Buying homeowners insurance involves a few simple steps that ensure you’re purchasing a policy tailored to your needs. By investing a little time, you’ll be rewarded with coverage that protects your home and your belongings at the right price. This holds true whether you’re buying a house and insurance for the first time or shopping around for a better rate.
Insurance can be tricky, and many policies have a flurry of exceptions when it comes to what’s covered and what isn’t. Having an insurance policy with certain kinds of exceptions can wind up costing you hundreds of dollars for coverage that might fall short when it’s needed.
Fortunately, you can avoid that scenario. Here, we’ll walk you through how to buy homeowners insurance as well as offer some tips on how to find the best rate on your policy this year.
5 Steps to Shopping for Homeowners Insurance
When shopping for homeowners insurance, it’s a good idea to compare similar policies. You want to be sure you’re reviewing what different insurers charge for policies with almost identical coverage.
You’ll also want to shop around to get the best deal you can. Policies from the same company can vary widely by geography, property type, and even between two different zip codes.
It’s also a smart move to compare some intangibles, such as a company’s reputation for customer service and claims satisfaction. They can have a big impact when it comes time to file a claim.
Now, let’s walk through the steps of how to shop for homeowners insurance.
Step 1: Decide How Much Coverage You Need
When deciding how much homeowners insurance coverage you need, you’ll want to make sure that you have enough coverage to replace your most important belongings; rebuild your house in the event it’s destroyed; and cover any liability for injuries that might occur on your property. Your policy will be there in case a fire, storm, or crime causes a loss.
In industry terms, homeowners insurance coverage for the aforementioned events is typically broken into four categories:
• Personal property coverage: Insures against losses to personal property — including furniture, clothing and electronics — in the event of a covered incident.
• Dwelling coverage: Covers the repair or replacement of your property and any attached structures, like a garage, fence, or any sheds.
• Liability coverage: Protects against any medical or legal expenses that you may be liable for as a result of injuries that occurred on your property.
• Additional living expense coverage (ALE or Loss of use coverage): Pays for temporary housing and related costs in the event you’re displaced from your home due to a covered loss.
Each of the coverages listed above are subject to their own insurance limits. These are calculated based on both the insurers’ proprietary formulas and the amount coverage you choose to purchase. Here’s a closer look at each kind of coverage and how much you might want to buy.
Personal Property Coverage
Just as the name suggests, personal property coverage covers the cost of any personal property that you would need replaced in the event of a covered loss. This can include all the contents of your home, including furniture, electronics, kitchenware, and jewelry.
Generally, you’ll want enough personal property coverage to cover the cost of replacing all of your important belongings. To help you calculate how much this might cost, create a written inventory of all your major belongings and their cost. This allows you to better estimate how much personal property coverage you need and gives your insurer a reference point for how much insurance you might need. You might even consider doing a video inventory to keep track of your property.
Bear in mind that not all items are covered under your home insurance policy. For example, any vehicles damaged while housed in your garage should be covered under your auto insurance. Additionally, rare and high-value items, like art, fine jewelry, and antiques, may be subject to value caps under your policy and may require separate/supplemental insurance policies for full coverage.
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Dwelling Coverage
Dwelling coverage covers the cost to repair or rebuild the building on your property, in addition to any attached structures, like garages, balconies, or fences. When you think about the dollar amount here, you probably want to be prepared for the worst-case scenario of totally rebuilding your home. Though rare, this kind of catastrophic incident can happen.
Liability Coverage
Liability coverage helps shield you from lawsuits in the event you’re found liable for any accidents that occur on your property. These can range from slips and falls to any damage caused by falling trees from your property.
Generally, the more assets you have, the more liability insurance you’ll want to purchase. However, liability coverage will only pay out to a set dollar limit as listed on your policy, with you responsible for any balance. If you’re looking for added liability coverage, you may want to look into a personal umbrella policy.
Additional Living Expense Coverage
Additional living expense coverage, or loss of use coverage, pays for reasonable housing and living costs if you’re displaced for an extended period due to a covered event. Imagine that a storm sent a tree branch crashing through your roof and your bedrooms became uninhabitable — that’s the kind of situation that would lead you to move out and tap what’s sometimes called ALE coverage.
Typically, your loss of use coverage will encompass a fixed percentage of your dwelling coverage. Larger families may wish to opt for more coverage if your weekly living expenses are particularly burdensome.
Learn the Difference Between ACV, RCV, and GRC Coverage
Once you have some ballpark numbers in mind for the amount of coverage you need, you also need to decide what kind of coverage you want in terms of potential payout. There are three terms to know — ACV, RCV, and GRC — and these will impact how claim amounts are determined as well as your premiums.
• Actual Cash Value (ACV): Typically the cheapest option, ACV calculates your home and property’s value based on its current market value minus depreciation. Depreciation occurs naturally over time. Let’s say you had a 10-year-old refrigerator that had cost $1,000 when you bought it. After 10 years, its “cash value” might be, say, $100, so that is what ACV would reimburse you if it were destroyed during a covered event. This would not enable you to go out and buy a similar unit.
• Replacement Cost Value (RCV): This policy is more expensive. In the event of loss, it insures your home for the cost it takes to rebuild it like new and replace the items in it at their full cost. Unlike actual cash value, RCV does not factor in depreciation.
• Guaranteed Replacement Cost (GRC): The most expensive policy of the bunch, this policy insures your home and property for its replacement cost value plus a certain percentage over that amount, which can help protect against inflation.
💡 Quick Tip: If you have a mortgage, a homeowners policy may be required by your lender. Surprisingly, unlike auto insurance, there is no legal mandate to carry insurance on your home.
Step 2: Verify Details About Your Home
Before an insurer can give you a quote, you’ll need to provide them with details about you and your home so they can accurately price your home insurance policy.
Keep in mind that insurance agents will take steps to verify the accuracy of this information, so be sure to answer to the best of your ability. Here are some of the most commonly requested details:
• Property size and foundation
• Roof type, material, and age
• Age of structure and building materials
• Age and type of electrical, plumbing, and heating system
• Presence of any adjacent structures, pools, fences, etc.
• Presence and number of pets
• Intended use of property (rental, secondary, or primary home)
You can ask your real estate agent to forward you this information or obtain it from publicly available sources. Often, many of these details can be found in your home inspection and appraisal reports. Remember to disclose any improvements or renovations that have been made over time.
Step 3: Consider Whether You Need Added Coverage
A typical homeowners insurance policy goes a long way towards protecting you from damage to or loss of your home and property. But it doesn’t cover everything. Acquaint yourself with these details and decide if you want additional coverage.
According to FEMA, a common myth among many Americans is that homeowners insurance covers flooding. However, it does not.
In fact, here’s a list of common events that are often NOT covered under most home insurance:
• Floods
• Earthquakes
• Sinkholes
• Water and sewer backup
It’s important to review your insurance policy for any exceptions or issues not mentioned that you may want covered. You may be able to purchase additional insurance coverage for the above-mentioned issues as part of a separate policy, or what’s known as an endorsement, on your existing home insurance policy.
Also remember that personal property coverage often has a reimbursement cap on valuable items, which may limit the recoverable amount on certain rare or valuable goods. If you inherited valuable artwork or saved like crazy to afford a luxury watch, you may want to purchase additional endorsements for these.
Step 4: Take Advantage of Any Discounts Your Insurer Offers
Before finalizing your policy, check with the insurer about any discounts they offer and how many you might qualify for.
These can take them form of bundling discounts, which reward you for purchasing other policies (e.g. auto and life) through the same insurer; retention discounts which reward you for staying with a single insurer for an extended period of time; and even safety discounts, which reduce your premiums based on various improvements that you make to your home (e.g. adding a security system).
Each insurer has its own batch of discounts that you may be eligible for. Make sure to check with each potential policy provider to confirm that you’re getting the best deal possible.
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Step 5: Finalize Your Policy and Figure Out Your Payments
Now that you’ve selected the coverage you want, at the price you want, it’s time to put the finishing touches on your homeowners insurance policy.
First, you’ll want to set your insurance policy deductible, which is the amount you agree to be personally responsible for before the insurance company pays out on any claims. This is similar to a copay on a health insurance plan and is charged on a per-claim basis.
Generally, higher deductibles lead to lower insurance premiums, because they transfer some of the financial burden of paying for claims from the insurer to you.
While you will end up paying more out of pocket when you need to file a claim, this can be a smart financial decision for newer homes and low-risk areas. Of course, this option will only make sense for you though if you are confident you can cover that deductible in an emergency.
Second, you’ll need to decide how you wish to pay your insurance premiums. Policies are typically written on an annual basis and can be paid on a monthly or quarterly basis, or even in one lump sum. Some insurers offer added discounts if you decide to pay the entire amount upfront.
Finally, you’ll need to set the date on which your policy takes effect. Generally, this should be the same day you take possession of the property if you’re buying a new home. If you’re switching insurance providers, it should coincide with the end date of the previous policy, without any lapse in coverage.
💡 Quick Tip: Your insurance needs depend on your age, dependents, assets, possessions, and economic situation. As your circumstances change, so should your insurance plans.
The Takeaway
Buying the right homeowners insurance ensures that your home is protected if disaster ever strikes. That said, shopping for a policy can feel overwhelming at first since there are a lot of new terms to be learned, figures to calculate, and decisions to be made.
As you gather the information and quotes you need to make your choice, you’ll be rewarded with a policy that suits your needs, is priced just right, and can give you peace of mind.
If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.
Photo credit: iStock/JLco – Julia Amaral
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