How to Buy Homeowners Insurance

What Is Homeowners Insurance and How Does It Work?

Homeowners insurance helps protect you financially if a covered event causes damage or loss to your house or personal belongings. Many policies also include protection to help cover legal expenses if you face a liability lawsuit.

Homeowners policies typically come with a lot of built-in protections, but some policies are more comprehensive than others. Make sure you understand what’s covered by the policies you’re considering.

When a covered event like a fire or storm damage does occur, you can file a claim through your insurance agent. Your policy should help cover the associated costs, up to your policy’s limits. This is where replacement cost versus market value comes in.

Most homes are insured for replacement cost, which is the amount it would cost to rebuild it to the same standards. On the other hand, market value is what your home is worth on the market.

It’s almost always more expensive to build a new home than it is to buy one, so replacement cost policies typically provide better financial protection. Your independent insurance agent can help you understand your home’s replacement cost and your insurance options.

How to Buy Home Insurance: 5 Steps to Shopping for Home Insurance

Shopping for home insurance can be a complicated journey, especially if you don’t have an independent insurance agent to help you. It’s easy to buy a policy online, but doing it on your own may get you insufficient or overpriced coverage.

These steps will help guide you through the process, which should start early in your home-buying journey. To get optimal coverage at a great rate, work with an independent insurance agent who can help you find and understand the ideal home policies.

Even if you paid cash or your lender doesn’t require homeowners insurance, getting protection is still strongly recommended. Without it, you could face paying for a total home rebuild if the house is destroyed, which isn’t possible for most Americans.

So, where and when do you start? The answer: as soon as you find a home you love.

Home insurance will be an ongoing cost of home ownership, so it’s a key factor when determining affordability. Before making an offer on a house, you should get home insurance quotes to know if you can afford to protect it.

To get accurate quotes, you’ll need to provide information about the house, including:

• Square footage
• Foundation type
• Roofing material
• Age
• Types of heating and cooling systems (gas, electric, etc.)
• Renovation history
• Outdoor structures

You’ll also need to provide information about your desired level of coverage and your household, like if you have kids, pets, a pool, or a trampoline.

Typically, your lender will require you to insure your home up to the amount of money you borrowed to purchase it. For instance, if the home’s price was $300,000, but you made a $40,000 down payment, then you’ll need a policy limit of at least $260,000.

You may want coverage beyond the amount mandated by your lender, and you’ll need to choose between a replacement cost or actual cash value (ACV) policy. 

Replacement Cost: Most people opt for replacement cost coverage because they would like to rebuild their home if it gets destroyed. The cost to rebuild your home (including materials and labor) is assessed and then used to establish policy limits. If you have $300,000 of coverage on your home and it gets destroyed, then the insurance company will pay you up to $300,000 to rebuild.

Each state has slightly different laws when it comes to this payout. Most states will pay you whatever it costs to rebuild, up to your policy amount. So, if it costs $275,000 to rebuild, they will pay you $275,000 and not the full $300,000. Other states will pay you whatever you have on your policy, even if rebuilding costs less.

Actual Cash Value: The other option is to have an actual cash value policy or ACV. For ACV policies, you can choose limits that align with your desired protection level and budget. If a covered loss occurs, however, the payout is only for the value of the item before it was damaged, up to your policy limits. Because ACV policies take depreciation into account, payouts are rarely enough to cover replacement costs.

This option is commonly used on lower-value homes where you might not want to rebuild. For example, if you buy an older home for $50,000, you could buy an ACV home insurance policy with $50,000 coverage on it.

If your home is totally destroyed on an ACV policy, you would receive $50,000 in cash. But if your home is partially destroyed, your claims check would take into account depreciation and the age and condition of the home, meaning your claims check might be much less than it would actually cost to repair or replace the damage.

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Once you know your desired coverage, you can compare policies for the home you want to buy. Different insurers will offer different policy coverages, exclusions, and pricing. Comparing your options will help you find one that meets your needs.

When it comes to pricing, insurers use a variety of factors to determine your home insurance premium. These include:

• Your desired policy type and limits
• The value, condition, and location of the home
• Claims history for the home

Many insurance companies also offer a wide range of discounts, such as:

• Bundling your car insurance with the same company
• Having added security, like video cameras or being in a gated community
• Being a senior

If you let an independent insurance agent do the legwork for you, they’ll get quotes from multiple insurance companies and then present you with several options. Your independent insurance agent will also explain the differences between each type of coverage and the pros and cons of each company.

The best home insurance option for you might not necessarily be the cheapest. You can always remove coverages and strip down your policy to the bare bones to save money, but you will likely regret doing so if you have a claim.

Be sure to review your options with an independent insurance agent, who can give you recommendations and advice on insurance companies and policies. They may also recommend add-ons like:

• Flood or earthquake insurance: Standard homeowners policies don’t cover flood or earthquake damage, so homes in at-risk areas will need an add-on policy to be protected.
• Guaranteed/extended replacement cost: If costs to rebuild or replace your property or possession unexpectedly increase, a guaranteed/extended replacement cost policy can help cover costs above your primary policy limits.
• Personal property endorsement: Particularly valuable items, like fine art or jewelry, may need a policy endorsement to be covered up to their full value.

Once you have a closing date, you can purchase your new home insurance policy. You can usually set the start date as the day you’ll close on the home, so it’s covered as soon as it legally becomes yours. 

To buy a home insurance policy, you’ll likely need to sign some paperwork online or in person, and a final loss report may be run on the property. If there have been any unreported losses in the last three to five years, then your premium could go up.

You’ll need to pay your premium to activate your coverage. If it’s being paid out of an escrow account, your lender will usually take care of this. You can still issue your policy by selecting “Bill to Mortgagee” when finalizing your coverage.

If you’re paying for the policy on your own, you can typically select monthly payments, quarterly, semi-annual, or annual payments.

But what if you have an existing homeowners or renters insurance policy? You’ll want to cancel that policy while avoiding gaps in coverage. Your insurer may be able to cancel it on a specified date and adjust your premium accordingly.

If you end up canceling your policy before you leave the property, short-term gap coverage can help make sure you’re protected if an incident occurs before you move.

Mistakes to Avoid When Buying Homeowners Insurance

Even if you work with an independent insurance agent, you’ll be the one to decide on and control your homeowners insurance policy. When doing so, try to avoid these mistakes:

• Prioritizing price over coverage: Affordability is important, but low premiums won’t offset the costs of a flimsy policy that doesn’t offer adequate protection when it’s time to file a claim.
• Being in the dark about what your policy includes: If you don’t understand what your policy covers, you could run into unpleasant surprises down the road. You should make sure it covers risks you want to be protected from, like liability suits, theft, and plumbing issues. It may also include coverage you wouldn’t expect or know to use if you hadn’t taken the time to review your policy information.
• Not keeping an inventory of your belongings: You should keep a detailed inventory of your personal belongings, including electronics, furniture, appliances, instruments, and more. Include descriptions, photos, and serial and model numbers of each, and store this information somewhere safe. This makes it easy for your insurer to estimate their value in the event of a claim.
• Blindly sticking with the same policy each year: Just because this policy is best for you now doesn’t mean it will be the best option next year. Sometimes, better pricing or coverage will become available elsewhere. If you do choose the same policy, make sure you let your agent know about any renovations, additions, or other changes to your home, which could affect the coverage you need.

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Why Work with an Independent Insurance Agent when Shopping for Home Insurance?

Making sure your home is fully protected without overpaying is what an independent insurance agent does best. They can be a resource for any questions you might have, plus somebody to turn to if you have a claim.

An independent insurance agent will also give you home insurance quotes from multiple companies, finding you the best option for your needs. Talk to an agent today to give your home the protection it deserves.

Frequently Asked Questions about Buying Home Insurance