How To Buy Homeowners Insurance: Homeowners Insurance Guide

Homeowners insurance (also known as home insurance) is a necessity, not a luxury. Not just because it protects your home and belongings from damage or theft. Almost all mortgage companies require borrowers to have insurance coverage for the full or fair value of a property (usually the purchase price) and will not make a loan or finance a residential real estate transaction unless proof of coverage is provided. Here is how to buy homeowners insurance.

How To Buy Homeowners Insurance: Homeowners Insurance Guide

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How To Buy Homeowners Insurance
How To Buy Homeowners Insurance

Because your home is most likely your most valuable asset, you should have enough insurance to replace it in the worst-case scenario. When shopping for homeowners insurance, you should avoid underinsuring yourself or signing with a company that cannot pay claims.

Many consumers, however, overlook the importance of adequate coverage and quality customer service in favor of the lowest possible rates. Homeowners Insurance Guide.

Meanwhile, you don’t even have to own a home to need insurance; many landlords require renters to have renter’s insurance. However, whether or not it is required, having this type of protection is prudent. We’ll go over the fundamentals of homeowners insurance policies.

Key Notes about how To Buy homeowners insurance-How To Buy Homeowners Insurance

  • Homeowners insurance policies typically cover destruction and damage to the interior and exterior of a home, as well as the loss or theft of personal belongings and personal liability for harm caused to others.
  • Actual cash value, replacement cost, and extended replacement cost/value are the three basic levels of coverage.
  • Policy rates are largely determined by the insurer’s risk that you will file a claim; this risk is assessed based on previous claim history associated with the home, the neighborhood, and the condition of the home.
  • Get quotes from at least five companies when shopping for a policy, and definitely check with any insurer you already work with—current clients often get better deals.

What is homeowners insurance?

How To Buy Homeowners Insurance
Homeowners Insurance Guide

Homeowners insurance protects you from financial disaster if you suffer a home-related loss or are sued for an injury on your property. It isn’t required by law, but it is required if you have a mortgage. Homeowners Insurance Guide.

In any case, according to Greg Pannhausen, Farmers Insurance’s head of countrywide homeowners products, it’s a good idea to financially protect your home and yourself with a homeowners insurance policy.

Your home and personal belongings are covered by standard homeowners insurance. It also provides liability coverage and additional living expenses if your home is rendered uninhabitable as a result of a loss.

Floods, earthquakes, wear and tear, and high-value jewelry or electronics are not covered by homeowners insurance. Coverage for these perils is available on an individual basis. How To Buy Homeowners Insurance.

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What a Homeowners Policy Offers

A homeowner’s insurance policy, while infinitely customizable, contains certain standard elements that specify what costs the insurer will cover. How To Buy Homeowners Insurance.

1. Damage to Your Home’s Interior or Exterior – How To Buy Homeowners Insurance

In the event of damage caused by fire, hurricanes, lightning, vandalism, or other covered disasters, your insurer will compensate you so that your home can be repaired or rebuilt. Destruction or mutilation caused by floods, earthquakes, or poor home maintenance is typically not covered, and you may need to purchase separate riders if you want that type of coverage.

Freestanding garages, sheds, and other structures on the property may also require separate coverage under the same guidelines as the main house.

Clothing, furniture, appliances, and the majority of your home’s other contents are covered if they are destroyed in an insured disaster. You can even get “off-premises” coverage, which means you can file a claim for lost jewelry anywhere in the world. However, there may be a cap on how much your insurer will reimburse you.

According to the Insurance Information Institute, most insurance companies will cover 50% to 70% of the amount of insurance you have on your home’s structure. For example, if your house is insured for $200,000, your possessions are covered up to $140,000 in value.

If you have a lot of high-priced possessions (fine art or antiques, fine jewelry, designer clothes), you may want to pay extra to put them on an itemized schedule, purchase a rider to cover them, or even purchase a separate policy to cover them.

2. Personal Liability for Injuries or Damage; How To Buy Homeowners Insurance

Liability insurance protects you from third-party lawsuits. This clause even applies to your pets! So, if your dog bites your neighbor, Doris, whether at your house or hers, your insurer will cover her medical expenses. Alternatively, if your child breaks her Ming vase, you can file a claim to compensate her.

And, just like if someone was injured on your property, if Doris slips on the broken vase pieces and successfully sues for pain and suffering or lost wages, you’ll be covered for that as well.

While policies can provide as little as $100,000 in coverage, the Insurance Information Institute recommends at least $300,000 in coverage. A few hundred dollars more in premiums can buy you an extra $1 million or more in coverage through an umbrella policy.

How To Buy Homeowners Insurance
How To Buy Homeowners Insurance

3. Hotel or house rental while your home is being rebuilt or repaired

It’s unlikely, but if you are forced to leave your home for an extended period of time, it will undoubtedly be the best insurance you have ever purchased. This section of insurance, known as additional living expenses, would reimburse you for rent, hotel rooms, restaurant meals, and other incidental costs incurred while waiting for your home to be habitable again. How To Buy Homeowners Insurance.

However, before booking a suite at the Ritz-Carlton and ordering caviar from room service, keep in mind that policies impose daily and total limits. Of course, if you’re willing to pay more for coverage, you can increase those daily limits.

Different Types of Homeowners Insurance Coverage

All insurance policies are not created equal. The cheapest homeowners insurance will almost certainly provide the least amount of coverage and vice versa. How To Buy Homeowners Insurance.

There are several types of homeowners insurance in the United States that have become industry standards; they are designated HO-1 through HO-8 and offer varying levels of protection depending on the needs of the homeowner and the type of residence being covered.

There are three distinct levels of coverage, viz:

1. Actual cash value: Homeowners Insurance Guide

After depreciation, the actual cash value covers the cost of the house plus the value of your belongings (i.e., how much the items are currently worth, not how much you paid for them).

2. Replacement cost

Replacement value policies cover the actual cash value of your home and possessions without depreciation, allowing you to repair or rebuild your home to its original value.

3. Guaranteed or extended Replacement cost/value

This comprehensive policy pays for whatever it costs to repair or rebuild your home, even if it exceeds your policy limit. Certain insurers provide extended replacement coverage, which means it provides more coverage than you purchased, but there is a cap; typically, it is 20% to 25% higher than the limit.

Some advisors believe that all homeowners should purchase guaranteed replacement value policies because you need enough insurance to rebuild your home, preferably at current prices, not just enough insurance to cover the value of your home (which probably will have risen since you purchased or built). How To Buy Homeowners Insurance.

“Often shoppers make the mistake of insuring [a house just] enough to cover the mortgage, but that usually equates to 90% of your home’s value,” says Adam Johnson, a home insurance product manager for policy comparison site “Due to a fluctuating market, it’s always a good idea to get coverage for more than your home is worth.”

Guaranteed replacement value policies absorb the increased replacement costs and provide a cushion to the homeowner if construction prices rise.

What Is Not Covered by Homeowners Insurance

While homeowner’s insurance typically covers the majority of loss scenarios, some events, such as natural disasters or other “acts of God,” and acts of war, are typically excluded from policies.

What if you live in a flood-prone or hurricane-prone area? Or perhaps an earthquake-prone area? You’ll need riders or an additional policy for earthquake or flood insurance. You can also add sewer and drain backup coverage, as well as identity recovery coverage, which reimburses you for expenses incurred as a result of identity theft.

What Factors Influence Homeowners Insurance Rates

So, what is the driving force behind interest rates? According to Noah J. Bank, vice president and insurance advisor at HUB International, it’s the insurer’s perceived “risk” that a homeowner will file a claim. In determining risk, home insurance companies take into account the homeowner’s previous home insurance claims, as well as claims related to that property and the homeowner’s credit. How To Buy Homeowners Insurance.

“Claim frequency and severity of the claim play a considerable role in determining rates, especially if there’s more than one claim relating to the same issue like water damage, wind storms, etc.,” Bank says.

While insurers are in business to pay claims, they are also in business to make money. Insuring a home that has had multiple claims in the last three to seven years, even if the claim was filed by a previous owner, can raise your home insurance premium to a higher pricing tier. According to Bank, you may not even be eligible for home insurance based on the number of recent past claims filed.

The neighborhood, crime rate, and availability of building materials will all play a role in determining rates. Of course, coverage options such as deductibles or additional riders for art, wine, jewelry, and so on—as well as the amount of coverage desired—all influence the size of an annual premium.

Home Insurance Quotes

What else affects your rates? How To Buy Homeowners Insurance

“Pricing and eligibility for home insurance can also vary depending on an insurer’s appetite for certain building construction, roof type, condition or age of the home, heating type (if an oil tank is on-premise or underground), the proximity to the coast, swimming pool, trampoline, security systems, and more,” says Bank.

“The condition of your home could also reduce a home insurance company’s interest in providing coverage,” says Bill Van Jura, an insurance planning consultant in Poughkeepsie, N.Y. “A home that’s not well-maintained increases the odds the insurer will pay on a claim for damage.”

Even the presence of a dog in your home can cause your home insurance rates to rise. Depending on the breed, some dogs can cause significant damage.

Tips for Reducing Insurance Costs-How To Buy Homeowners Insurance

While it is never a good idea to skimp on coverage, there are ways to reduce insurance premiums. Viz:

1. Maintain a security system: Homeowners Insurance Guide

A burglar alarm that is monitored by a central station or directly linked to a local police station can help reduce the homeowner’s annual premiums by 5% or more. To qualify for the discount, the homeowner must typically provide proof of central monitoring to the insurance company in the form of a bill or a contract.

Another important consideration is smoke alarms. While most modern homes have them, installing them in older homes can save the homeowner 10% or more on annual premiums. CO detectors, deadbolt locks, sprinkler systems, and even weatherproofing can help.

2. Raise your deductible-How To Buy Homeowners Insurance

The higher the deductible, as with health insurance or car insurance, the lower the annual premiums. However, choosing a high deductible means that claims/problems that typically cost only a few hundred dollars to fix, such as broken windows or damaged sheetrock from a leaking pipe, will almost certainly be absorbed by the homeowner. And these can quickly add up.

3. Look for multiple policy discounts-How To Buy Homeowners Insurance

Many insurance companies offer a 10% or higher discount to customers who have multiple insurance contracts under the same roof (such as auto or health insurance). Consider getting a quote from the same company that provides your homeowners insurance for other types of insurance. You could end up saving money on two premiums.

4. Make renovation plans ahead of time

Consider the materials that will be used if you plan to build an addition or an adjacent structure to your home. Because wood-framed structures are highly flammable, they typically cost more to insure. Structures made of cement or steel, on the other hand, will be less expensive because they are less likely to be destroyed by fire or adverse weather conditions.

Another factor that most homeowners should consider, but often do not, is the insurance costs associated with building a swimming pool. Pools and/or other potentially hazardous devices (such as trampolines) can increase annual insurance costs by 10% or more.

5. You should pay off your mortgage: Homeowners Insurance Guide

This is obviously easier said than done, but homeowners who own their homes outright will most likely see their premiums decrease. Why? The insurance company believes that if you own a place completely, you will take better care of it.

6. Conduct policy reviews and comparisons on a regular basis

Whatever the initial price, you should do some comparison shopping, including looking into group coverage options through credit or trade unions, employers, or association memberships. Even after purchasing a policy, investors should compare the costs of other insurance policies to their own at least once a year.

Furthermore, they should review their current policy and make note of any changes that may have occurred that could result in lower premiums. How To Buy Homeowners Insurance

Maybe you dismantled the trampoline, paid off the mortgage, or installed a sophisticated sprinkler system. If this is the case, simply notifying the insurance company of the change(s) and providing proof in the form of photos and/or receipts could result in significant savings in insurance premiums. “Some companies have credits for complete upgrades to plumbing, electric, heat, and roof,” says Van Jura.

How to Compare Home Insurance Companies

Best Homeowners Insurance Companies

Here’s a checklist of search and shopping tips to help you find an insurance carrier: How To Buy Homeowners Insurance

1. Compare statewide insurance costs and providers

When it comes to insurance, you want to make sure you are dealing with a legitimate and creditworthy provider. Your first step should be to visit the website of your state’s Department of Insurance to learn the rating for each home insurance company licensed to do business in your state, as well as any consumer complaints lodged against the insurance company.

The website should also include an average cost of home insurance in various counties and cities.

2. Conduct a company health check

Examine the ratings of potential home insurance companies on the websites of the top credit agencies (such as A.M. Best, Moody’s, J.D. Power, and Standard & Poor’s) as well as the National Association of Insurance Commissioners and Weiss Research.

These websites track consumer complaints against companies as well as general customer feedback, claim processing, and other information. In some cases, these websites rate a home insurance company’s financial health to determine whether or not the company can pay out claims.

3. Examine the claim response-How To Buy Homeowners Insurance

Following a significant loss, the burden of paying for repairs out of pocket while waiting for reimbursement from your insurer may place your family in a difficult financial position. A number of insurers are outsourcing core functions, such as claim processing.

Before you buy a policy, find out whether your claims will be handled by licensed adjusters or third-party call centers. “Your agent should be able to provide feedback on his or her experience with a carrier, as well as its market reputation,” says Mark Galante, president of field operations for the PURE Group of Insurance Companies.

“Look for a carrier with a proven track record of fair, timely settlements, and make sure to understand your insurer’s stance on holdback provisions, which is when an insurance company holds back a portion of their payment until a homeowner can prove that they started repairs.”

4. Get Multiple Insurance Quotes-How To Buy Homeowners Insurance

“Obtaining multiple quotes is important when looking for any type of insurance; however, it is especially important for homeowner’s insurance since coverage needs can vary so much,” says Eric Stauffer, former president of “Comparing several companies will yield the best overall results.”

How many quotes should you obtain? Five or so will give you a good idea of what people are offering and how much leverage you have in negotiations. However, before gathering quotes from other companies, request a price from insurers with whom you already have a relationship.

As previously stated, a carrier with whom you already do business (for your car, boat, etc.) may offer better rates because you are an existing customer.

Some businesses offer a special discount to seniors or people who work from home. The reasoning is that both of these groups are more likely to be on-premises, making the house less vulnerable to burglary.

5. Current Policyholder Satisfaction-How To Buy Homeowners Insurance

Every company will claim to provide excellent claims service. However, cut through the noise by inquiring about the insurer’s retention rate—that is, what percentage of policyholders renew each year—from your agent or a company representative. Many businesses report retention rates of 80% to 90%.

Annual reports, online reviews, and good old-fashioned testimonials from people you trust can also provide satisfaction information.

6. Look beyond the price: Homeowners Insurance Guide

The annual premium is frequently what drives the decision to purchase a home insurance policy, but don’t base your decision solely on price. “No two insurers use the same policy forms and endorsements, and policy wording can be very different,” says Bank. “Even when you think you’re comparing apples to apples, there’s usually more to it, so you need to compare coverages and limits.”

7. Talk to a Real Person-How To Buy Homeowners Insurance

Stauffer feels the best way to get quotes is to go directly to the insurance companies or speak to an independent agent who deals with multiple companies, as opposed to a traditional “captive” insurance agent or financial planner who works for just one home insurance company. Bear in mind, though, “a broker licensed to sell for multiple companies often attaches their own fees to policies and policy renewals. This could cost hundreds extra a year,” he notes.

Bank urges consumers to ask questions that give them a detailed sense of their options: “You want to consider different deductible scenarios to best weigh if it makes sense to opt for a higher deductible and self-insure,” he says.

Mistakes to avoid when shopping for home insurance

1. Choosing the cheapest policy

A homeowners insurance policy should protect you and cover the costs of rebuilding if necessary. Choosing the cheapest coverage, on the other hand, may result in insufficient coverage to completely cover a home-related loss. According to Pannhausen, your home will most likely be your largest expense and one of your top priorities after a loss.

Aside from your home and personal property, you may face financial hardship if you lack liability insurance and must pay for someone else’s medical bills and legal defense out of pocket.

2. Shopping only once a year/Not shopping annually

You are not required to choose just one insurance company. Every year, you can select a provider with lower rates for your coverage. Most companies will allow you to cancel your policy even if it is still in effect and will refund any unused premiums. Homeowners Insurance Guide.

Be aware of any cancellation fees your insurance provider may impose and, if applicable, notify your mortgage lender of your cancellation.

3. Not updating your coverage amounts on an annual basis

Your replacement cost may not be the same today as it was last year due to factors such as rising inflation. Make sure you update your insurance coverage on an annual basis to avoid gaps in coverage.

4. Incorrectly estimating the replacement cost of your home

Many customers base their replacement cost on the purchase price of their home, which may leave them underinsured. It is critical to obtain an accurate estimate of the cost of completely rebuilding your home. Consider new and expensive features, and be honest when discussing home improvements, advises Pannhausen.

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