What does homeowner’s insurance cover, and how much do you need?

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Buying your first home? Congratulations! You’ll need homeowner’s insurance. Insurance helps to protect you from financial risk, and a home is often a person’s biggest asset.

While researching the best policy, you’ll want to know what a given homeowner’s insurance plan covers, and just as importantly, what it doesn’t cover. Without insurance, you would have to repair or replace your home on your own if the need arises—which is why your mortgage servicer will likely require at least enough insurance to cover the mortgage balance, if not more.

Do you rent instead? We’ll also look at what renter’s insurance covers—and doesn’t—for your abode.

First, let’s review a few insurance-specific terms so you understand what you’re buying.

Insurance helps you manage risk; it can compensate you if your house is damaged or destroyed. Here are some key terms to know when buying insurance for your home:

The type of homeowner’s insurance policy you need depends on a number of factors, including your property, your possessions, where you live, and your home’s age. The Insurance Information Institute says the most popular policy is the HO-3, known as an “all risk” policy; it covers the home’s structure, your belongings, and personal liability if someone is hurt on your property. It offers the broadest coverage, protecting against 16 disasters or perils, including:

There are other types of homeowner’s policies. HO-2, known as a broad, or “named-perils” policy, protects your home and belongings from specific damage—but only from the perils listed in the policy. There’s also the HO-1 (also perils-based, and even more restrictive than the HO-2). Some states no longer allow the HO-1 because of all the exclusions.

Condominium owners can purchase an HO-6 policy, which covers belongings and the part of the dwelling that belongs to the condo owner and is part of the building. Condo owners are also covered by named perils. As a condo owner, you likely pay into a homeowners association (HOA), which, among other things, pays to insure the actual structure.

If you have a home mortgage, a home equity line of credit (HELOC), or another lien on your home’s equity, your lender will likely require that you have homeowner’s insurance. After all, they have a financial interest in protecting the money that they loaned you to buy the home. If you live in an area prone to flooding, lenders may also require you purchase flood insurance, which is often a separate policy from traditional homeowner’s insurance.

If you don’t have a mortgage or home equity loan, there is no legal obligation for you to have house insurance; however, if your home is damaged, you will pay for any repairs yourself. This is known as self-insuring.

All policies are tailored to you. Typically, house insurance helps to cover your dwelling, meaning the structure of the house, including the home’s foundation, its walls, and the roof. Depending on your policy, the dwelling may include other structures attached to the house, such as a garage or porch.

A homeowner’s policy is typically broken down into sections. The first section spells out coverages and amounts of insurance. You’ll likely see coverage explained in line items, with the coverage type and amount of insurance detailed. For example, the first section will include information about:

A subsection to the coverage information may include details about:

The second section spells out the deductibles and how much you’ll need to pay out of pocket if you file a claim. Section three details information and costs about other coverages, such as riders for jewelry or collectibles.

Section four may detail if your insurance offers any credits or discounts. Some common homeowner discounts include:

The last section will calculate the total policy premium cost, detailed by month, quarter, or annual price by adding up all the credits, discounts, optional coverage, and state taxes or surcharges, if applicable.

Read your policy carefully, especially when it comes to covered perils that are considered acts of God. Most severe weather impacts are considered acts of God, but not every storm impact is covered.

You may not own your home, but you may still need to get renter’s insurance, as some landlords require coverage.

Renter’s insurance usually includes coverage for:

Renter’s insurance doesn’t cover an apartment’s building or detached structures. Before buying renter’s insurance, take an inventory of your belongings to make sure you purchase enough coverage. Also, check to see if you may be covered by your parents’ policy.

House insurance (and renter’s insurance) covers a number of perils, but there are a few things it doesn’t:

You’re mandated to carry insurance if you have a mortgage or home equity loan. If you’re a renter, a landlord might not rent to you if you don’t have a policy.

Insurance helps protect you financially when disasters hit. However, different insurers will quote you different prices for coverage, and coverage may vary from year to year.

Insurers may also drop you from their coverage if you live in an area subject to high risks, such as wildfires or hurricanes. It pays to shop around and see what coverage you can get for various prices. Even if you’re not mandated to have insurance, you’ll need to weigh whether you can afford to replace your home and belongings from your own savings. It’s typically not worth the risk to go without protection.