Definition

As with all types of coverage, you pay a specified amount to an insurance carrier, and your insurance carrier will pay for damage or losses to your property. Your premium--or payment--can be affected by factors such as location, deductibles and prior claims.

Potential Risks

According to Financial Web.com, the average claim for exterior damage is $16,000, and the average interior damage claim is $4,000. The average annual premium as of 2007 in the United States was $822 according to the Insurance Information Institute.

Coverage

Homeowner's insurance policies cover both the structure and your personal possessions. You can purchase varying levels of coverage: actual cash value, replacement cost and guaranteed--or extended replacement--cost. The benefits and premium costs increase with each level of coverage.

Descriptions

If you opt for actual cash value, your policy will pay to replace the cost of your home and possessions less their depreciated value. With replacement cost coverage, you're paid for repair and/or replacement without a deduction for depreciation. A policy with guaranteed coverage is the most expensive, but pays to rebuild your home as it was prior to damage even if it exceeds the policy limit.

Requirements

You are not legally required by the government to have homeowner's insurance; however, your mortgage lender will probably require it to cover its potential loss. Once your mortgage is satisfied, you can drop your insurance, but according to the Insurance Information Institute, it's unwise to do so. You risk losing everything you've invested in your home should catastrophe strike.

Source:

FinancialWeb: What Are the Benefits of Homeowner's Insurance Worth?

Agency Info: Homeowner's Insurance

Insurance Information Institute: Homeowner's Insurance