Homeowners insurance not only covers your home, but your belongings, you and your family from lawsuits, and “loss of use,” which may cover hotel rooms, additional storage, and groceries/restaurant bills while your home is being repaired. While there’s no state or federal law that requires you to carry homeowners insurance, if you have a mortgage, your lender will likely require you to have a policy. If you live in an area that’s prone to natural disasters like earthquakes and floods, you may have to purchase additional coverage. If you own a condominium, your condo association may require homeowners insurance as well. In other words, if you’re a homeowner or you’re considering purchasing a home, chances are you’re going to need it. If you’re new to the process or need a refresher, this is a brief guide on how to buy homeowners insurance.
First and foremost, you’re going to want to get at least a few quotes to compare prices. According to the most recent data from the Insurance Information Institute, the average homeowners insurance premium in 2014 was $1,132. You can expect that your rates vary by where you live. In 2014, Florida had the highest average premiums ($2,005), while Oregon had the lowest ($574).
While price may be the biggest driver when buying homeowners insurance, you’ll also want to consider customer service. A homeowners claims can run from minor claims and repair, to being displaced while your home is inhabitable, so it makes sense to consider a carrier’s reputation in handling claims. Websites like the National Association of Insurance Commissioners (www.naic.org) has information regarding different insurers, as well as complaints.
(The NAIC has also compiled this quick and handy consumer’s guide to home insurance)
In addition to price and customer service, you’ll also want to research a carrier’s financial stability to ensure they can pay their claims. While all 50 states have protections in place for the consumer when their insurance company is having financial problems, resolution can be drawn out, which isn’t good when you’re in need of home repair. A.M Best and Standard and Poor’s are good places to start.
After you’ve selected a carrier and you’re purchasing a policy, you’ll want to understand the details of your policy and what it covers. From U.S. News personal finance, these are the most common levels of coverage:
HO-2 – Broad policy that protects against 16 perils that are named in the policy.
HO-3 – Broader policy that protects against all perils except those specifically excluded by the policy.
HO-5 – Premium policy that typically protects newer, well-maintained homes; it covers all perils except those excluded by the policy.
HO-6 – Insurance for co-ops/condominiums, which includes personal property coverage, liability coverage and coverage of improvements to the owner’s unit. Insurance for the actual structure usually comes through the association.
HO-7 – Similar to HO-6, but for mobile homes.
HO-8 – Specifically for older homes, with similar coverage to an HO-2 policy, though it only covers cash value.
Additionally, you’re going to want to understand your liability coverage in case someone gets hurt on your property. You’ll want to know the extent of your personal property coverage in relation to your estimated value of your personal property. You should understand the replacement cost (when insurance pays for the replacement of your dwelling) and if the amount is high enough to cover your home. Some policies give the Actual Cash Value, which provides for the current cash value of your dwelling or personal property. There’s also sub-limits, which caps a certain amount of coverage, such as personal property at 50% of dwelling coverage. And then, there are riders, which are additional coverages for specific items such as antiques, art, or jewelry.
To ensure you have the right amount of coverage, you may want to hire a homebuilder to walk through your home and give you an estimate of what it may cost to rebuild your home, then adjust your coverages accordingly. The bottom line is that each home has its own specific circumstance, and as a homeowner, you want to have an accurate accounting to make sure your coverages are adequate. If you live in an area that’s prone to natural disasters, you’ll want to make sure you have coverages specific to them (and your lender may require it, as well). Once you’ve narrowed down your choice of insurance carriers, speak with agents about your needs and their ability to tailor a policy that best suits you.
Additional Savings & Other Considerations
When buying homeowners insurance, there are opportunities to save on your annual premiums. One of the most common ways to save is by bundling multiple lines. By doing so, your carrier may extend a discount. One of the most common ways to save is by bundling your homeowners insurance with your auto insurance. A Consumer Report study shows that those who bundle their homeowners with their auto could save up to $235 in yearly premiums.
Another opportunity for savings is raising your deductible. By doing so, you’ll decrease your annual premiums, though in the event of a claim, you’ll be responsible for more money up front. However, many consumers don’t file homeowners claims for smaller claims, as doing so may raise premiums. A typical homeowner files one claim every ten years. Some recommend raising your deductible to the highest you can afford. Discuss this with your agent to determine what the difference in annual premiums will be, as well as considering your own financial situation and the ability to cover a higher deductible.
Another opportunity to save money is to reduce potential risks to your home. Your insurer may offer discounts for smoke detectors, burglar alarms, and dead-bolt locks. These discounts are typically worth 5%. Per Consumer Reports, more robust systems such as a sprinkler system that alerts first responders could result in a 15% to 20% discount. Fortifying your home against natural disasters, such as storm shutters, may also result in a discount. More information on that end can be found at www.disastersafety.org.
As previously discussed, many homeowners rarely file claims. If you have a low claims history and stay with the same insurer, they may also offer a loyalty discount. However, staying with the same carrier doesn’t necessarily mean that’s always the best option. We recommend periodically reviewing your coverages and the value of your possessions to a) re-evaluate if your policy is appropriate; and b) to determine if you’re able to get a better rate at a different insurer. It doesn’t hurt to compare quotes with other companies, and if the savings and level of customer service appeals to you, it may be beneficial to switch carriers.
If you understand the value of your possessions, the cost of repair and rebuilding your home, as well as some of the regional risk factors, you’ll be better prepared to buy a homeowners policy that will have the appropriate amount of coverage, as well as avoiding coverages which may not be applicable to your needs. Shop around and talk with different carriers regarding the coverages available, as well as discounts you might be eligible for. The more research and preparation you put into the front end of buying homeowners insurance, the better off you’ll be when it comes time to file a claim.