Homeowners Insurance Guide For Beginners
Homeowners insurance is also known as home insurance.
Homeowners insurance is a form of property insurance that covers losses and damages to an individual’s residence, along with furnishings and other assets in the home.
Although they are infinitely customizable, a homeowner’s insurance policy has certain standard elements that provide what costs the insurer will cover.
Damage to the Interior or Exterior of Your House
In the event of damage due to fire, hurricanes, lightning, vandalism, or other covered disasters, your insurer will compensate you so your house can be repaired or even completely rebuilt.
Destruction or mutilation from floods, earthquakes, and poor home maintenance is generally not covered and you may require separate riders if you want that type of protection.
Freestanding garages, sheds, or other structures on the property may also need to be covered separately using the same guidelines as for the main house.
If you own a lot of high-priced possessions (fine art or antiques, fine jewelry, designer clothes), you might want to pay extra to put them on an itemized schedule, purchase a rider to cover them, or even buy a separate policy.
Personal Liability for Damage or Injuries
Liability coverage protects you from lawsuits filed by others. This clause even includes your pets! So, if your dog bites your neighbor, Doris, no matter if the bite occurs at your place or hers, your insurer will pay her medical expenses.
Or, if your kid breaks her Ming vase, you can file a claim to reimburse her. And if Doris slips on the broken vase pieces and successfully sues for pain and suffering or lost wages, you’ll be covered for that, too, just as if someone had been injured on your property.
While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute.
For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy.
Hotel or House Rental While Your Home Is Being Rebuilt or Repaired
It’s unlikely, but if you do find yourself forced out of your home for a time, it will undoubtedly be the best coverage you ever purchased.
This part of insurance coverage, known as additional living expenses, would reimburse you for the rent, hotel room, restaurant meals, and other incidental costs you incur while waiting for your home to become habitable again.
Different Types of Homeowners Coverage
All insurance is definitely not created equal. The least costly homeowners insurance will likely give you the least amount of coverage, and vice versa.
In the U.S. there are several forms of homeowners insurance that have become standardized in the industry; they are designated HO-1 through HO-8 and offer various levels of protection depending on the needs of the homeowner and the type of residence being covered.
There are essentially three levels of coverage.
Actual cash value
Actual cash value covers the cost of the house plus the value of your belongings after deducting depreciation (i.e., how much the items are currently worth, not how much you paid for them).
Replacement value policies cover the actual cash value of your home and possessions without the deduction for depreciation, so you would be able to repair or rebuild your home up to the original value.
Guaranteed (or extended) replacement cost/value
The most comprehensive, this inflation-buffer policy pays for whatever it costs to repair or rebuild your home—even if it’s more than your policy limit.
Certain insurers offer an extended replacement, meaning it offers more coverage than you purchased, but there is a ceiling; typically, it is 20% to 25% higher than the limit.
What Isn’t Covered by Homeowners Insurance?
While homeowner’s insurance covers most scenarios where a loss could occur, some events are typically excluded from policies, such as natural disasters or other “acts of God,” and acts of war.
What if you live in a flood or hurricane area? Or an area with a history of earthquakes? You’ll want riders for these or an extra policy for earthquake insurance or flood insurance.
There’s also sewer and drain backup coverage you can add on, and even identity recovery coverage that reimburses you for expenses related to being a victim of identity theft.
How Are Homeowners Insurance Rates Determined?
So what’s the driving force behind rates? According to Noah J. Bank, a vice president and insurance advisor at HUB International, it’s the likelihood a homeowner will file a claim—the insurer’s perceived “risk.”
And to determine risk, home insurance companies give significant consideration to past home insurance claims submitted by the homeowner as well as claims related to that property and the homeowner’s credit.
“Claim frequency and severity of the claim play a considerable role in determining rates, especially if there’s more than one claim relating to the same issue like water damage, wind storms, etc.,” Bank says.
While insurers are there to pay claims, they’re also in it to make money. Insuring a home that has had multiple claims in the past three to seven years, even if a previous owner filed the claim, can bump your home insurance premium into a higher pricing tier.
You may not even be eligible for home insurance based on the number of recent past claims filed, notes Bank.
Cost-Cutting Insurance Tips
While it never pays to play it cheap with coverage, there are ways to cut down on insurance premiums.
Maintain a security system
A burglar alarm monitored by a central station or tied directly to a local police station will help lower the homeowner’s annual premiums, perhaps by 5% or more.
In order to obtain the discount, the homeowner must typically provide proof of central monitoring in the form of a bill or a contract to the insurance company.
Smoke alarms are another biggie. While standard in most modern houses, installing them in older homes can save the homeowner 10% or more in annual premiums. CO detectors, dead-bolt locks, sprinkler systems, and in some cases even weatherproofing can also help.
Raise your deductible
Like health insurance or car insurance, the higher the deductible the homeowner chooses, the lower the annual premiums.
However, the problem with selecting a high deductible is that claims/problems that typically cost only a few hundred dollars to fix—such as broken windows or damaged sheetrock from a leaky pipe—will most likely be absorbed by the homeowner. And these can add up.
Look for multiple policy discounts
Many insurance companies give a discount of 10% or more to customers who maintain other insurance contracts under the same roof (such as auto or health insurance).
Consider obtaining a quote for other types of insurance from the same company that provides your homeowners insurance. You may end up saving on two premiums.
Plan ahead for renovation
If you plan to build an addition or adjacent structure to your home, consider the materials that will be used.
Typically, wood-framed structures will cost more to insure because they are highly flammable. Conversely, cement- or steel-framed structures will cost less because these are less likely to succumb to fire or adverse weather conditions.
Another thing most homeowners should, but often don’t, consider are the insurance costs associated with building a swimming pool.
In fact, items such as pools and/or other potentially injurious devices (like trampolines) can drive the annual insurance costs up by 10% or more.
Pay off your mortgage
Obviously, this is easier said than done, but homeowners who own their residences outright will most likely see their premiums drop.
Why? The insurance company figures if a place is 100% yours, you’ll take better care of it.
Make regular policy reviews and comparisons
No matter what initial price you’re quoted, you’ll want to do a little comparison shopping, including checking for group coverage options through credit or trade unions, employers, or association memberships.
And even after purchasing a policy, investors should, at least once per year, compare the costs of other insurance policies to their own. In addition, they should review their existing policy and make note of any changes that might have occurred that could lower their premiums.
For example, perhaps you have disassembled the trampoline, paid off the mortgage, or installed a sophisticated sprinkler system.
If this is the case, simply notifying the insurance company of the change(s) and providing proof in the form of pictures and/or receipts could significantly lower insurance premiums. “Some companies have credits for complete upgrades to plumbing, electric, heat, and roof,” says Van Jura.
How to Compare Home Insurance Companies
When looking for an insurance carrier, here’s a checklist of search and shopping tips.
1. Compare statewide costs and insurers
When it comes to insurance, you want to make sure you are going with a provider that is legitimate and creditworthy.
Your first step should be to visit your state’s Department of Insurance website to learn the rating for each home insurance company licensed to conduct business in your state, as well as any consumer complaints lodged against the insurance company.
The site should also provide a typical average cost of home insurance in different counties and cities.
2. Do a company health check
Investigate home insurance companies you’re considering via their scores on the websites of the top credit agencies (such as A.M. Best, Moody’s, J.D. Power, Standard & Poor’s) and those of the National Association of Insurance Commissioners and Weiss Research.
These sites track consumer complaints against the companies as well as general customer feedback, the processing of claims, and other data.
In some instances, these websites also rate a home insurance company’s financial health to determine whether the company is able to pay out claims.
3. Look at claims response
Following a large loss, the burden of paying out-of-pocket to repair your home and waiting for reimbursement from your insurer could place your family in a difficult financial position.
A number of insurers are outsourcing core functions, including the handling of claims.
Before purchasing a policy, find out whether licensed adjusters or third-party call centers will be receiving and handling your claims calls.
“Your agent should be able to provide feedback on his or her experience with a carrier, as well as its market reputation,” says Mark Galante, president of field operations for the PURE Group of Insurance Companies.
“Look for a carrier with a proven track record of fair, timely settlements, and make sure to understand your insurer’s stance on holdback provisions, which is when an insurance company holds back a portion of their payment until a homeowner can prove that they started repairs.”
4. Current Policyholder Satisfaction
Every company will say it has good claims service. However, cut through the clutter by asking your agent or a company representative the insurer’s retention rate that is, what percentage of policyholders renew each year.
Many companies report retention rates between 80% and 90%. You can also find satisfaction information in annual reports, online reviews, and good old-fashioned testimonials from people you trust.
5. Get Multiple Quotes
“Obtaining multiple quotes is important when looking for any type of insurance; however, it is especially important for homeowner’s insurance since coverage needs can vary so much,” says Eric Stauffer, former president of ExpertInsuranceReviews.com. “Comparing several companies will yield the best overall results.”
How many quotes should you get? Five or so will give you a good sense of what people are offering and leverage in negotiations.
But before collecting quotes from other companies, request a price from insurers you already have a relationship with. As previously mentioned, in many instances, a carrier you’re already doing business with (for your auto, boat, etc.) may offer better rates because you’re an existing customer.
Some companies provide a special discount for seniors or for people who work from home. The rationale is both these groups tend to be on-premises more often—leaving the house less prone to burglary.
6. Look beyond the price
The annual premium is often what drives the choice to purchase a home insurance policy, but don’t look solely at price.
“No two insurers use the same policy forms and endorsements, and policy wording can be very different,” says Bank. “Even when you think you’re comparing apples to apples, there’s usually more to it, so you need to compare coverages and limits.”
7. Talk to a Real Person
Stauffer feels the best way to get quotes is to go directly to the insurance companies or speak to an independent agent who deals with multiple companies, as opposed to a traditional “captive” insurance agent or financial planner who works for just one home insurance company. Bear in mind, though, that “a broker licensed to sell for multiple companies often attaches their own fees to policies and policy renewals. This could cost hundreds extra a year,” he notes.
Setting aside your legal obligation to refer students to Child Protective Services if you suspect abuse or neglect, there…