Choosing the right homeowners insurance policy can be a complicated task. Homeowners need to analyze their risks and living situation, but also objectively compare insurers’ rates, customer service and claim reimbursement efficiency.
Read on to see what factors to consider when choosing the best home insurance for you.
Table of Contents
- Learn About Coverage Options and Policy Types
- Get a Better Price by Comparing Quotes
- Choose the Deductible That Best Suits Your Finances
- How to Choose the Best Homeowners Insurance FAQ
How to choose homeowners insurance
Here are some simple steps to take when in the market for a new homeowners insurance policy.
Learn About Coverage Options and Policy Types
The first step when choosing the right homeowners insurance policy is to truly understand what homeowners insurance is, what it does and doesn’t cover, and how.
Know what homeowners insurance covers, and how
Here are the standard types of coverage you can expect from any home insurance policy:
- Dwelling coverage covers damage to your house and its structure.
- Other structure coverage takes care of fences, guest houses and tool sheds, and any other buildings or structures on the property.
- Loss of use coverage reimburses you for costs you incur, including hotel stays and restaurant meals, if your home is rendered uninhabitable. It’s also referred to as additional living expenses insurance (ALE).
- Liability coverage protects you against medical and other expenses in the event a visitor to your home gets hurt on your property.
- Building code coverage covers the cost of getting your home up to code when damaged by a covered peril.
Every policy will also protect against many or most of the almost universal perils that can cause damage to homes. Those include household fires, of course, along with rain that enters the home directly, and property damage caused by extreme cold spells, such as burst pipes.
Those customary perils are covered by the standard deductible for the policy — that is, the amount per year (often around $1,000) that the homeowner must pay out of pocket before insurance reimbursement pays for remaining expenses.
Other less universal and less frequent weather perils, however, are typically covered differently and less generously. In areas where wildfires are prevalent, for example, some insurers may not cover the peril at all in their policies.
Damage from hail and windstorms is usually subject to a different, higher deductible for claims, such as a percentage of the total coverage for the home. That can result in the homeowner paying thousands of dollars more than for a regular claim before any reimbursement kicks in.
Additionally, in most states that are prone to hurricanes, special hurricane deductibles — again, usually a percentage of the home’s total coverage — can apply when named storms reach a certain intensity.
Choose your reimbursement type
Your next step is a crucial one: choosing how you’d prefer your reimbursement if something were to happen to your home and belongings. Depending on the reimbursement arrangement you choose, the insurance company could reimburse you anywhere from a depreciated value of the damaged areas of your home to the full bill for a like-new replacement.
A cash value policy will reimburse you based on the actual cash value of items, with depreciation taken into account. For instance, if your 10-year-old TV is destroyed, you’ll get the cash value of a 10-year-old TV, not a new TV.
A replacement cost policy, by contrast, will reimburse you at a rate based on what it would cost you to repair or replace what was ruined. This is higher than the cash value rate, so you could actually replace that 10-year-old TV in the example above with a new TV. Note that the repair or replacement of some items, such as roofs and fences, are typically only reimbursed at a cash value rate.
If you live in an area with rapidly rising home prices or high building costs, or if you live in a new home with high-end finishes and fixtures, you might want to look into extended or guaranteed replacement cost coverage, which will ensure that you can rebuild your home even if doing so costs more than the policy limit.
Other factors to consider for additional coverage
Depending on your circumstances — including where your home is located, the items in it, and whether it’s an older home — you may need to expand your standard home insurance through extra-cost supplements to the policy, otherwise known as endorsements or riders.
The add-ons offered vary by home insurance company and policy. But these are among those that are most frequently offered, and are worth considering depending on your situation:
- Coverage for specialized items. Expensive items, such as power tools or antique collectibles, might need extended replacement cost coverage. This lets you collect more for these than the per-item limit under standard coverage, which is often $1,000 or $1,500.
- Coverage for damage by pets. Many policies explicitly exclude property damage done by pets. If you have a dog or cat with destructive tendencies, consider adding coverage for any havoc they might cause.
- Small-business coverage. If you operate a modest business from home, endorsements to your home insurance may allow you to increase your coverage for business-related equipment above the standard amount of $2,500 or so. You may also be able to pick up a business liability insurance endorsement in case someone is injured on your property.
- Building code coverage. This adds to standard dwelling coverage, which covers restoring your home's existing structure to its original state, any costs to bring the home up to current building codes during the repairs.
- Identity theft restoration coverage. This helps to reimburse you for costs you incur after identity theft, such as legal fees, lost wages or costs to mail documents.
- Landscaping coverage. Covers damage to your landscaping, which may not be included in your standard coverage.
- Water backup coverage. Not typically covered under a standard homeowners policy, this protects against water backups that may damage your home or its contents, such as furniture or appliances.
- Earthquake insurance. Though sometimes bought as a separate policy, like flood insurance, you may also be able to add this coverage to your standard home policy.
Some other protections for your home, though, require policies separate from your homeowners one. These include:
- Flood insurance. Home insurance does not cover damage from any water that does not enter your home directly — such as rain or snow, for example. Protection against flooding requires a separate flood insurance policy. Such a policy may be wise even if you live in an area in which flooding has been relatively rare, especially given the effects of climate change. For more information, make sure to look up the National Flood Insurance Program.
- Landlord insurance. It’s possible your home insurance may cover occasional rental of your home or part of it; check with your insurance company or agent. But any regular rental arrangements will likely require landlord insurance, which includes protection against both damage to your property and the liability risk to you posed by having renters.
Get a better price by comparing quotes
As insurance costs can vary so much according to specific circumstances, we recommend getting insurance quotes from at least three companies, making sure that each one includes every coverage option you need, whether it’s standard to the policy or an add-on option.
Consider, too, opportunities to bundle your home insurance coverage with other policies, especially your auto insurance so you can earn discounts on each policy. Some companies also offer discounted rates for security systems or burglar alarms, smoke and carbon monoxide detectors, deadbolts and other safety measures around the home.
After you’re well aware of all the coverage, bundling and discounts, establish a base for comparison. For example, try choosing the same amount of coverage, say, $300,000 on a $500,000 home (with the same deductible on each) then compare the premiums.
A higher deductible results in a lower premium, and vice versa. Bear in mind that, as with car insurance, insurance providers will also take your claims history into account when determining how much you’ll pay. Depending on your state and your insurer, a bad credit score or poor credit history can also raise your rates considerably.
Speak to an independent insurance agent
If you need help picking the right insurance coverage or figuring out how to buy home insurance in general, it could be a good idea to contact an independent insurance agent or broker.
A broker works with multiple homeowners insurance companies and can give you unbiased comparisons between rates, coverage options and customer service history. Considering their experience with past clients and claims, they might also have a clearer picture of how your needs should be met and which company is your best bet.
You can contact your state’s Department of Insurance — which issues broker’s licenses — to get access to a directory or make sure that the independent agent you’ve found is certified. You can also look into associations such as Trusted Choice or the Independent Insurance Agents & Brokers of America.
Choose the deductible that best suits your finances
There are two basic types of homeowners insurance deductibles:
- Dollar amount deductibles. These define a specific amount that’s taken off your claim payment (and that you’ll therefore have to cover out of pocket). For instance, if your roof suffered damage that would cost $20,000 in repairs, and your dollar amount deductible was $1,000, your insurer would pay out $19,000.
- Percentage deductibles. As the name says, these are determined based on a percentage of the home’s insured value. Say your dwelling coverage is $100,000 and you have a 2% deductible. If you had to make an insurance claim, your deductible would be calculated at 2% of $100,000, or $2,000. That amount would be subtracted from any claim you made for a covered loss.
All other policy details being equal, the higher your deductible, the lower your premium. Many homeowners insurers offer a minimum deductible of $500 or $1,000. Provided you can afford it, though, insurance pros often recommend choosing a higher deductible — say, $2,000 instead of $500 or $1,000 — then banking the difference in the insurance premium you would pay with a low versus a high deductible for a year or two.
Pay only for the amount of coverage you actually need
When you’re deciding how much homeowners insurance coverage you need and what your policy’s coverage limits should be, take into account your home’s replacement cost, and that of any outbuildings or structures. For a general idea of how to determine replacement cost, multiply the home’s square footage by your area’s building costs per square foot. An appraiser, insurance agent or real estate agent can help.
Second, inventory your personal property — everything from clothing to tech to collectibles, sporting equipment, and linens or silverware. Remember to include your furniture and any outdoor equipment like barbecues. It’s good practice to be as specific as you can, jotting down when and where you purchased expensive items. There are many home inventory apps that can streamline this process and keep you organized, and the Insurance Information Institute also has a number of helpful resources.
Once you have a rough idea of how much it would cost to replace or repair your property, you’ll know how much coverage you actually need and be able to choose a policy that suits your budget and risk tolerance, while taking into account the likeliest perils that may occur.