How to Shop for Homeowners Insurance in 5 Steps
A little preparation goes a long way when shopping for the best coverage and rates for your home.
Whether you’re buying your first house or shopping for a new provider, shopping online to begin a search for homeowners insurance will net you thousands of hits with very little actual information. You’ll recognize some names from large companies with healthy advertising budgets, but there will be plenty of other options you haven’t heard of. Clicking a link can pull you down a rabbit hole of options that make it almost impossible for you to sort out what you’re paying for and how much it will cost. Before you start randomly entering your email address and phone number into quote generators, make sure you know what you’re looking for—and what you’re not. Shopping for homeowners insurance doesn’t have to be overwhelming or complicated if you plan your approach.
Before You Begin…
How are you supposed to know how to choose homeowners insurance? And what is it, anyway? If you’re purchasing your first home, homeowners insurance is just one more expense stacked on top of many requirements your lender has listed for you to complete before your closing. Home loan lenders require borrowers to carry homeowners insurance to protect both the lender and the borrower from financial loss. Policyholders pay an annual premium, which is calculated based on the amount of coverage you want; the size, structure, and value of your home and possessions; and the size of the deductible. In return, homeowners insurance will cover the cost of damage to the home and its contents caused by covered events such as weather, fire, vandalism or accidents, after the homeowner has paid the deductible. Homeowners policies may also extend liability coverage for bodily injury or property damage that occurs away from your home.
How does this protect you and the lender? Yes, you’ll pay a premium that feels high if you don’t need to make a claim, but the damage caused by fires, large storms, and accidents can be shockingly high. Consider what it would cost to replace your possessions, then add in the cost of tearing down and hauling away damaged parts of the building, then rebuilding those portions of your home—all while still making your monthly mortgage payments and paying additional costs to live elsewhere while the repair is being completed. If a neighbor slips on your icy front step, do you have the savings to pay for their expensive hospital bills?
Insurance is a little bit of a gamble—you pay for protection that you hope you’ll never need. But if you need it, having insurance can be the difference between an annoying deductible payment and bankruptcy. This is why your lender will require you to carry a policy and may even require that you pay into an escrow account over the course of a year’s worth of mortgage payments so that it can make sure the insurance premium is paid on time. For example, if your home is destroyed and you can’t afford to fix it, you’ll likely default on your mortgage, and the lender will be left with a financial loss and no home to sell to make up that collateral. The insurance protects your financial health and that of the mortgage company. It’s also why, even if your mortgage is paid off and homeowners insurance is no longer required, you should still plan to carry a policy.
Before you start shopping, do a little assessment of what you own; this will help you know what you’re looking for as you begin to compare plans. What is the value of the home? Do you have special or valuable possessions that will need extra coverage? Think about what you are insuring, then start looking at what your options are.
STEP 1: Decide on the level of coverage you need.
If you’re just starting this process for the first time (or if an agent has always handled it for you), it can be hard to know what to look for in homeowners insurance. First, there are three levels of insurance that designate how the policy will pay out. Not all insurers offer all three, so you’ll want to consider what you’re looking for so that you can eliminate companies that don’t offer that type of coverage. All homeowners policies will cover repair and replacement costs for damage caused by a covered event (as defined by the policy). The different levels of coverage determine how the company decides how much to pay. The three levels are actual cash value coverage, replacement cost coverage, and extended replacement cost coverage.
Actual cash value coverage is the least expensive option. In the event of a claim, the insurance company will take the original value of your home and possessions, subtract the cost of depreciation (age, expected wear and tear), and pay out that amount. You’ll pay less in premiums, but you’ll also receive less money when you file a claim—and depending on market values, there can be a big difference between what the insurance pays out and what it costs to repair your home. Replacement cost coverage is another option—some companies offer this as their standard policy, but others offer it as an upgrade. It’s a bit more expensive, but in the event of a claim, the insurance company will pay out the cost in today’s market to repair and replace items, so if the TV you bought 6 years ago for $400 is destroyed when a tree branch crashes through the ceiling will cost $800 to replace with a similar version today, the insurance will pay the $800. Finally, the most expensive option is extended replacement cost coverage. Every insurance policy has a total payout limit; some policies limit payout per claim, others per year. For an increased premium, extended replacement cost coverage will pay the replacement cost value for repair, replacement, and rebuilding, even if it goes above and beyond the policy limit. It’s a good level of coverage to have if your chief concern is getting full coverage after a larger-scale disaster, when construction costs can soar because of high demand, but it will cost more in premium.
As you adjust the level of coverage you need to match your budget, it’s important to note that damage caused by floods, earthquakes, and landslides is not covered by standard homeowners insurance policies. Coverage for floods can be purchased separately (and may also be required by a home loan lender), and coverage for earthquakes and landslides is sometimes offered as add-on endorsements.
STEP 2: Determine how much homeowners insurance you need.
In order to get accurate quotes, you’ll need to gather some information and do a little math on your own. First, you’ll need to determine the square footage of your home. This may be in your purchase contract, in the real estate listing, or available from your town’s assessment office. When you seek quotes from potential insurers, they’ll use this information to determine a rough replacement cost for the structure, but you can also do a little research into the local cost of building per square foot in your town. Multiply your square footage times the per-square-foot building cost, and you’ll have a rough estimate of what rebuilding your home would cost.
Next, you’ll need to do an inventory and rough valuation of your possessions. Furniture, clothing, appliances, and personal items all go on this list. There are a number of apps and websites that can help you build a complete list that is easy to maintain, or you can work with an insurance agent. The more detail you provide on your inventory, the better your chances of full reimbursement are. Especially for furniture and high-value items, noting the purchase date and cost and including receipts you have will bolster your case for their value if you need to file a claim. Walking through your home slowly while taking a video or photographs, then storing the video in the cloud or in another safe location can also be very helpful when filing claims and can help you zero in on items you might otherwise have forgotten.
To prepare to insure especially high-value items, such as jewelry, antiques, musical instruments, and artwork, you may want to have the items appraised by a licensed expert. Some of these items may not be covered fully by a standard policy because of coverage limits, but you’ll be able to add endorsements that bypass the standard limits for individual items or collections. Having the appraisal in hand will help agents provide you with accurate quotes.
Gather this information together, and you’ll have a fairly accurate picture of how much insurance you’ll need. Be prepared to adjust this amount after you speak with an agent because it’s possible that you have over- or undervalued some items, and the agent may ask questions that help you remember additional items to add. But having the square footage, an estimate of rebuilding cost, and an inventory will streamline your search process.
STEP 3: Gather and compare multiple quotes.
Now that you know the level of coverage you want and have a rough estimate of how much insurance you’ll need, you can begin to limit your search for companies and start to zero in on where to request quotes. A homeowners insurance tip: Consider where you already have insurance relationships, such as for your auto or renters insurance, because this company may give you a better rate as an existing or bundled customer. Ask family members and friends where they have had good experiences (not just good rates, but also good claims experiences). Once you’ve identified some companies to consult, begin making inquiries. Quotes can be acquired on the phone or online, though most online quote providers will follow up with a phone call to ask questions and get more details before generating a specific quote for you. They may ask additional questions about the age of your home, whether or not you have a security system (which can lower your homeowners insurance rate), whether you have a dog and what the breed is (certain types of dogs can increase your rate or limit your liability coverage), and other specifics.
You’ll want to provide the same information to each company, and it’s a good idea to have it all written down in front of you when you talk to agents. As you speak with different companies, choose the same deductible for each quote you receive, and choose the same coverage limit (or get as close as you can). Seek out at least five quotes. None will be exactly alike in cost or coverage, so once you have a range of them, you can sit down and start to compare them. Part of the reason it’s important to prepare your information before seeking quotes is that no two policies are alike. Each quote will include the premium, the deductible, and the level and amount of coverage, along with coverage limits. It can be difficult to compare quotes as a result of this, so you’ll have to start balancing the quotes against each other to decide what your priority is.
STEP 4: Carefully choose a company and a policy.
Decision time! You’ve done your homework in calculating your needs and asking for a range of quotes, and now you’ll need to choose which company you’ll feel most comfortable working with. The numbers aren’t the only story here; you’ll want to make sure the company you select has a good reputation for customer service, is responsive to customer calls, and has a straightforward procedure for filing claims. Check the annual reports for companies you’re considering: What is their annual retention rate? In other words, how many of their customers stick with them each year instead of looking for a new company? Ask their agents questions about who handles their claims process—will it be an adjuster who works for the company, or will it be an outside third-party hire? Do they have their own call center, or do they use a common service with other companies? Is the company financially sound enough that they’ll be able to pay out should the need arise? This information can be found at the National Association of Insurance Commissioners or credit agencies such as Moody’s or J.D. Power.
Once you’re confident in the companies themselves, get down to the nitty-gritty of comparing the policies. Read the language closely and slowly. Make sure the coverages you’re comparing are roughly equal, and if they’re not, then you’ll have to start balancing priorities. If the lower deductible with a higher premium is most important to you right now and the coverage is roughly equal, select the policy that meets that need. If lower cost overall is critical, choose the policy that fits. And if you’ve found that you need to seek more quotes or quotes from a few companies where you change the parameters of the policy because none of them quite meet your needs, do that. Choose the policy that comes closest to meeting your financial needs now and covering your home in a way that makes you feel secure.
Once you’ve made your choice, confirm your deductible, your coverage dates, and how you’ll pay for your policy; your lender may require that you pay into an escrow account so it can monitor your coverage status, or you may be able to pay directly in annual or semiannual installments. Make sure you’re clear on these items before signing the policy.
STEP 5: Avoid common mistakes when choosing a policy, such as choosing the cheapest option.
If you’ve done your preparation well, your quotes will be pretty similar in coverage, but they may differ in price. It’s not wise to automatically choose the cheapest quote; it’s not necessarily the wrong one to choose, but you need to make sure you’re not losing an important piece of coverage in exchange for that lower rate. Also, it’s unadvised to buy a policy based entirely on a quote provided by an online quote generator—while these can be helpful, there are too many nuances to homeowners insurance policies for a computer to cover all the bases. You’ll want to speak to a person at least once before making a choice.
The most critical mistake people make when buying a homeowners policy is not reading it closely. You need to know what is covered under your policy and what is not without any confusion, and if you’re not clear on these coverages, ask. Few things are more frustrating after a disaster than learning that something you thought was covered is not—or paying out of pocket for a repair you assumed wasn’t covered, only to find out too late that you could have filed a claim.
If you’re buying a home for the first time, this process may seem arduous. But what you’re really doing as you’re shopping for homeowners insurance is getting to know your house, getting to know what’s in it, and deciding how to protect your investment. This knowledge is power, and you’ll use it every year—because it’s important to shop for insurance every year just before your policy expires. Knowing how to shop for homeowners insurance will make the process easier when you repeat it each year. Don’t fall into the rut of sticking with your current carrier just because it’s easier! Every homeowner should check out their options each year to see if there’s a better option at a different company. You may choose to bundle your car insurance with your homeowners for a better rate, but as needs and contents of the home change, you might find a better policy at a separate company. It costs nothing but time to check each year, and it can save you a significant amount of money without sacrificing coverage.