Homeowners insurance (also known as house insurance) is a necessity, not a luxury. Not just because it safeguards 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 (typically the purchase price) and will refuse to make a loan or finance a residential real estate transaction unless proof of coverage is provided.
You don’t even have to own a home to need insurance; many landlords insist on their tenants having renter’s insurance. Regardless of whether it is required or not, it is prudent to have this level of protection. We’ll go over the fundamentals of homeowner’s insurance policies.
What a Homeowner’s Policy Provides
A homeowner’s insurance policy has certain standard elements that specify what costs the insurer will cover, despite the fact that they are infinitely customizable.
Damage to the Interior or Exterior of Your House
Your insurer will compensate you if your house is damaged by fire, hurricanes, lightning, vandalism, or other covered disasters. Floods, earthquakes, and poor home maintenance are generally 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 require their own coverage, following 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 limit to how much your insurer will reimburse you. Most insurance companies, according to the Insurance Information Institute, will cover 50 percent to 70 percent of the amount of insurance you have on your home’s structure. 1
For example, if your house is insured for $200,000, your personal belongings are covered for up to $140,000.
If you have a lot of expensive items (fine art or antiques, fine jewelry, designer clothes), you may want to pay extra to have them itemized on your policy, purchase a rider to cover them, or even buy a separate policy.
Personal Liability for Property Damage or Personal Injuries
Liability insurance protects you from third-party lawsuits. This clause also applies to your pets! So, if your dog bites your neighbor, Doris, your insurer will cover her medical expenses, whether the bite occurs at your house or at hers. You can also file a claim to reimburse your child if she breaks her Ming vase. And if Doris slips on the broken vase pieces and sues for pain and suffering or lost wages, you’ll be covered as well, just like if someone was hurt on your property.
While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute. For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy
Rental of a hotel or a house While Your House Is Being Repaired or Built
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. Additional living expenses insurance reimburses you for rent, hotel rooms, restaurant meals, and other incidental costs incurred while waiting for your home to be habitable again. Keep in mind that policies impose strict daily and total limits before booking a suite at the Ritz-Carlton and ordering caviar from room service. Of course, if you’re willing to pay more for coverage, you can increase those daily limits.
Homeowners Insurance Comes in a Variety of Forms
There is no such thing as “universal” insurance. The cheapest homeowners insurance will almost certainly provide the smallest amount of coverage, and vice versa.
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 provide varying levels of protection depending on the needs of the homeowner and the type of residence covered.
There are three levels of coverage in general.
Actual cash value
After depreciation, 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)
Replacement cost
Replacement value policies cover the actual cash value of your home and belongings without depreciation, allowing you to repair or rebuild your home to its original condition.
Guaranteed (or extended) replacement cost/value
This inflation-buffer policy is the most comprehensive, paying for whatever it costs to repair or rebuild your home, even if it exceeds your policy limit. Certain insurers offer an extended replacement, which provides more coverage than you purchased but with a cap; typically, the cap is 20% to 25% higher than the limit.
Some experts believe that all homeowners should purchase guaranteed replacement value policies because you don’t just need enough insurance to cover the value of your home; you also need enough insurance to rebuild it at current prices (which probably will have risen since you purchased or built). “Many shoppers make the mistake of insuring [a house] just enough to cover the mortgage,” says Adam Johnson, a home insurance product manager for policy comparison site QuoteWizard.com. “Given the ebb and flow of the market, it’s always a good idea to insure your home for more than it’s worth.” Guaranteed replacement value policies absorb the increased replacement costs and provide a cushion for the homeowner if construction costs rise.
What Doesn’t Homeowners Insurance Cover?
While most scenarios where a loss could occur are covered by homeowner’s insurance, some events are typically excluded from policies, such as natural disasters or other “acts of God,” as well as acts of war.
What if you live in an area prone to flooding or hurricanes? Or perhaps an earthquake-prone region? For these, you’ll need riders or an additional policy for earthquake or flood insurance. You can also add on sewer and drain backup coverage, as well as identity recovery coverage, which reimburses you for expenses incurred as a result of identity theft.
How Are Homeowners Insurance Rates Determined?
So, what is the force that drives rates? It’s the likelihood of a homeowner filing a claim—the insurer’s perceived “risk,” according to Noah J. Bank, a vice president and insurance advisor at HUB International. And, 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. “Claim frequency and severity play a significant role in determining rates,” Bank says, especially if there are multiple claims relating to the same issue, such as water damage or wind storms.
Insurers are in the business to make money as well as pay claims. Even if a previous owner filed the claim, insuring a home that has had multiple claims in the last three to seven years can push your home insurance premium into a higher pricing tier. Based on the number of recent past claims filed, you may not even be eligible for home insurance, according to Bank.
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 added riders for art, wine, jewelry, and other valuables—as well as the amount of coverage desired—influence the size of an annual premium.
“Home insurance pricing and eligibility 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), proximity to the coast, swimming pool, trampoline, security systems, and more,” according to Bank.
What other factors influence your rates? According to Bill Van Jura, an insurance planning consultant in Poughkeepsie, N.Y., “the condition of your home could also reduce a home insurance company’s interest in providing coverage.” “A home that isn’t well-maintained increases the chances of an insurer paying on a damage claim.” Even having a dog in the house can increase your home insurance premiums. Depending on the breed, some dogs can cause a lot of damage.
Insurance Savings Suggestions
While it’s never a good idea to skimp on coverage, there are ways to save money on insurance.
Keep a security system in place.
A burglar alarm that is monitored by a central station or linked directly to a local police station can help homeowners save up to 5% on their annual insurance premiums. 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 item is smoke alarms. Although they are standard in most modern homes, installing them in older homes can save the homeowner 10% or more on annual insurance premiums. CO detectors, deadbolt locks, sprinkler systems, and weatherproofing can all help.
Increase your deductible amount.
The higher the deductible, similar to 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 resolve—such as broken windows or sheetrock damage from a leaking pipe—will almost certainly be absorbed by the homeowner. And all of these things can add up.
Look for discounts on multiple policies.
Customers who have other insurance contracts under the same roof often get a 10% or more discount from their insurance company (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 might be able to save money on two premiums.
Renovations should be planned in advance.
Consider the materials you’ll use if you’re planning to build an addition or an adjacent structure to your home. Because wood-framed structures are highly flammable, they usually cost more to insure. Cement or steel-framed structures, on the other hand, will be less expensive because they are less likely to be destroyed by fire or adverse weather.
Another factor that most homeowners should consider, but rarely do, is the cost of insurance associated with constructing a swimming pool. In fact, pools and/or other potentially dangerous devices (such as trampolines) can increase annual insurance costs by 10% or more.
Get your mortgage paid off.
Obviously, this is easier said than done, but homeowners who own their homes outright will almost certainly see a reduction in their insurance premiums. Why? The insurance company believes that if you own a place completely, you will take better care of it.
Review and compare policies on a regular basis.
You should do some comparison shopping regardless of the initial price you’re given, including checking for 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. They should also review their current policy and note any changes that may have occurred that could result in lower premiums.
Perhaps you dismantled the trampoline, paid off your 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 photographs and/or receipts may result in a significant reduction in insurance premiums. “Some companies have credits for complete plumbing, electric, heating, and roofing upgrades,” Van Jura explains.
Make periodic assessments of your most valuable possessions to see if you have enough coverage to replace them. “Many consumers are under-insured with the contents portion of their policy because they have not done a home inventory and added the total value to compare with what the policy is covering,” says John Bodrozic, co-founder of HomeZada, a home maintenance app.
Also, keep an eye out for changes in the neighborhood that could lower rates. Installing a fire hydrant within 100 feet of a home, or constructing a fire substation close to the property, for example, may result in lower premiums.
How to Evaluate Home Insurance Providers
Here’s a list of search and shopping tips to help you find an insurance carrier.
1. Compare costs and insurers across the state
When it comes to insurance, you want to make sure you’re dealing with a reputable and trustworthy company. Your first step should be to go to the website of your state’s Department of Insurance to find out how each home insurance company licensed to do business in your state is rated, as well as any consumer complaints filed against the company. A typical average cost of home insurance in various counties and cities should also be available on the site.
2. Conduct a health check on your company.
Examine the websites of the top credit agencies (such as A.M. Best, Moody’s, J.D. Power, Standard & Poor’s) as well as the National Association of Insurance Commissioners and Weiss Research for the scores of home insurance companies you’re considering. These websites keep track of consumer complaints as well as general customer feedback, claim processing, and other information. These websites may also rate a home insurance company’s financial health in order to determine whether it is able to pay claims.
3. Examine the claimant’s response
Following a significant loss, the cost of repairing your home out of pocket while waiting for reimbursement from your insurer may put your family in a financial bind. A number of insurers are outsourcing core functions, such as claim processing.
Find out whether your claims will be handled by licensed adjusters or third-party call centers before purchasing a policy. Mark Galante, president of field operations for the PURE Group of Insurance Companies, says, “Your agent should be able to provide feedback on his or her experience with a carrier, as well as its market reputation.” “Look for a carrier with a track record of timely, fair settlements, and be sure to understand your insurer’s position on holdback provisions, which are when an insurance company withholds a portion of their payment until a homeowner can prove that repairs were started.”
4. Policyholder Satisfaction Currently
Every company will claim to provide excellent claims service. Ask your agent or a company representative about the insurer’s retention rate, or what percentage of policyholders renew each year, to cut through the clutter. Many companies claim to have retention rates of between 80% and 90%. Annual reports, online reviews, and good old-fashioned testimonials from people you trust can also provide information on customer satisfaction.
5. Obtain Multiple Estimates
“When looking for any type of insurance, getting multiple quotes is essential; however, getting multiple quotes for homeowner’s insurance is especially important because coverage needs can vary so much.” “Former president of ExpertInsuranceReviews.com, Eric Stauffer, says “The best overall results will come from comparing several companies.”
How many quotes do you think you should get? Five or so will give you a good idea of what people are offering and how much negotiating power you have. However, before getting quotes from other companies, ask for a quote 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 be able to offer you better rates because you’re a repeat customer.
Seniors and people who work from home may be eligible for a special discount from some businesses. The rationale is that both of these groups are more likely to be on-premises, making the house less vulnerable to burglary.
6. Consider factors other than price.
The annual premium is often the deciding factor in whether or not to purchase a home insurance policy, but don’t base your decision solely on cost. “No two insurers use the same policy forms and endorsements, and policy wording can differ dramatically,” Bank says. “Even when you think you’re comparing apples to apples, there’s almost always more to it, so compare coverages and limits.”
7. Speak with a Live Person
Instead of using a traditional “captive” agent, Stauffer believes that going directly to the insurance companies or speaking with an independent agent who deals with multiple companies is the best way to get quotes “Working for a single home insurance company as an insurance agent or financial planner. “A broker licensed to sell for multiple companies frequently attaches their own fees to policies and policy renewals,” keep in mind. “This could add up to hundreds of dollars per year,” he says.
Bank advises customers to ask detailed questions about their options: “You should consider different deductible scenarios to best weigh whether it makes sense to opt for a higher deductible and self-insure,” he says.
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