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- Ensure your coverage type and limits are of equal footing across the insurers whose quotes you’re comparing.
- Avoid the impulse to choose the lowest premium if the policy does not completely cover you.
- Update your coverage and shop insurance companies annually to get the best value at the lowest rate.
Your home is probably the most expensive thing your own, and you want to have enough insurance to replace it in a worst-case scenario. Being underinsured, or signing with a company that can’t pay claims, are mistakes you should avoid at all costs when shopping for homeowners insurance. However, many consumers overlook the importance of adequate coverage and quality customer service and instead focus on the lowest rates.
It is important to do your due diligence to find an insurer you trust and purchase coverage that fits your needs. By shopping around, you get the right coverage at a competitively priced premium. We’ll take you step by step through what you need to know to do that.
What is homeowners insurance?
Homeowners insurance protects you from financial hardship if you experience a home-related loss or get sued for an injury on your property. It isn’t required by law but is mandatory if you have a mortgage. In any case, it is a good idea to financially safeguard your home and yourself with a homeowners insurance policy, says Greg Pannhausen, head of countrywide homeowners product at Farmers Insurance.
Standard homeowners insurance protects your dwelling and personal belongings. It also offers liability coverage and additional living expenses if your home is inhabitable due to a loss. Homeowners insurance will not cover floods, earthquakes, wear and tear, and high-valued jewelry or electronics. Coverage for those perils is available separately.
The table below illustrates what a standard homeowners insurance includes and does not include:
|
Coverage |
Included with homeowners insurance? |
|
Dwelling/Structure |
Yes |
|
Personal liability |
Yes |
|
Personal belongings |
Yes |
|
Loss of Use (additional living expenses) |
Yes |
|
High-end electronics/special jewelry |
Limited, requires add-on* |
|
Equipment breakdown |
Yes |
|
Electrical outage |
Yes* |
|
Service lines |
Yes* |
|
Cyber liability |
Yes* |
|
Water damage |
Yes |
|
Flood |
No** |
|
Wind or hail |
Yes, but not high winds*** |
|
Earthquake |
No* |
|
Pets |
Yes* |
* Available as add-on coverage if not part of the policy.
** Available through the National Flood Insurance Program and approved insurers.
*** Windstorm rider may be required in hurricane or tornado areas.
When purchasing homeowners insurance, ensure your coverage limits are sufficient. Most insurers offer three levels: actual cash value coverage, replacement cash coverage, and guaranteed or extended cash coverage.
Actual cash value coverage covers your property and belongings at their depreciated value. For instance, if your television is stolen, you will get compensated for its value minus depreciation. Actual cash value is the cheapest policy option.
With replacement cash value coverage, your insurer will compensate you to replace your dwelling or personal belongings at their initial cost. For instance, if a fire damages your kitchen, the company will pay you to replace the items inside your kitchen and the kitchen structure with the same material or material of similar value, minus your deductible.
Guaranteed cash coverage or extended cash coverage is an endorsement to protect you against inflation, which can quickly drive up the cost of materials and construction. Therefore, your replacement cost may not be enough when you need it. An inflation guard add-on will automatically cover up to 125% of your homeowners policy, ensuring you’re always protected. This endorsement is usually available at an extra charge.
7 steps to getting the right homeowners insurance
Step 1: Figure out what you need covered
Start by determining the replacement cost of your home, the total value of your personal belongings, and the total value of your assets. You also want to consider covering additional structures such as garages or sheds and purchasing flood or earthquake insurance if you live in a high-risk area.
Step 2: Calculate how much coverage you need
Calculate the replacement cost of your dwelling: Local construction cost and you’re home’s size are two of the most significant factors affecting your home’s replacement cost, according to the Insurance Information Institute (III). Factors such as your home’s exterior and interior construction materials or other special features on your property like garages or a pool will also determine how much coverage you’ll need.
There are several ways to estimate your dwelling’s replacement cost. You can either get an estimate from your insurer or use a third-party replacement cost calculator. You can also hire an in-person appraiser, which may be more costly, or you can do it yourself by multiplying your local construction cost by the square footage of your home. Use multiple methods to get the most accurate replacement cost, which will ensure you’re covered entirely.
Perform a home inventory of your personal belongings: Creating a detailed list of your possessions will help you assess how much you’ll need in homeowners insurance. After recording your home’s inventory, consider whether you’d like to insure your personal property for its actual value or replacement cost coverage.
Take note of expensive items like jewelry or expensive electronics. If your inventory includes things that require more coverage, consider purchasing a personal property floater or endorsement.
Determine how much additional living expense insurance you’ll need: Most policies cover you if you need to make alternative living arrangements while rebuilding your home after a claim. According to the III, the cost to pay for living expenses during repairs amounts to 20% of the home’s replacement cost. Check with your insurer as additional living expense limits vary with each provider. You can increase this coverage at an extra charge.
Determine how much liability insurance you’ll need: You should purchase enough liability insurance to cover your assets. Most homeowners insurance policies have a minimum of $100,000, but consider having at least $300,000 to $500,000 of coverage, says the III. If that’s not enough to cover your assets, consider purchasing an umbrella or excess liability coverage.
Step 3: Have your personal information and your home’s information
Having your personal and home’s information on hand can help you expedite gathering home insurance quotes.
- Personal information: Name, date of birth, marital status, and contact information
- Basic information about your home: Address, how long you’ve lived in your there, what type of home you reside in and if it’s your primary residence, if there’s a mortgage on the property, the year it was built, square footage, number of bedrooms/bathrooms, number of stories
- How your home was built: Material your building, exterior wall, and roof are made out of, heating or cooling systems, and the type of foundation and construction your home has
- Safety: How far your home is from the nearest fire station and fire hydrant, if you have home safety systems
- If you need extra coverage: Jewelry and high-end electronics, pets, swimming pools, or trampolines if you operate a business in your home
Step 4: Gather and compare home insurance quotes
The III recommends gathering quotes from at least three different companies. To begin your search, ask friends and relatives for recommendations. You can also contact your state insurance department to provide you with rates and complaint ratios of major insurers.
To compare quotes, know what’s going into your policy’s coverage to make the best apples-to-apples comparison. A standard homeowners insurance will include dwelling, personal belongings, liability protection, and additional living expenses coverage. Ensure any additional coverage you opt to purchase is included in your quote.
You also want to check that your deductibles and coverage amounts are equal across all your quotes. A deductible is an amount you have to pay before your insurance provider delivers your claim. The lower your deductible is, the higher your premiums will be. Additionally, it’s necessary to ensure your coverage amounts are the same across the board. You don’t want to end up underinsured if you need to rebuild your home, replace your personal property, or get sued for accidents that occur on your property.
Step 5 : Look into discounts you qualify for
While it is important not to overlook your coverage for a lower rate on your homeowners insurance premiums, there are still ways to reduce your costs. Here are some of the popular discounts homeowners insurance offer.
- Multi-policy discounts: Receive a discount for bundling your homeowners insurance policy with another insurance product, usually auto insurance.
- New home/new home buyer discounts: If you’re a new home buyer or just purchased a newly constructed home, you may qualify for a discount. What qualifies as a “new home” varies among insurance companies.
- Automatic, pay-in-full, electronic funds transfer, paperless discount: Get a discount for choosing a payment type.
- Claims-free discount: Receive a discount for having a clean record with your homeowners insurance.
- Loyalty discount: Your provider may offer a discount for being insured with them for a consecutive number of years.
- Home safety discount: You may be eligible for a discount if you have devices like burglar alarms or smoke detectors installed.
- Smoke-free discount: Non-smokers can get a discount for having a smoke-free household.
- Home improvement discount: Get a discount for upgrading your roof, electrical, heating, and plumbing systems to improve the quality of your home.
Step 6: Research the trustworthiness of each company
To ensure you get the best value, research the trustworthiness of an insurance provider. An insurer’s financial strength, rated by independent agencies, can help you determine if it can compensate you for a claim when you need it. AM Best assigns insurance companies letter grades from A+ to F. If a company is rated anything below a B, it is not financially stable and cannot pay claims reliably.
You can also check a company’s trustworthiness by looking at customer satisfaction. J.D. Power’s home insurance customer satisfaction survey ranks major insurance companies based on a 1,000-point scale.
Step 7: Finalize and purchase your policy
Once you’ve selected the right policy for you, ensure all your information is correct before signing. Note that your insurance company may require a home inspection to make sure your application’s replacement cost coverage and property information is accurate.
You also want to know how you will be paying your insurance premiums. You will usually pay your insurance premiums to your homeowners insurance provider or mortgage lender. You’ll pay your premiums in full or in recurring payments through your homeowners insurance company. If you have a mortgage lender, you may have to pay premiums with your monthly mortgage payment through an escrow account.
Finally, you’ll have to choose your policy’s date. If you are purchasing a new policy, notify your mortgage lender.
4 mistakes to avoid when shopping for home insurance
1. Choosing the cheapest policy
A homeowners insurance should protect you and cover your costs if you need to rebuild. However, choosing the cheapest coverage might mean you won’t have enough to cover a home-related loss entirely. Your home will probably be your largest expense and one of your main priorities after a loss, says Pannhausen. Aside from your dwelling and personal property, you also may take a financial hit if you lack liability protection and have to pay for someone else’s medical bills and your legal defense out-of-pocket.
2. Not updating your coverage amounts annually
Due to factors like rising inflation, your replacement cost may not be the same today as last year. Ensure you are updating your coverage annually so that you won’t have any gaps in your insurance coverage.
3. Not shopping annually
You don’t have to settle for one insurance company. You can choose a provider with better rates for your coverage every year. Most companies will allow you to cancel your policy even during your period term and will return unused premiums. Be aware of cancellation fees your insurance provider might require you to opt out and notify your mortgage lender of your cancellation if applicable.
4. Improperly estimating replacement cost
Many customers will choose their replacement cost based on the price they paid for their home, which may leave them underinsured. It is vital to get an accurate estimate of how much it would take to rebuild your home completely. Consider new and expensive features and be honest when discussing the improvements you made to your home, says Pannhausen.
How much does homeowners insurance cost?
Insurers look at your home’s size, the year it was built, quality of construction materials, location and its risk, special features on your property, and more to determine your home insurance premiums, says Pannhausen. They also look to see if you’re eligible for home safety discounts or multi-policy discounts.
Your homeowners insurance premiums will vary on your unique situation, so it’s good to get an estimate online or speak to a homeowners insurance agent. According to 2019 data from the III, the average cost of HOI premiums was $1,272.
You want to ensure you have enough to avoid going into extreme debt and experiencing financial hardship. Pannhausen says to ask yourself one question when purchasing homeowners insurance.
“If my home and everything in it is destroyed tomorrow, could I afford having to start over from scratch?”
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