Although homeowners insurance is not a legal requirement, it’s often required by lenders as part of the mortgage contract. Even if you own your house outright, the coverage homeowners insurance provides protects you from experiencing the full weight of financial loss if your home or belongings are damaged or destroyed. If you can’t afford to rebuild your home if it were a total loss, it’s wise to buy homeowners insurance.
Purchasing home insurance can be overwhelming, however, because of the many considerations before you can buy it. This guide can help you understand how to buy homeowners insurance, including valuable savings tips that can ensure you get the right amount of coverage to protect your largest asset.
What Does Homeowners Insurance Cover?
Homeowners insurance covers you against perils, which are circumstances or events that cause damage or loss to your home or belongings. Homeowners insurance will also cover you if you cause injuries to other parties. Here are the standard homeowners insurance coverages you can expect to find when shopping for home insurance.
Dwelling Coverage
Dwelling coverage applies to the structure of your home, including items attached to the home. Interior attachments include cabinets and doors, and exterior attachments are structures directly attached to the dwelling, such as a garage or breezeway.
Other Structures Coverage
Other structures coverage is for any structures or buildings on your property that aren’t directly attached to your home. This may include a garage, shed, pool, fence, or other outbuilding.
This coverage is usually included automatically and is a percentage of your dwelling coverage, typically 10 percent. If you need more coverage, you may be able to increase this coverage independently, without affecting your dwelling or other coverages.
Personal Property Coverage
Also called belongings coverage, personal property coverage covers all your stuff, like your clothes and shoes, kitchenware, appliances, furniture, and electronics. Valuable items, such as jewelry, fine arts, silverware, and goldware may have specific coverage limits that are lower than the value of your items. In this case, the company may allow you to increase to the coverage limit you need or offer a separate scheduled personal property policy.
Many standard homeowners insurance policies provide coverage on either an actual cash value basis, or depreciated value. Depending on the company, you can pay extra for replacement cost coverage, which will replace your items at today’s cost, rather than depreciation based on age and condition.
Personal Liability Coverage
Personal liability coverage protects you if you injure a guest or someone not living in your household. It also covers you if you are sued or found liable for another party’s injuries or property damage. The coverage extends to your pets if they bite someone, though certain types of pets and dog breeds may be excluded with some insurance carriers.
If you’re worried about your liability exposure, you can increase your policy from the base limit of $100,000. The highest amount available depends on the company. You can also buy a separate personal umbrella policy, which will apply to both your home and car if you exhaust your liability limits on either policy from a covered claim.
Guest Medical Payments Coverage
If someone who doesn’t live in your household gets injured while on your property, guest medical payments will pay for their medical expenses. This coverage typically comes with a low limit in the base policy, like $1,000, but you can increase the limit for an additional premium.
Loss of Use
Also called additional living expenses, or ALE, loss of use pays for you to stay somewhere else temporarily if your home is uninhabitable after a covered loss while it’s being repaired or rebuilt. Depending on the insurance company, this coverage may also pay for relocation, food, gas, pet boarding expenses, and other incidentals. There is a limit on how much you can claim, and you may be limited to a daily amount.
What Isn't Covered by Homeowners Insurance?
While your homeowners insurance covers many things, there are some perils you’ll find aren't covered by homeowners insurance. The events that occur to cause damage to your home or property depends on if you’re covered by homeowners insurance.
For instance, your home is covered under an open perils policy. This means if it’s not excluded in the policy contract, it’s included or covered. However, your belongings are only covered under a named peril policy. This means the opposite – if it’s not specifically named as a peril, it’s not covered.
Named perils include:
- Ash or smoke
- Damage caused by vehicles or aircraft
- Damage from power surges
- Explosions
- Falling objects
- Fire or lightning
- Freezing of household systems (plumbing, HVAC, etc.)
- Riots
- Theft
- Vandalism
- Volcanic eruptions
- Weight of ice, sleet, or snow
- Windstorms or hail
Certain risks, like earthquakes and sinkholes, are not covered unless you purchase an endorsement, or add-on, to your homeowners insurance policy. In some states, like California, you can buy a separate earthquake policy. You may also want to consider backup of sewer or drains, also called water backup or sump pump overflow coverage, as damage caused by backed up sewers, drains, or an overflowing sump pump otherwise wouldn’t be covered.
Flood is also not covered by homeowners insurance. If your area has a history of floods or overflowing bodies of water, you won’t be covered unless you purchase a separate flood insurance policy. Some insurance companies offer flood insurance through the National Flood Insurance Program (NFIP) by FEMA.
How Much Homeowners Insurance Coverage Do I Need?
Determining how much homeowners insurance coverage you need can take some work. You’ll need to identify how much it could take to rebuild your home if it were a total loss. This is not the same as the market value of your home, which includes the land value.
Luckily, this is something you don’t need to figure out on your own. Insurance companies have valuation tools they use to calculate the replacement cost of your home based on characteristics like its age, structure type, number of levels, age of household appliances, roof materials, and square footage.
For your belongings, you’ll have to come up with the coverage amount yourself. In the basic policy, the personal belongings coverage will typically be a percentage of your dwelling coverage by default. If that amount doesn’t cover everything, you can increase it. To determine the worth of all your stuff, create an inventory to help with the valuation.
Actual Cash Value vs Replacement Cost
When determining your homeowners insurance coverage needs, it’s also important to understand the differences in settlement value. If you don’t pick the right type of coverage, you could miss out on compensation when you file a claim.
Most homeowners policies will cover the dwelling with replacement cost, but belongings with actual cash value. Replacement cost will repair or replace the home or belongings without factoring in depreciation, while actual cash value factors in depreciation.
You may also be offered extended or guaranteed replacement cost on the home. While this type of policy costs more, it provides greater protection if your home is badly damaged or a total loss.
An extended replacement cost policy will pay over the dwelling coverage limit by a percentage, usually 20% or greater. This will cover any increases in costs, such as labor and materials in your area. A guaranteed replacement cost policy will pay the cost to repair or rebuild your home back to its quality prior to the loss, regardless of cost.
How to Choose a Homeowners Insurance Company
There are several things to consider when choosing a homeowners insurance company.
If you want to manage your policies online or through a mobile app, choose a company with these features and check reviews for user experience. You should also consider a company’s customer satisfaction scores and financial strength. J.D. Power releases annual studies showing customer satisfaction for home insurance and property claims satisfaction. You can also check third-party rating companies, such as YouGov and Trustpilot, for consumer reviews.
The company’s financial strength shows how well a carrier can meet future financial obligations, like paying for claims. There are several third-party agencies that classify insurance companies:
- A.M. Best
- Fitch Ratings
- Kroll Bond Rating Agency (KBRA)
- Moody’s
- Standard & Poor’s (S&P)
Another resource is the National Association of Insurance Commissioners. The NAIC receives complaints reported by state insurance departments, with an index calculated for each insurer. The higher the index, the more complaints filed against that insurance company.
Asking friends, family, and colleagues about their experience with insurance companies is another great way to narrow down your choices. You can use their experiences as a policyholder and claimant to determine which company best treats their customers and handles the claims process.
How to Compare Home Insurance Companies and Quotes
Whether you’re set on a particular home insurance company or still deciding, it’s a good idea to compare quotes.
Get at Least Three Quotes
Many companies offer online quotes, but you can also get them over the phone or in-person by speaking to a local agent. It’s recommended to get at least three quotes from different companies to compare.
This way, you can not only compare pricing, but also coverage limits, add-ons and endorsement options. When you do this, it’s best to first compare the same coverages, or do an “apples-to-apples” comparison, so you can get a true sense of each company’s premium.
Consider an Independent Agent versus a Captive Agent
An independent agent, or broker, works with multiple carriers and can get several quotes for you from different companies at the same time. They can make the quoting process faster and easier. A captive agent only works for one company, like State Farm, for example. If you work with a captive agent, you will have to get the other quotes yourself to compare.
Pay Attention to Deductibles
Also, pay attention to deductibles because they can be different for every company. For example, one company may offer one deductible for all covered perils, while others may have a separate deductible for wind and hail, which is usually a percentage of your dwelling coverage. Though you may get a lower premium with this carrier, you would be out-of-pocket a higher amount if you file this type of claim.
Don’t Forget About Additional Coverages
If you want additional coverages, like increased limits on valuable items or water backup coverage, don’t forget to include those in your quote. You may also want to ask about optional coverages, which can help you decide which insurance company best fits your needs.
How to Lower Homeowners Insurance Premiums
There are several ways you can lower homeowners insurance premiums to get the best rate on your coverage besides comparing quotes.
Bundle Your Home and Auto
Not only does insuring both your home and auto with the same company make it easier to keep manage, it also can help you lower your homeowners insurance premiums. The percentage savings varies by carrier, but can save you 15% or more.
Protect Your Home
The more disaster-resistant you make the home, the less risk you have of filing a claim. Since the insurance company sees you as less of an insurance risk, they pass some savings onto you with discounts. This can include installing an impact-resistant roof, hurricane shutters, water shutoff system, a whole house surge protector, fire alarm, burglar alarm, or interior sprinkler system.
Increase Your Deductible
Raising your deductible can lower your premium, but you’ll have more out-of-pocket costs when you file a claim. If you do this, make sure you can pay the higher deductible, or the savings may not be worth it.
Ask About Discounts
Each carrier has its own set of discounts, and many can be stacked together to maximize your savings. Ask about available discounts to see how many you’re eligible for to lower your homeowners insurance premium.
Avoid Filing Claims
Although home insurance is there to help you repair or replace your property, you don’t want to file claims frequently. Insurance is based on risk, and if you file too many claims, especially small ones, the company can cancel you.
Having a higher deductible can not only save you on premium, it can also keep you from filing small claims.
Only Buy the Coverage You Need
If you’re a risk-averse person, you may think more coverage is better. But if you buy high limits, you don’t need coverage that you won’t use, you're wasting money on premiums. Do an annual review of your policy and possessions to see if you need to increase, decrease, or delete coverage.
How Long Does It Take to Get Homeowners Insurance?
Typically, it doesn’t take long to get homeowners insurance coverage in place. You can go from getting a quote to securing a policy in one day, if you’ve done your homework and know what coverages you need and details about your home. However, normal turnaround time is up to three days.
If you want to get coverage fast, be prepared to provide information about you and your home:
- Your full name
- Date of birth
- Property address
- How many people are living in your home
- Your spouse’s name and date of birth
- What date coverage should start
- How much coverage you need
- If there is any business conducted on the premises (home business, daycare, etc.)
- The home’s age
- Safety features (deadbolts, alarm systems, sprinklers, etc.)
- Building characteristics (year built, square footage, roof age, etc.)
- Any additional coverages or endorsements you want
Even if the policy is made effective the same day you get a quote, it still has to go through underwriting. There may be a home inspection, where someone from the insurance company or a third-party vendor comes out to verify the home details are accurate and take photos. The insurance company may make coverage or rate adjustments to reflect their findings.
How Are Homeowners Insurance Rates Determined?
Homeowners insurance companies use several factors to determine rates for coverage, some personal and some based on your location.
Frequency of Claims Filed
Your personal claims history and the home’s past claims history if you’re a new owner are used to determine homeowners insurance rates. Although insurers are there to pay claims, they also need to make money, so they don’t want to insure risky properties or people.
If there are many claims filed in the last few years, you will probably pay a higher premium, even if a previous owner filed it. If there are too many claims, the insurance company may think it’s too risky and choose not to insure the property at all.
Location
Home insurance rates are based on the location of the home. The home’s proximity to the coast, crime rates in the ZIP code and frequency of natural disasters in the area can affect premiums. Material and labor costs also factor into insurance ratings. The higher the cost of labor and materials in your area, the more you could pay for homeowners insurance.
Home Characteristics
Not only will your home’s characteristics play a part in your homeowners insurance rates, it can also affect your eligibility for coverage. The older your home is, the more you could pay for insurance, especially if there haven’t been recent updates. If you live in an historic home, you may pay higher rates or need a special policy to cover the older structure.
A well-maintained home can lower your rates, and a home left in disrepair will increase them. If you have a pool or other “attractive nuisance,” as they’re called in the insurance industry, expect to pay higher premiums — and have a case for higher liability limits.
Your Credit Score
Your credit can also affect your homeowners insurance rates, except in Maryland and Massachusetts.
An insurance-based credit score differs from your financial credit score. Insurance credit scores focus mainly on how you manage your money, like paying bills on time and avoiding collections. The more responsible you are with your money, the higher your insurance-based credit score should be. Studies have shown that a low credit score correlates to higher claims frequency, which is another reason your insurance credit score can affect your homeowners insurance premium.