioned at the top, skipping insurance to save money won’t be worth it. Any short-term savings can quickly transform into devastating financial losses when disaster strikes. Instead of eliminating coverage, consider these money-saving strategies:

Increase your deductible: Raising your deductible from $500 to $1,000 can lower premiums by 15 to 20% or more, according to CNBC.
Bundle policies: Combining home and auto insurance often yields discounts of 15-25%.
Improve home security: Installing security systems and smoke detectors can reduce premiums while protecting your home.
Shop around annually: Insurance rates vary significantly between providers. Regular comparison shopping ensures you’re getting the best value.
Ask about discounts for things like a new roof, smart home devices, or having a claims-free history.

The bottom line

Remember that homeowners insurance is not a maintenance policy, but protection against sudden and accidental losses. Update your policy after completing any major renovations, acquiring valuable items, or after life changes (marriage, children, etc). Regular maintenance and proactive risk management remain your responsibility as a homeowner.

Insurance policies vary widely. Always consult with a professional insurance agent to understand your specific coverage.

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