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How to Pick Your First Homeowners Insurance Policy
Purchasing your first home can be an overwhelming process, one fraught with emotion and a seemingly endless stream of paperwork and documentation.
For many people, a home is the most significant purchase of a lifetime, making it even more critical to protect this investment with a thoughtfully chosen homeowners insurance policy.
While homeowners insurance isn’t mandated by law the way car insurance often is, most mortgage lenders require that a policy be in place before closing on the home.
But how is one to weed through the myriad options available, obtain a reasonable price, and find a reliable company? We asked industry experts to weigh in.
Find the best home insurance policy by following these steps:
- Compare policies and quotes.
- Pick the right type of homeowners insurance for your needs.
- Bundle policies.
- Pick a deductible.
Shop around and start early
First and foremost, it’s important to shop around. And start doing so early in the home buying process, not at the last minute.
“A lot of buyers wait until the end of the loan approval, appraisal, and inspection process to start looking and then they’re in a bind and need something fast,” said Missouri-based agent Justin Strong. “When this happens they usually end up going with something cheap that might not be the best fit for what they actually need.”
Doing your research ahead of time, on the other hand, allows you to develop a sense of what the going rates are as well as the various coverage options so you can find the best home insurance company for your needs.
To compare costs, you can call individual insurance carriers one by one and obtain quotes, work with an independent insurance agent who can do that legwork for you, or use one of the many online price comparison platforms, suggests Fabio Faschi, property and casualty team lead at PolicyGenius. The latter two options will save you time — and time is valuable as you’re getting ready to close on a new home, noted Faschi.
What do you need to buy home insurance?
When shopping for quotes, you’ll need to supply the insurance company with details about your home so they can craft a policy that covers everything you need. Cheap homeowners insurance is great, but you also want to make sure your property is adequately insured. Providing the home’s address is helpful, especially if there’s a recent real estate listing with pictures and details about the house. You may also wish to provide an appraisal or inspection report to help the insurer understand your home’s condition.
Also pass on any specific requirements your lender has so that your policy meets the conditions of your mortgage. For instance, if the home is located in a flood plain, you may have to purchase additional flood coverage.
Understand the various policy types
As you’re shopping around, it’s also important to have a grasp of the types of homeowner policies available.
The options have names such as HO-1; HO-2; HO-3; all the way up to HO-8, explained Katie Tu, an insurance specialist at QuoteWizard. HO-1, for instance, is a basic policy, while HO-8 is designed for older homes.
“Homeowners insurance is not one-size-fits-all and each form has different coverages included with it,” Tu explained, adding that HO-3 is a common choice among first-time homebuyers, as it covers more perils than the very basic HO-2.
A less comprehensive option, often referred to as a “named perils” plan, HO-2 covers a specific list of problems including such things as fire or lightning, smoke, theft, vandalism, windstorms and hail, damage caused by vehicles or aircraft, and more.
Those who want protection that extends beyond the specific problems outlined in HO-2 policies may want to consider HO-3, which typically covers all risks except those specifically excluded.
It’s a good idea to discuss the options with an agent who can help decide which is the best fit for you, said Tu.
Understand how much homeowners insurance you need
Several factors impact how much insurance you need for your home. Your policy may cover your property and belongings in one of two ways: actual cash value (ACV) or replacement cost value (RCV). Actual cash value results in a lower premium, but only reimburses you based on the current age and condition of the item damaged. On the other hand, Replacement cost value factors the current market value of how much it would cost to replace something. In other words, your claim reimbursement will be much larger.
The amount of coverage you will need also depends on things like the size of your home, your location, the type of construction and any other structures on the property, like a garage.
Another thing to keep in mind are your personal belongings, since they’re covered under your policy as well. Creating an inventory list makes it much easier to file a claim, especially if you have big ticket items like expensive electronics or jewelry.
Determine how much coverage you want
Most home insurance policies include four types of coverage as part of the standard cost. Dwelling coverage takes care of the actual structure of the home. Personal property coverage includes your personal belongings that are in the home. Check the limit for specialized categories like jewelry, electronics and art and see if you need additional coverage to be reimbursed if they’re stolen or damaged.
Personal liability coverage helps cover legal and medical costs in case someone is injured while on your property. Most policies start the coverage at $100,000 but experts now recommend getting between $300,000 and $500,000 in liability coverage. If you have assets that exceed your liability coverage, they’re vulnerable in a lawsuit. Additional coverage may be necessary to protect them.
Finally, loss of use coverage pays for your living expenses if you can’t stay in your home while it’s being repaired. In addition to your hotel stay, it can also cover things like groceries and gas.
Know what determines your rate
A variety of factors will impact your ultimate policy premium. They include such things as your home’s value, location, the coverage level you choose, and even your credit score, says Tu.
Still other items that play a role in the policy’s cost include the building materials used to construct the home and the age of the property.
“Brick homes could receive lower premiums compared to a wood-sided home because of the reduced risk of a fire hazard, collision damage, or structural collapse,” Tu explained. “When your home was built could determine if the wiring and plumbing has been updated to general building code. Aging components are prone to wear and tear, thus presenting an increased risk. Older homes are also prone to asbestos or lead paint. Overall, if a home is viewed to be riskier to insure, the premiums are likely to be higher.”
The key takeaway is that there are many items beyond your control that impact your home insurance cost — and there are also variables you can control when selecting a policy.
To bundle or not to bundle?
Bundling is one of the choices you can make to lower your home insurance premiums. Most insurance companies offer multi-policy discounts, making it a good idea as you’re shopping around to check in with the company where you may currently have car insurance or other types of coverage.
Bundling your home insurance with your auto or life insurance may lower your rate up to 25%, says Tu.
However, just because you have an existing auto or life insurance policy with a particular company doesn’t mean it’s the best company to provide your home insurance. It’s still important to ask questions and consider other providers as part of your research process.
“The company that you’re using for life and auto insurance may not be able to offer a better price on your home insurance even with the bundle discount, or they may not be able to insure your home like it needs to be insured based off of the type of home it is,” explained Strong.
“Not all companies can write every type of home,” he added. “Some companies don’t write mobile homes or maybe they don’t write homes that are built prior to 1970 or they don’t write homes that have roofs that are over 10 years old.”
Settle on a deductible
The deductible is another area that can impact your policy’s final cost. For the uninitiated, a deductible is the amount of money you will be responsible for paying out of pocket if you have a loss. For example, a $1,000 deductible means you’ll pay the first $1,000 toward repairing a covered loss, and the insurance company will pick up the rest.
In general, opting for a lower deductible typically increases the overall cost of the policy, while higher deductibles will often reduce the cost of your policy.
It’s also important to note that some policies will list deductibles as a percentage. In addition, some may have multiple deductibles. If you live in a hurricane-prone area for instance, your coverage may have a separate hurricane deductible, said Seth Miller, a licensed insurance agent and sales director at InsuraMatch.
The bottom line?
“Pick a deductible you would be comfortable paying in the event of a loss,” said Miller. “If paying $1,000 out of pocket would be a significant hardship, then it makes sense to opt for a lower deductible. The caveat there is that the premium will be higher.”
Understand the difference between market value and replacement value
When determining just how much coverage you want to pay for, it’s critical to know the difference between your home’s market value and its replacement value, and why that even matters.
“First and foremost, be educated. Understand that a bank appraisal will not determine the amount of coverage you actually need,” explains Mildred Ayala, first vice president of private client services at HUB International Northeast, a personal insurance practice.
Market value is typically the amount that you can sell your home for, and that price takes into consideration such factors as the size of the property, the school district, and more, said Ayala.
Replacement value, meanwhile, is purely the cost to rebuild your home back to what’s known as “pre-loss condition,” using materials of like kind and quality. If your home is destroyed by fire, you’ll need to rebuild – but that doesn’t mean you need to repurchase the land it sits on.
“When you insure your home to value, which is required by most insurance carriers, the policy will provide guaranteed replacement in the event of a loss,” said Ayala. “In other words, if there is a total loss, the company will pay the full amount to rebuild the home.”
Know what the policy does not include
Keep in mind there are certain risks and events that homeowners insurance doesn’t cover, notes Tu, of QuoteWizard. For example, standard policies typically do not cover floods or earthquakes.
“If you’re in an area that may be prone to such disasters, you’ll have to consider getting separate insurance for that,” she explained.
Many policies include some coverage for items like computers, firearms, and jewelry, but it’s a good idea to review and confirm the limits your policy includes for these additional items, said Kimberlee Leonard, insurance analyst for Fit Small Business.
“If the policy’s jewelry limit is $5,000, but your engagement ring is valued at $15,000, you will need a different policy to protect the ring from loss, called a Personal Articles Policy,” said Leonard.
If you’re working with an independent insurance agent, have the agent explain what you’re purchasing. The goal is to make sure you’re getting a good policy that will cover your needs in the event of a claim.
“Not all policies cover everything that can happen to a home, so make sure to ask many questions about what is covered and what isn’t,” said Strong.
Research the financial strength of the insurer
It’s also a good idea to review an insurance provider’s financial strength. In other words, can you be confident that the company will be able to meet its financial obligations?
There are various organizations that analyze a company’s financial solvency and issue an associated rating, explained Strong.
“AM Best is a common organization that will issue financial reports for insurance companies,” said Strong. “There are also other companies that will issue reports depending on the size of company. For instance, Standard & Poor’s issues reports for companies that are larger in size.”
Smaller single state or regional insurance companies may not be included in such rating criteria. But Demotech issues reports on companies that are smaller in size, said Strong.
Find the right balance between price and protection
Ultimately, when shopping for home insurance, the goal is to work toward the right balance of price and coverage, as the lowest price often doesn’t equate to best purchase, says Tom Schwarz, executive director for Military United Insurance.
“Understand what you’re buying and make sure it’s appropriate for your situation,” said Schwarz.
What’s more, you can always change your selection as you continue to shop around, says Leonard.
“Just because you send the [mortgage] lender a quote from one insurance agency doesn’t mean you can’t shop for a better rate while the [closing] deal is still being done,” said Leonard. “Keep the process moving with a quote, and update it if you find a better deal.”