Homeowners Insurance Buyer’s Guide

Wondering About Homeowners Insurance?

“The most important advice I could give to first-time shoppers is that although home insurance seems pretty simple, it is really anything but,” says Scott W. Johnson, an independent agent with Marindependent Insurance Services.

Maybe you plan to compare homeowners insurance companies on your own. Maybe you’d prefer a more hands-off approach working with an an independent agent. Either way, it’s incredibly important to understand the parameters of your policy, and exactly how coverage and payments would shake down in the event of a disaster.

“As with any purchase, do your own research before you start shopping. Educate yourself so you have a level of comfort with the questions you ask.”

This guide covers all the need-to-know information that you should arm yourself with before shopping for a home insurance policy. Are you a brand new homeowner? Don’t sweat it — we’ve covered the most frequently asked questions about homeowners insurance just below. If this isn’t your first time around the block, feel free to skip down the page for advice on:

Homeowners Insurance FAQ

What is homeowners insurance?

When a home is damaged by accident or natural disaster, it’s often incredibly expensive to repair or replace. Homeowners insurance protects you from paying those costs out of pocket. In exchange for your annual payment — called a “premium” — the insurer agrees to pay out a much larger sum if your home is damaged by a covered cause. Homeowners insurance costs vary by home, homeowner, location, and company, with states’ average premiums ranging from around $600 to $2,000 per year.

What does homeowners insurance cover?

Homeowners insurance includes coverage for six main categories: Your dwelling (meaning the main house and anything directly attached to it); other structures like garages, fences or guest houses; personal property like furniture and appliances; liability costs and medical bills if someone is injured on your property; and loss of use coverage that can help cover living expenses while your home is being repaired.

How does homeowners insurance work?

Homeowners insurance only pays out on damages caused by something specifically covered under your policy. Within each of the six categories listed above are certain coverages and exclusions; for example, “water damage” is generally covered under dwelling insurance if it’s caused by a burst pipe, but not if it’s caused by flooding. There are 16 common causes or “named perils”that may be covered under homeowners insurance. Which of those 16 perils are covered varies by policy type.

Perils commonly covered by homeowners insurance

What does homeowners insurance not cover?

The two big areas not covered by homeowners insurance are flooding and earth movement (which includes earthquakes, landslides, mudflows, and so on). A few private companies sell insurance for these perils, but most homeowners end up getting coverage through federal insurance programs. Other perils not covered by standard home insurance include things like damage from regular wear and tear, fungi or mold, pests, sewer backup, power failure, and “ordinance or law” requiring renovations to meet new codes. Please note that this list is not exhaustive. Exclusions vary by company and by policy type.

Homeowners Insurance Coverage

Know your home’s replacement cost

There are two ways to calculate homeowners insurance limits. Your home can either be insured for its actual cash value (ACV), meaning the market value with depreciation subtracted, or replacement cost, meaning the amount that it would actually cost to rebuild your home if it were leveled by a catastrophe.

Insure your home for its replacement cost. That way, if a covered disaster strikes, your insurance company will pay for repairs or replacement in full.

Most homes are insured under an HO-3 policy, which automatically uses replacement cost as the overall coverage amount (also known as your dwelling insurance limit). Keep in mind, though, that you can always opt for higher limits. Coverages for personal property, liability, and other structures are calculated as a percentage of your dwelling insurance — so the higher that limit is, the better coverage you’ll have in all subsequent areas.

Take stock of risks

When choosing coverage, it’s also crucial to think about the types of risks your home will be subject to. Follow the old real estate adage of “location, location, location.” Where you’re located determines, in large part, the likelihood that you’ll have to file a claim, what the nature of that claim will be, and thus which coverages are most important.

There are a few steps you can take to understand your home’s unique risk factors, and make sure you’re protected against them:

  • Check the home’s claim history: C.L.U.E. (the Comprehensive Loss Underwriting Exchange) is the main database and reporter for claim records. All homeowners are entitled to one free C.L.U.E. report per year. You must own the property to request a report — meaning prospective homebuyers can’t check it themselves, but they can request a report from the seller. This information will show whether the structure or location of the home have caused any past claims that are likely to recur.
  • Check common claims in the area: We recommend using Allstate’s common and costly claims tool, which turns up the most commonly filed claims by ZIP code and how much they cost on average. This will show you which areas of coverage are worth paying special attention to on your policy.

In the 53226 ZIP code of Milwaukee, Wisc., the most commonly filed claim is water damage, but the most expensive claim is fire damage. Source: Allstate.com

Think about supplemental coverage

There are a number of homeowners insurance coverage options that can be added to your policy for an extra cost. These “endorsements” can amp up the limits on a standard policy item (like personal property) or tack on protection against perils that usually aren’t covered (like earthquakes).

Add endorsements to protect your home against perils not typically covered by a homeowners insurance policy.

Note that the availability of endorsements varies by company and by location. Some of the most common options include:

  • Earth movement/ earthquake coverage — pays for home damages caused by earthquake, mudslide, sinkhole, etc. (not covered under an HO-3 policy)
  • Sewer or sump-pump backup — covers water damage caused by a backed-up or overflowing system (not covered under an HO-3 policy)
  • Enhanced (or “scheduled”) personal property protection — bumps up personal property limits to cover valuables like collectible art, furs, or expensive jewelry
  • Identity theft coverage — can help cover expenses like financial counseling, attorney fees, lost wages, and phone bills if your identity is stolen
  • Watercraft/ sports equipment coverage — extends coverage to your sport, water, or utility vehicles parked on the property
  • Home business coverage — adds business liability insurance and can cover some equipment for those that work or run a business out of their homes
  • Ordinance or law coverage — can help pay for repairs or upgrades if the homeowner must make them to be in compliance with local building and safety codes
  • “Green” home coverage — boosts dwelling limits on homes with “green” additions in order to cover rebuilding costs with equally eco-friendly components
  • Personal umbrella liability coverage — tacks on additional liability coverage to protect your assets in the event that a liability claim exceeds your homeowners policy limits

Understand your policy type

There are eight main types of homeowners insurance policies (HO-1 through HO-8). Of these, most homeowners are best off with an HO-3 or “special form” policy. Rather than covering a list of specific perils, the HO-3 excludes certain perils. That means your insurer is obligated to pay out on any claim, unless damages were caused by one of the perils specifically excluded. Note that the HO-3’s extensive coverage only applies to your home itself. Possessions within the home are protected on a named peril basis.

Here are the perils not covered by an HO-3 homeowners insurance policy:

  • Ordinance or law: Your insurer will not pay for renovations or updates required for your home to meet new building and safety codes
  • Earth movement: Incidents related to earth movement, like earthquakes, landslides, mudflows, shockwaves, and sinkholes are not covered
  • Water damage: Water damage is not covered when it results from flooding, sewer backup, groundwater seepage, and certain other causes
  • Power failure: Your insurer won’t cover losses from a power failure, unless the outage was the direct result of a covered peril (like a windstorm)
  • Neglect: Losses occurring from failure to perform proper maintenance on the home and property are not covered
  • War: Damages and loss of use due to war are not covered
  • Nuclear hazard: Damages and loss of use due to nuclear hazard are not covered
  • Government action: You insurer won’t cover replacement costs if your home is destroyed or confiscated by government or another public authority
  • Loss to property: Your insurer won’t cover losses due to sub-par construction or repairs, faulty building materials, or poor maintenance
  • Intentional loss: This may seem like a no-brainer, but your insurance company won’t cover damages that were incurred on purpose with the intent to file a claim

Of course, an HO-3 policy isn’t best 100% of the time. Circumstances like the age, replacement value, or ownership status of your home might warrant another form of homeowners insurance. Here’s a brief overview of each policy type and when they may be appropriate.

Covers… Best for… Average yearly cost according to NAIC*
HO-1 or “basic form” 10 basic, named perils Rarely sold, except for homes in particularly poor condition or risky areas $1,412**
HO-2 or “broad form” 16 named perils Rarely sold, except for homes in particularly poor condition or risky areas $1,129
HO-3 or “special form” Your home, with 10 named exclusions
Your property, for all 16 named perils
Almost all homeowners. It offers big coverage at a generally reasonable cost $1,173
HO-4 or “tenant’s form” or “renters insurance” 16 named perils Renting a home, condo, apartment, or townhome
HO-5 or “comprehensive form” Your home and belongings, with certain named exclusions Better personal property coverage for households with valuable items $1,231
HO-6 or “condo form” 16 named perils Condos or townhomes
HO-7 or “mobile home form” Coverage equal to HO-3, but for mobile homes Mobile homes
HO-8 or “older home form” 10 basic, named perils Older homes (40+ years) that don’t meet code requirements for HO-3 or have exceedingly high replacement costs $986

*Average prices sourced from the National Association of Insurance Commissioners’ most recent nationwidehomeowners insurance cost evaluation (2015). HO-4, HO-6, and HO-7 policies were not included in NAIC’s study.
**HO-1 policies are generally cheaper than HO-3, but averages are skewed by expensive outliers in a few states

A refresher on the 16 common “named perils”

Homeowners Insurance Companies

See what’s available in your area

The first step when choosing a homeowners insurance company is to take stock of the providers available where you live. Not all insurers are available in all ZIP codes. Start by checking your state’s fact sheet from the Insurance Information Institute. This will list top homeowners insurance companies by market share, giving you an idea of which insurers are tried and true in the area. You can also check out our state-by-state homeowners insurance reviews for a more in-depth analysis of the biggest providers in each state.

Of course, market share is dominated by big-name insurers (think Progressive, Allstate, State Farm, and so on). While there are benefits to working with a national provider — like extensive online resources and 24/7 support — some customers may prefer working with a regional or local insurer instead. “[These companies] are literally a part of the community they serve,” says David Miller, VP at the insurance firm Plexus Groupe. “They can afford to invest in more resources (agents, claims representatives, underwriters, marketers, etc.) to serve that market.”

Interested in checking out local homeowners insurance options? Miller recommends working with an independent insurance agent — they know the market, are not beholden to any one company, and can shop around for the best policy on your behalf.

Take service and claims into consideration

Your first question will probably be “What’s the cheapest homeowners insurance company?” — but before jumping into price comparisons, it’s worth taking a moment to look at service and claims records for the insurers you’re considering.

“An insurance company is only as good as how fast it pays out on claims. Review not only premiums and deductibles, but also consumer sentiment on claim payment and responsiveness.”

Luke Kinton,Director of Marketing at TrueBlueLifeInsurance.com & former home insurance agent at State Farm, Allstate, and Country Financial

In a best-case scenario, you won’t have to interact with your insurer after purchasing a policy. However, if you do need to file a claim at some point, working with a reputable and supportive company can mean the difference between timely, smooth repairs versus a painful, inefficient claims process.

Start by checking customer ratings at J.D. Power and Consumer Reports. These organizations poll thousands of insurance customers to get an accurate reading on the quality of each company’s customer service and claims handling. You can also see our review of the best homeowners insurance for an in-depth analysis of the eight best national providers.

Compare prices

Of course, price will be the deciding factor between any two insurers that offer comparable policies and service. Each company calculates cost a little differently, so you’ll need to check prices from a few different providers to see who can offer the cheapest premium on the coverage you need.

Call and request quotes from at least three companies to make sure you’re getting the best price on the coverage you need.

It’s important to actually call and request homeowners insurance quotes over the phone. These policies are more complex than, say, car insurance (which you can get a pretty accurate quote for online). With homeowners insurance, you’ll need to walk through your home’s specs and your coverage needs with an agent to get a price that’s accurate and worth comparing.

Cost Considerations

Homeowners insurance cost

The price of homeowners insurance varies drastically depending on the person and home being insured, their location, and the insurance company. According to the most recent data from the National Association of Insurance Commissioners, the national average premium for an HO-3 policy lies around $1,173. On a state-by-state basis, though, average HO-3 prices range from $640 to more than $1,900.

So, why does cost fluctuate so much? In short, each company that you get a quote from has to analyze all possible risk factors — from you, to your home and possessions, to your address — in order to weigh the potential cost versus benefit of insuring you. Every insurer calculates these odds differently, which is why your premium will change from company to company even though all your information stays the same. This means the only way to find the cheapest homeowners insurance is by comparing personalized quotes from multiple companies.

What affects homeowners insurance costs?

Homeowners insurance deductibles

Just like car insurance and health insurance, homeowners insurance includes a deductible that you must pay out of pocket before the insurer will chip in on claims. For home insurance, the deductible is either expressed as a dollar amount (usually starting at $500 or $1,000), or as a percentage of your home’s insured value (so for example, a 1% deductible on a home insured for $250,000 comes out to $2,500 out of pocket).

As with other lines of insurance, a higher deductible on your homeowners policy means lower annual premiums. However, experts recommend using extreme caution when choosing a higher deductible in order to save on insurance.

“Many people carry high deductibles in order to keep their yearly costs down, but these same folks often end up unable to cover the deductible [in the event that they have to file a claim].”

Johnston goes on to say that inability to pay a deductible is “often a worse scenario than paying a few extra dollars per month to ensure you are protected.” If the deductible wipes out someone’s emergency savings, they’ll be left in a dangerous position when future expenses arise. And if one is ultimately unable to pay their deductible, an insurance company may void the claim altogether — stopping crucial home repairs or replacement in their tracks.

Peril deductibles

One thing that sets homeowners apart from other insurance lines: Your policy will include separate peril or “disaster deductibles” in addition to the standard deductible. Disaster deductibles generally apply to hurricane coverage, wind or hail coverage, flood insurance, and earthquake insurance, and are expressed as a percentage of your overall policy limit.

Note that peril deductibles must be paid on top of your standard deductible. So, for example, if your home is insured at $250,000 with a $1,000 standard deductible and a 2% hail deductible, your total out-of-pocket payment on hail-related damages will be $6,000 before the insurance company kicks in. Disaster deductibles are generally set at a fixed rate by the insurer, though a few companies (like State Farm) will give you a couple percentage options to choose from.

Flood and earthquake insurance

Flood and earthquake insurance are the two biggest (read: most expensive) perils not covered by a standard homeowners insurance policy. Earthquake insurance can often be purchased as an endorsement from the same company that writes your HO-3 policy. However, not all companies carry this endorsement — so if you live in a state where earthquake claims are commonplace, you’ll want to be sure and choose a company that does.

Flood and earthquake insurance must be purchased separately from a standard HO-3 policy.

Flood insurance is much harder to find through a private insurer — only a handful of companies carry it. Most homeowners will end up purchasing this coverage through FEMA’s National Flood Insurance Program (NFIP). Severe storms have caused flooding and flood-related claims to spike in recent years, so it’s crucial to be properly insured. Be sure to speak with your insurance agent about flood risk around your home and getting the appropriate coverage.

Reviewing your homeowners insurance

Experts recommend reviewing your homeowners insurance every year or two. Doing this will help you catch rate hikes on the insurer’s part. When you compare your current premium with quotes from a few other providers, you’ll be able to tell whether prices are in line with local rate increases and decreases, or drastically different.

“It’s always a good idea to shop around every couple years, even if you’re just keeping your agent honest on price. Insurance rates will be up one year and down the next, depending on prior losses in your area.”

This doesn’t mean you need to change companies every year — in fact, it’s best to stay with one provider so long as its prices remain competitive.“Insurers share information about how many companies you’ve been with and for how long,” points out David Miller of the insurance firm Plexus Groupe. “If you’re considered a perpetual ‘shopper,’ your quoted price will be higher than someone who rarely switches insurance companies.”

In other words: Check prices on a regular basis to make sure your provider isn’t inflating rates artificially, but only switch companies when it’s truly necessary.

The Bottom Line

Cost is important, but it’s not the only thing that matters. Be sure that you’re getting ample homeowners insurance coverage, and that your policy protects against all possible risks to your home. Paying a little more each month for better coverage will take a much smaller toll on your wallet than the alternative: having to pay potentially thousands of dollars in losses out of pocket if your limits won’t cover them.

“Keep in mind that this is your home… The insurance you buy is not just an expense. It is a contract that promises to restore your life after a tragedy occurs.”

David Miller,VP Client Executive for Personal Lines at Plexus Groupe

Miller emphasizes the importance of working with an insurance agent that you trust, and whose advice you can rely on to pick the coverage and company that work best for you. That said, you should still come to the table prepared. Have an idea of the coverage you’ll need and how much you can afford to pay – both in premiums and deductibles. The more research you do beforehand, the more comprehensive and affordable your homeowners insurance will be.

Homeowners Insurance Company Ratings

Below are financial scores and customer ratings for the eight of the top homeowners insurance companies. For in-depth look at each of these providers, check out our review of the best homeowners insurance companies.

A.M. Best
S&P Global
J.D. Power Overall Satisfaction
Consumer Reports Reader Score
State Farm
Why doesn’t Progressive have customer satisfaction ratings?

Homeowners insurance ratings explained:

  • A.M. Best rates the financial strength of insurance companies by comparing their overall worth against their “ongoing obligations” (meaning all current policies that they could potentially have to pay out on). A high FSR is important for a few reasons; first, because it means your insurer is able to pay out on claims of any size. It also indicates that the company could weather large-scale fiscal challenges — like a natural disaster that causes many claims to be filed at once, or an economic downturn. In other words: The higher an insurer’s FSR, the safer your investment with the company.
  • J.D. Power’s overall customer satisfaction rating tallies responses from more than 14,000 respondents, who ranked their insurance companies based on coverage, price, billing, interaction, and claims handling
  • Consumer Reports’ reader score considers satisfaction ratings from more than 7,000 home insurance customers, focusing on the claims process, agent interactions, and claim payouts

Original source: reviews.com