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First-Time Home Buyer's Guide
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Chapter 6
Understanding Homeowners Insurance
5 min read

Understanding Homeowners Insurance Coverage

You have a lot to consider in the pursuit of finding your first home, which is why it can be easy to gloss over something like your home insurance options. But choosing homeowners insurance is actually one of the most important steps in the home buying process. Many first time homeowners choose a policy without doing enough research, but one of the smartest things you can do as a new homeowner is understand how to protect it.

Take a look at what you need to know about homeowners insurance.

What Is Homeowners Insurance?

Homeowners insurance is protection for your home that helps cover repairs or replacements to your home's structure, belongings and even covers you if you're liable for injury to another person or damage to their property.

Do You Need Homeowners Insurance Before Closing?

Yes. Most mortgage lenders require that a buyer has homeowners insurance before they purchase a home. They’ll request proof of insurance before they agree to closing. This is because they want to make sure their investment is protected, since they’ll technically own the title of the home until you pay off the mortgage. So unless you’re paying in cash, you’ll need home insurance before closing.

The Basics of Homeowners Insurance

There’s a lot to know about homeowners insurance, but learning about it doesn’t have to be complicated or time consuming. We’ll start with the basics about what you need to know before buying a home insurance policy.

How Does Homeowners Insurance Work?

Home insurance is financial protection that covers damages to the interior and exterior of your home and your personal property. It also includes liability protection for you and your family members. It’s designed so you’ll have the funds to return your home and possessions, or additional structures on the property, back to normal if your home faces damage covered by your policy.

What Makes up a Homeowners Insurance Policy?

Although homeowners insurance isn’t required by law, typically your mortgage lender will require you to have it. Here’s a high-level look at the main components of homeowners insurance: property coverage, liability coverage and other coverage options.

Property Coverage

From fires and storms to vandalism and burglaries, property insurance helps you recover from accidental damage or destruction to your home and its contents. In the event you need to repair, rebuild or replace what’s damaged or lost, homeowners insurance helps cover the costs, so you aren’t stuck paying everything out of pocket.


There are four basic categories of property coverage:

Dwelling protection

Dwelling coverage provides protection in the event your home and attached structures are damaged.

Coverage of other structures on your property

Other structures coverage covers damage to stand-alone structures like fences, toolsheds or detached garages.

Personal property coverage

Personal property coverage pays for the cost of repairing or replacing belongings that are stolen or damaged.

Loss of use coverage

Loss of use coverage helps with additional living expenses, including hotel costs and meals, in the case you have to temporarily relocate while repairs are made.

Like all insurance policies, your homeowners policy includes limitations on certain types of property, as well as a deductible — which is the amount you pay for each claim before the insurance kicks in.

Liability Coverage

Let’s say an accident occurs on your property — a visitor is injured after slipping on your icy sidewalk, or you’re cutting down a tree and it falls on your neighbor’s brand new car. Liability coverage helps financially protect you from paying expensive damages for which you are legally liable.

Optional Coverage

For extra coverage and peace of mind, you can add optional coverage to your homeowners policy. Some optional coverages are itemized personal property, which covers things like jewelry, fine art and musical instruments. Other available options include coverage for identity theft, home day care, home office, equipment breakdownservice line coverage and more. Talk with your insurance agent to decide which coverage works best for your home.

Want to find out about more ways to protect your new home? Keep reading to learn about all your options for homeowners insurance coverage

Compare the main components of homeowners insurance

  • Dwelling Protection

    Commonly Covers:

    • Fire
    • Wind
    • Hail
    • Lightning
    • Smoke
    • Explosion
    • Vandalism
    • Theft
    • Falling objects


    Dwelling Protection

    Provides protection in the event your home and attached structures are damaged.

  • Personal Property

    Commonly Covers:

    • Fire & Smoke
    • Lightning
    • Smoke
    • Theft
    • Explosion
    • Windstorm
    • Wildfire


    Personal Property

    Pays for the cost of repairing or replacing belongings that are stolen or damaged.
  • Other Structures

    Commonly Covers:

    • Detached garages
    • Gazebos
    • Sheds
    • Swimming pools
    • Fences


    Other Structures

    Covers damage to stand-alone structures on your property.

  • Loss of Coverage

    Commonly Covers:

    • Temporary living arrangements, like a hotel or apartment
    • Increased food expenses, like restaurant meals
    • Storage costs for household items


    Loss of Use Coverage

    Helps with additional living expenses in the event you have to temporarily relocate while repairs are made

  • Liability Coverage

    Commonly Covers:

    • Injuries on your property
    • Negligent acts of children or others
    • Accidental damage to someone else’s property
    • Dog bites


    Liability Coverage

    Helps protect you from paying expensive damage for which you are legally liable.

  • Umbrella Coverage

    Commonly Covers:

    • Bodily injury liability
    • Property damage liability
    • Personal injury offenses
    • Landlord liability
    • Defense costs



    Umbrella Coverage

    Provides an additional layer of liability coverage above your policy limit.

  • Itemized Personal Property

    Commonly Covers:

    • Jewelry
    • Fine art
    • Musical instruments
    • Furs
    • Collectibles


    Itemized Personal Property

    Extra coverage that allows you to add on protection for specific valuables.

  • Additional Coverages

    • Identity theft
    • Home day care
    • Home business
    • Matching siding
    • Equipment breakdown
    • Sump pumps
    • Much more!


    Additional Coverages

    Here are some other, unique coverages you might be interested in.

    How Much Insurance Do You Need for Your Home?

    There are a number of factors your insurance agent will look at in order to help you create a customized policy that’s specific to your needs. They’ll consider things like the cost to rebuild your home, your home’s age, your claims history and recreational additions, like a trampoline or swimming pool.

    It’s important to have enough protection to cover the costs of rebuilding your home and replacing your possessions in the event of the unexpected.  

    How High Should You Set Your Deductible?

    When considering how much you want to pay, keep in mind you’ll be required to pay a deductible if you file a claim. As previously noted, the deductible is the amount you’ll pay out of pocket before your insurance company steps in. The lower your deductible, the higher your premium. You’ll want to choose a deductible that you are financially comfortable with in the event of a loss. Your agent can help you decide upon the best approach, depending on your situation and budget.

    Saving Money on Homeowners Insurance

    If you’re looking to save money on homeowners insurance, talk to your agent about the many available discounts. For example, we offer a discount for bundling policies, like home and auto insurance. You could also get a lower rate for having a home security system or smart home technology like Ring.

    Head to our homeowners insurance discounts to learn if you’re eligible to save on your home insurance with American Family Insurance.

    Need More Information About Homeowners Insurance?

    Reach out to an American Family Insurance agent to find the best coverage for your home and needs. They’ll help you create a customized policy that works hard all year round to protect your home and lifestyle. If you’d like to take the first step in insuring your home, get a home insurance quote online.

    More Chapters in This Guide

    Closing on a house is an exciting yet hectic time, but don't worry. Our closing day checklist and tips can help you succeed. Learn more from American Family.
    Congratulations! You’ve closed on your home and can start making it your own. But there are a few final steps you’ll need to take. Use the following resources to make your transition into your new home as smooth as possible.
    Not sure where to start when buying a home? Our first time home buyer guide explains what you need to know about buying your first home. Learn more today!
    Buying a home for the first time? Our first-time home buyer guide explains the process of buying your first home, step by step. Read more today!
    Buying a house but confused by financing? Learn about the different types of home loans and mortgages with our first-time home buyer guide.
    Starting to shop for homes but don’t know where to start? Learn about what to look for when buying a house so you can find the perfect home for your needs.
    Found the home of your dreams and want to place an offer? Read our tips for making an offer on a house and learn how much to offer to stay competitive in the market.

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