How to Buy Homeowners Insurance

If you own a home, you probably have insurance. Did you research how to buy homeowners insurance before you picked your policy? Have you read your insurance policy? Most of us spend less than an hour searching for the cheapest homeowner insurance available. That might be good for a few years but you might be sorry when you have a home emergency and learn what your insurance doesn’t cover.

Why You Need to Buy Homeowners Insurance

Buying a house is a huge investment. Buying homeowners insurance protects your home and belongings from theft, fire, accidents and certain types of weather. It provides you with peace of mind knowing if there’s an emergency, you’ll have enough money to replace what was lost or damaged.

There’s another reason why you need to buy homeowners insurance. Anyone financing their home is required by the lender to have adequate insurance coverage to cover the amount loaned (but not necessarily your equity). You can’t close on a new house without insurance. If you let coverage lapse, the mortgage company has the right to purchase insurance which you’ll ultimately pay for. That’s why most lenders use an escrow account and require you to pay for insurance and property taxes monthly, along with your mortgage payment.

When to Buy (and Renew) Your Homeowners Insurance

Lenders will require you to buy homeowners insurance and have the policy in effect at the time you close on your new house. Insurance is only optional if you’re paying cash and willing to accept the risk, which international buyers seem more comfortable doing … or maybe they aren’t familiar with homeowners insurance? Things will be chaotic leading up to you’re closing so it’s better to shop for insurance right after you finish all your home inspections and other lender requirements.

Please don’t file and forget about your home insurance policy. Once you’ve gotten through your first 60 to 90 days in your new home (read: 30 New Homeowner Tips You Don’t Want to Skip), make time to read your insurance policy. You don’t want to wrestle with a cap on mold like I did after my house flooded and the water mitigation company failed to dry my house quickly.

{quote]”In 2010, the average annual cost of homeowners insurance was $909. As of 2020, ValuePenguin analysts estimate that the average costs of home insurance is $1,445 – an increase of 59%“[/quote]

While most mortgage payments are fixed, property taxes and homeowner insurance costs typically go up year after year. Annual increases range from less than one percent to more than six percent depending on where you live (table with state increases from 2019 to 2020). That’s why you want to shop around for more reasonable insurance costs every two to three years.

Identifying What Your Home Insurance Policy Should Cover

There’s a saying “you get what you pay for” and that’s true when it comes to buying homeowners insurance. Never forget that insurance companies are in business to make a profit for their shareholders. They’re able to do this by writing policies that reduce their risk so a cheaper policy means more exclusions and/or caps on how much they’ll pay for when you’ve got a legitimate insurance claim.

The most common insurance coverage for single family homes (condos, mobile homes and renters have different policies) includes the following.

• Damage to your home’s exterior and interior from fires, lightning and other named disasters. Different policies cover named perils or all perils minus a list of exclusions.
• Coverage for additional structures such as a fence, freestanding garage or gazebo. Check for limits on this coverage as it’s often a percentage of your dwelling coverage and you might need to increase your policy’s coverage amount.
• Personal property coverage typically protects belongings regardless of where they’re kept: in the house, detached garage or your car. Coverage is typically a percentage of your dwelling coverage.
• Personal liability insurance coverage covers visitors who have an accident on your property, like falling down the stairs. It doesn’t cover the people who live in the house. Here’s more detail from Allstate on homeowner liability coverage.
• Additional living expenses (called loss of use by the insurance industry) are covered when the damage to your home prevents you from living there.

Insurance coverage that’s not typically covered by homeowners insurance. This reminds me of the day our California realtor showed us swaths of empty land between rows of houses. He explained the houses were damaged beyond repair after an earthquake and offered to check Federal Emergency Management Agency (FEMA) earthquake hazard maps for us.

• Damage from certain perils such as wind, floods or earthquakes may require a separate rider or policy specific to that peril. Flood insurance is a good example.
• Unusual local problems like sinkholes need research. According to the Insurance Information Institute (III), small sinkholes are common in seven states. In Florida, homeowners insurance companies must provide catastrophic ground cover collapse coverage but comprehensive coverage is optional.
• Pools require extra consideration. Coverage for pool repairs may be included but you might need extra liability coverage. The insurance company will want you to follow local laws and for safety, install a fence around the pool (review the Insurance Information Institute (III) article on Pool Safety and Insurance).
• Do you have any attractive nuisances such as a treehouse or trampoline (read: Backyard Fun & Homeowner Insurance)? There are different types of coverage for these:
  • No exclusions means your homeowners insurance policy has no restrictions against these features on your property.
  • Exclusions means your policy explicitly states they’re excluded from coverage. Most insurance companies won’t cover trampolines as the risk is too high.
  • Coverage with safety precautions is another option where an insurance company will cover a home feature provided you put safety precautions in place. Examples are a fence to limit access to a pool and removing a ladder used to access a treehouse.
• Personal property losses can be reimbursed in one of two ways, depending on decisions you made when buying homeowners insurance.
  • Actual cash value pays you the current value minus depreciation. A ten year old television that cost $2,000 may only be worth $400 after depreciation.
  • Replacement cost value pays you the current market price for that television, or $2,000 to replace your TV.
• Jewelry may be one of the most valuable items you own after your house. It’s fragile and can easily be stolen so it has more risk than most of your personal belongings. If you have valuable jewelry, you need to research adding an endorsement to your homeowners policy or a separate jewelry insurance policy.
• Expensive electronics have limited coverage through the typical homeowners insurance policy. Damage must be caused by a covered peril and then there’s usually a $1,500 limit which won’t cover much today. You’ll want to read this Guide to Insuring Valuables with Homeowners Insurance, to learn what options you have.
• Home-based businesses will likely need additional insurance, as a typical homeowners policy only provides $2,500 coverage for business equipment. You can add one/more endorsements to raise this coverage up to $10,000, in $2,500 increments according to the Insurance Information Institute (III).

Factors that Influence the Cost of Homeowners Insurance

Insurance costs vary significantly from state-to-state. States with the highest risk, those in Tornado Alley and along the Gulf Coast, have the highest insurance costs. While the map above shows relatively low costs for those living on the west coast, consider how all the recent wildfires will affect their homeowners insurance in future years.

Here are the most common factors that affect what you’ll pay when buying homeowners insurance.

• Your home’s location will play a major role, considering potential exposure to natural disasters such as storms and wild fires. Remember you’ll need additional insurance policies for flood and/or earthquake insurance:
  • Hurricane insurance is offered by the Federal Emergency Management Agency (FEMA) and sold through your homeowners insurance company.
  • Earthquake insurance is offered by the state of California.
• Neighborhood fire protection rating (how close your home is to a fire station) can also affect your insurance.
• Your home’s value is a key factor in calculating your homeowner insurance premium. Here’s how insurance companies look at your home:
  • Your home’s value and age, as insurance companies know that older homes have more risk as things like your roof and heating systems age.
  • Cost to rebuild your home if it was completely destroyed. This includes local construction costs (labor and materials like lumber), building regulations and more.
  • Additional risks on your property such as a swimming pool, guest house or an aggressive dog breed.
• Your financial profile also plays a role when you buy homeowners insurance:
  • An insurance score (insurance credit score) is used by insurance companies to project the likelihood you’ll file an insurance claim while under coverage. The score is based on your credit score and insurance claim history.
  • Claims history helps insurance companies identify homeowners most likely to submit a claim. They can also look at neighborhood claims where there are concerns about local problems like vandalism.

Learning How to Buy Homeowner Insurance

Most homeowners don’t spend much time researching homeowner insurance. We buy homeowners insurance because it’s required by the lender but don’t think we’ll ever need to use this insurance. That’s where you’re … wrong!

The Insurance Information Institute (III) analyzes insurance costs and claims extensively. Their statistics (supporting data here) demonstrate that over 20 years, you can expect to submit a claim (or two) against your homeowners insurance.

• Roughly 1 in 20 insured homes will have a claim each year.
• Roughly 1 in 40 insured homes will have a claim related to wind or hail each year.
• Roughly 1 in 50 homes will have a claim caused by water damage or freezing each year.
• Roughly 1 in 350 insured homes will have a claim related to fire and lightning.
• Roughly 1 in 400 insured homes will have a claim due to theft each year.
• Roughly 1 in 900 homeowners will have a liability claim to cover lawsuits for bodily injury or property damage where the policyholder or a family member is responsible.

So how do you buy homeowners insurance? You start with the value of your home which should reflect the cost to rebuild the house. You can (and sometimes should) adjust this value to reflect the insurance coverage you need:

• Decrease house value to subtract land value, typically 20% of house value.
• Increase house value to reflect planned improvements like remodeling the kitchen, bathrooms or updating flooring.

The dwelling value is used to set insurance coverage for everything else. If you don’t have any structures in your yard, you probably won’t care that coverage for “other structures” is 20% of dwelling coverage. You may want to increase coverage for personal property, and if you have a pool, you’ll probably want more liability coverage (see what liability insurance covers).

You should get at least three quotes when buying your homeowner insurance. Go ahead and start with some insurance quotes online but try to meet with at least one agent to get all your questions answered. My personal challenge is finding an experienced insurance agent who truly understands how the industry operates, including the claims process.

That’s because most insurance agents are strictly sales agents and seldom get involved in the claims process, although my Allstate agent in New Hampshire was really helpful. As I’m not your typical homeowner (are you?), I prefer working with people who have expertise and are willing to share information.

Here are the steps to follow when you’re ready to buy homeowners insurance:

• Pick the insurance companies you want to compare, starting with customer satisfaction via JD Powers’s Home Insurance Study. Independent agents don’t work for an insurance company so they can help you compare policies from different companies.
• Prepare the information needed to compare insurance quotes:
  • Details on how you use your home – primary or second home? home office use? renting out a room or the entire house?
  • Property history and liability questions – pets? pool? trampoline or tree house?
  • Coverage you want using the chart below plus tips shared earlier in this article.
  • Special requirements from … your lender, prior insurance policies and prior insurance inspection reports.
  • An estimate of the full rebuild cost of your home from an appraiser, remodeler or your team of home support contractors.
• Compare quotes and pick the policy that meets all your requirements.
• Review your policy details and finalize things like policy effective date, deductibles and how premiums will be paid.
• Prepare for a home inspection – if you’re a new customer, have an older home or if replacement costs are difficult to determine. New homes don’t typically need an inspection although in New Hampshire, my insurance agent had to take exterior photos before the closing.

Do You Need Extra Homeowners Insurance?

Thought you were done? Well … take a few more minutes to review homeowner coverage that might not be part of your homeowners policy.

• Do you need flood or earthquake insurance? Both of these are typically separate policies. Or you might want to learn how to identify houses with a flood (earthquake) risk during your home buying process.
• Consider common riders or endorsements you might want for expanded coverage, especially where the standard caps are too low. For example, business equipment is often just $2,500 and that’s not adequate for most home offices today (see insurance.com’s expanded list):
  • Equipment breakdown coverage – for the repair or replacement of appliances and systems such as your HVAC, water heater and possibly computers.
  • Home business endorsement – to cover business property and legal liability.
  • Identity theft – is often available for an extra fee to cover the legal costs (and time) to address identity theft or fraud.
  • Mold and fungus coverage – is sadly left out of many policies or there’s a cap that won’t cover costs like my flooded house.
  • Ordinance coverage – will increase the limit required to bring your home up to current building codes when renovations are required.
  • Replacement cost for personal property – that covers the full cost to replace damaged items, to avoid depreciation being subtracted from this cost.
  • Scheduled personal property coverage – takes care of high-priced belongings that might otherwise be capped, such as jewelry and art/antiques. You have to list items and estimated replacement cost.
  • Water or sewer backup – if there’s water damage to your home’s interior or foundation due to problems with a sewer, drain or sump pump.
  • Windstorm damage – isn’t covered by all homeowner policies, which is especially critical in areas vulnerable to severe wind storms or hurricanes.