How to Buy Homeowners Insurance

The average American homeowner spends more than $1,200 a year on homeowners insurance.

That’s about $100 a month, year after year, for a product most of us will never use. It makes sense to find the lowest rates possible.

But get this: The average homeowners insurance claim pays about $16,000 to fix damage caused by wind, fire, hail, lightning, and other perils.

If you needed to use your policy, you’d want a company that would come through for you. The $50 or $100 you’d saved on premiums this year wouldn’t matter anymore if the policy wouldn’t pay your large claim.

We’ll explore ways to build the best homeowners coverage below. But here are four things to consider when shopping for a new policy:

When to Shop for Homeowners Insurance:

Many people buy home insurance when they buy a house and never shop for it again. But many factors can influence the cost of your homeowners insurance policy. If you have installed a home security system, changed marital status, performed a remodel or (in some states) done something as simple as buying or selling a car or paying down your credit card — it might be the right time to shop for home insurance again.

What Type of Home Insurance Coverage to Buy:

As you shop, consider choosing “replacement cost coverage” instead of “market value coverage” for your policy.

What’s the difference?

  • Replacement cost coverage can restore your home to its original condition, even if the repairs exceed the market value of your home.
  • Market value coverage (also called actual cash value) factors in changes in property values and construction costs which could lower your claim’s payout. Your policy would protect the dollar value of your investment but not necessarily the integrity of your home.

What Type of Home Insurance Deductible to Choose:

A higher deductible can lower your premium, but you’d have to pay more out of pocket to unlock your policy’s coverage. Since claims will likely impact the cost of your future coverage, lower deductibles may not save you money in the long run. So many insurance shoppers choose higher deductibles and plan to handle smaller issues that may come up “out of pocket.”

Bundle Your Home and Auto Insurance to Save Money:

Consider buying extra coverage for catastrophes not typically covered by standard home insurance policies.

Standard policies won’t cover damage from earthquakes and floods, for example. If you live in an area prone to these perils, consider paying more for this coverage.

Many insurance carriers will also offer lower rates if you bundle your home insurance policy with your auto insurance.

Why Homeowners Insurance Is So Important

Insurance, generally and as a rule, is a trade-off,” said attorney Etienne Font of Merlin Law Group. Font has three decades of experience handling claim litigation for homeowners insurance.

“You have to determine if the amount of the premium is worth handing the risk over to the other side or if it’s better to keep it.

Font also points out it’s up to you, the consumer, to find an insurer you can trust to accept your risk.

And risk is out there: With natural disasters on the rise — from wildfires in California to hurricanes and flooding in the Southeast — choosing the right home insurance company to protect your investment has become even more important.

How to Choose the Best Home Insurance Company

As you already know, there’s more to finding the best homeowners insurance than finding the cheapest premiums.

You might save $100 a year on premiums but then lose tens of thousands of dollars if your coverage excluded the very peril that just damaged your home.

There are certain policies that just have very strange exclusions,” said Font, the insurance attorney we interviewed. “It’s important to ask for an itemized policy statement so you know how that exclusion may affect you and if you should invest in additional coverage.

It’s also essential to comparison shop. Insurance companies price risk differently and don’t necessarily offer the same discounts across the board — you could get a better rate by switching carriers.

According to the latest research from Statista, 53 % of homeowners don’t shop around for insurance. Even more alarming: About 60 percent of homeowners have underinsured homes.

Yes, comparing insurers and policy options can be time-consuming, but it can pay off big in the long run, especially after you’ve suffered extensive property damage.

While there’s more to the decision, you can start comparison shopping by understanding the different types of homeowners insurance options and what they cover.

Hundreds of companies offer home insurance so we’ve compiled a list of factors to consider as you shop: consumer satisfaction, financial strength ratings, claims processing, and coverage options. These are among the factors we considered when creating our seven best list.

Regardless of which company you choose, read through your homeowners insurance policy carefully to understand your coverage and exclusions.

While this might sound like a simple and unnecessary step, many homeowners have had claims denied after a disaster. Save yourself this trouble and understand your policy before you need to use it.

Coverage Options

Homeowners insurance exists to protect your home investment from losses caused by natural disasters, accidents, fire, and theft.

Most standard policies include four essential types of coverage:

  • Dwelling: This central component of your policy covers your home — the wood, stone, concrete, brick structure itself — and anything that’s attached or integrated such as pipes, electrical wires, and major systems.
  • Personal Belongings: This part of your coverage protects items unattached to your home including furniture, small appliances, electronics, and books.
  • Additional Living Expenses (ALE): You’d use this part of your policy to pay for a hotel or apartment — and possibly meals — while contractors repaired your damaged dwelling.
  • Liability Protection: If a visitor to your home got injured and successfully sued you for damages, this protection could prevent losing your property to a court order.

Some policies allow you to protect tenants if you rent out part of your home. Others let you ramp up your personal belongings coverage to include jewelry or other high value items.

For our list, we considered companies with a wide variety of coverage options and protections for total losses and losses exceeding coverage limits. We also looked at add-on coverage options for events such as flooding and discounts for bundling policies.

Claims Processing

An ideal homeowners policy should insulate you from any out-0f-pocket expenses to cover damages or loss.

For this reason, we prioritized insurance companies with a solid overall track record of getting back to their clients quickly as well as companies with hassle-free, 24-hour claims processing.

Solid Financial Standing

With climate catastrophes becoming more common, it’s especially important to seek insurance companies that can weather the storm.

A company with a strong financial outlook should let you avoid headaches like delayed claim payouts down the road.

That’s also why we prioritized insurance marketplaces that work only with financially sound companies — those with high A.M. Best ratings and solid reputations with the National Association of Insurance Commissioners (NAIC).

Consumer Satisfaction

You should feel at home with your insurance company. That includes being informed, getting updated during the claims process, and being treated fairly during a claim settlement.

We checked different consumer review websites such as the National Association of Insurance Commissioners (NAIC) to find out how well companies serve existing customers.

It’s a good sign when organizations answer customer reviews online; it shows they value their clients’ feedback and overall satisfaction.

You can’t always take individual complaints at face value, but customer reviews can help you identify complaint patterns before you decide to commit to a policy or company.

Types of Home Insurance Policies

You’ll see terms like “HO-2” or “HO-3” thrown around when shopping for home insurance.

These terms refer to the different forms of home insurance policies available today. These brief descriptions can help you know which kind of coverage to buy:

Spoiler-alert: Most homeowners will get HO-3 coverage.

HO-1 Insurance

This most basic insurance protects your property against named perils. If the peril isn’t named in your policy, your policy won’t cover it.

Typically, these plans protect you against damage caused by:

  • fire or smoke
  • lightning
  • hail
  • wind
  • theft
  • vandalism
  • explosions
  • vehicles colliding with your home
  • aircraft crashing onto your property
  • riots
  • volcanoes

HO-2 Insurance

HO-2 coverage is still a named-peril policy, but it names more perils, protecting your property from a broader array of problems.

In addition to the HO-1 named perils, HO-2 typically adds damage from:

  • the weight of wintry precipitation
  • falling objects
  • electrical surges
  • water damage from an accidental overflow
  • some kinds of spontaneous accidental materials destruction

HO-3 Insurance

Most homeowners have HO-3 coverage which offers an open-peril plan. This means your coverage would protect you against all perils unless your policy’s language specifically excludes the peril.

Earthquakes and floods will commonly be exclusions. Before signing policy documents, make sure you’ve read and understood your policy’s exclusions.

HO-4 Insurance

This is insurance-speak for a renter’s insurance policy. Renter’s policies protect personal belongings and may add in some coverage for additional living expenses and liability. They do not cover the property itself.

HO-5 Insurance

An HO-5 form policy offers an open-peril approach like an HO-3 form. But an HO-5 tends to be even more comprehensive and also more expensive.

HO-6 Insurance

This coverage, designed specifically for condos, stresses personal belongings and liability but limits dwelling coverage since condo owners normally don’t hold full responsibility for maintaining their structures.

HO-7 Insurance

This coverage behaves like an HO-3 form but has specific adjustments for mobile home owners.

HO-8 Insurance

Historic homes whose value lies partly in their unique and hard-to-replicate charm can benefit from this form which resembles an HO-3 but with adjustments to better serve owners of older homes.

Get a Replacement Cost Estimate for Your Home

Do you want Actual Cash Value (ACV) or Replacement Cost Value (RCV) coverage?

The answer could make a huge difference if you had to file a claim.

  • Actual Cash Value: Your insurance provider will pay your claims after subtracting an amount based on the age and condition of your home or personal property (depreciation). Your payout will not exceed the market value of your home.
  • Replacement Cost: Your insurer will pay the repair or replacement cost of your home or property — without subtracting depreciation costs — using the same kind and quality of materials. Even if repairs exceed the worth of your home, you can claim enough cash to complete them.

You can save on premiums with actual cash value coverage but the payouts on claims may not replace all your lost items or repair all damages sustained.

Replacement cost coverage costs more up front but the payouts will be higher as well, allowing you to cover most if not all expenses for lost or damaged items.

With either style of coverage, knowing the replacement cost of your home and its contents can help you decide how much coverage to buy.

To estimate your replacement costs, do the math yourself, use an online calculator, or hire a professional appraiser.

Take Inventory of Your Belongings

Guessing how much insurance you need can be risky. Instead, take an inventory of your belongings and have a ballpark figure of how much insurance you need as you compare policies.

A home inventory doesn’t have to take all week. Apps like MyStuff or BluePlum Home Inventory can quickly create an itemized list of your possessions.

The Allstate app’s Digital Locker feature allows you to take a quick inventory of your household items. From there, you can estimate each item’s value, so you know how much coverage to buy.

Filing a claim will be much easier when you have an inventory.

Decide How Much Insurance You Need

A quote for standard home insurance is just that: the price you’d pay for a standard policy.

There’s a good chance you’ll need to boost your coverage depending on your home’s individual needs. You can purchase optional add-on insurance, also known as endorsements or riders, to help cover needs specific to your situation.

For example, if you keep expensive items like jewelry, artwork, photography equipment, or antiques in your home, you might need coverage beyond a standard policy’s maximum.

Other common endorsements include coverage against sewer backups, home-based business coverage, and inflation riders that gradually boost the coverage limit over time.

If you’re having trouble estimating your insurance needs an agent could help you find the right level of coverage and the best add-ons.

Consider Additional Coverage for Weather-Related Catastrophes

Your local area can tell you a lot about your insurance needs. Most standard policies cover losses from hail damage and wildfires — but fixing damage from flooding and earthquakes will need extra coverage.

If you live in an earthquake- or flood-prone area, extra coverage for these disasters could be a game-changer for you.

Anything could go wrong when you least expect it,” said José Gandia, a Puerto Rico-based independent insurance broker with over 20 years of experience.

It doesn’t matter if you own your house or if you’re still financing it. It’s always a good idea to consider additional insurance to cover a natural disaster or events out of human control [commonly known in the insurance industry as ‘acts of god’].

“In Puerto Rico, many homeowners had paid off their properties and thought that since they sustained a category 5 hurricane, they were in the clear. They didn’t, however, anticipate the devastating damage an earthquake could have.”

Flood insurance is also good to consider, even if you don’t live in a flood plain. According to the Federal Emergency Management Agency (FEMA), over 20 percent of flood claims come from areas not deemed high risk.

Flood insurance works differently from most other home insurance policies: It’s purchased separately through the government’s National Flood Insurance Program. You could still buy it through a broker.

Identify Potential Risks and Take Steps to Reduce Them

Most insurance companies offer discounts to homeowners who take steps to reduce the risk of property damage or loss. Something as simple as installing a home security system or smoke detectors can qualify you for a discount. Evaluate potential risks in your home and neighborhood and take steps to reduce them.

And let your insurance company know about upgrades such as a new roof or new electrical wires. You’ll likely qualify for a discount when you do.

Shop for Quotes

When you know what kind and how much coverage you need, you can shop around for quotes confidently and know you’re making apples-to-apples comparisons.

There are several ways you could go about this.

  • The Direct Approach: You can check with each company directly. Though time consuming, this is useful because you might be better able to customize your quote.
  • Quicker Comparing: You can also use an insurance marketplace to easily compare multiple policies at once. But the marketplace will show quotes for standard home insurance policies without the additional options you may need for full protection.
  • Calling in Help: Another option is to make an appointment with an insurance broker. This might seem more expensive because of the broker’s commission, but the broker may find you better rates. Brokers can also help you figure out exactly how much insurance you need so you can buy just the right amount — which is an often-overlooked avenue for savings.

Choose a Home Insurance Policy Provider

Now it’s time to make the decision. You’ve already compared quotes for your specific needs and filtered out companies with inadequate coverage.

So now you have earned the freedom to choose the cheapest option if you want. However, if other aspects are important to you, make sure to take these into account.

For example, if you’d rather work with a local company or if you value customer service above all else, you may be willing to pay a little more for these features.

Font also says not to rely solely on the information provided by insurance agents as their recommendations could be self-serving.

They will only tell you what they think will sell you,” said Font. “You should ask for the policy or copy of a standard policy they would issue for your property. They should be able to provide that, and if they don’t – then what are they hiding, right?

Choose Your Deductible

One of the last decisions you’ll make can have the biggest effect on your premiums and your ability to file a claim: Where should you set your deductible?

Before your insurance company would kick in to repair the damage or replace something, you’d have to pay your part — your deductible.

For example, if a fallen tree does $10,000 worth of damage to your house and your deductible is $500, you’ll need to pay that $500 before your insurance pays the remaining $9,500.

Higher deductibles lower premiums. We advise choosing the highest deductible you could afford. This will save you money on your premium and keep you from being stuck in a difficult financial situation if you needed to file a claim.

And try to keep that deductible tucked away in a savings account you don’t use for everyday expenses. That way, you’ll be less tempted to spend it, it’ll earn interest, and you’ll have the money if you need it.

Review Your Home Insurance Policy Annually

We also recommend looking at your home insurance policy at least once a year to make sure you’re still fully covered. Your insurance needs might change over time as your circumstances change and evolve.

For example, if you’ve made substantial changes such as remodeling the kitchen or a bathroom, check with your insurer to make sure your coverage still fits your home.

Similarly, if you’ve recently taken up an expensive new hobby such as woodworking or photography, make sure your policy covers the new equipment in your home.

Shopping for home insurance doesn’t have to be daunting. A little homework ahead of time — along with learning how to reduce risks and having a clear idea of the amount of coverage you’ll need — will help you choose the insurance company and policy that best fits your needs. Also, if you’re looking for more ways to save on your premium, a home security system is worth adding. Most home insurance companies tend to give discounts if you have a security system in place.

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