8 Critical Facts to Know About Buying Homeowners Insurance Today
Homeowners insurance is not legally required anywhere in the U.S., but you will likely want to have a policy on file to financially protect your dwelling, belongings, and personal liability.
Moreover, if you have a mortgage, your lender almost certainly requires home insurance as a way to stabilize the value of the property by ensuring it can be properly repaired or rebuilt in the case of a covered loss.
There are many types of home insurance available from carriers in every state, ranging from basic HO-1 policies to the more comprehensive HO-3 and HO-5 forms.
Many insurers also allow for extensive policy customization, so that policyholders can add endorsements to their insurance, adjust its limits, extend its coverage to special circumstances such as earthquakes and floods, and bundle it with auto and life insurance for an overall lower rate.
What should you look for in a home insurance policy? Let’s review the most important facts to know when shopping for coverage.
1. Homeowner’s policies fit into Eight general categories
The immense variety of homeowner’s insurance is reflected in the broad HO classification system, which includes eight distinct policy categories:
- HO-1 (Basic Form): Applies only to a narrow set of named perils. If a hazard isn’t specifically listed in the policy text, it is not covered. Belongings and liability are typically excluded. HO-1 policies are relatively rare. In some states, they are more expensive than more comprehensive forms, with some mortgage lenders not considering them sufficient coverage.
- HO-2 (Broad Form): Covers the same named perils as an HO-1 along with others including unexpected failure of HVAC systems, damage to electrical infrastructure, and harm caused by falling objects. An HO-2 might also cover belongings and liability. At its core, though, it is still a named peril policy, meaning that its coverage is relatively limited.
- HO-3 (Special Form): One of the most popular policy types, the HO-3 covers everything an HO-2 does while going much further. HO-3s cover the dwelling, its attached structures, the belongings within, and the policyholder’s personal liability. As an open-peril policy, an HO-3 will usually cover anything not specifically excluded in writing. Common exclusions include floods and earthquakes.
- HO-4 (Tenant’s Form): Also known as renter’s insurance, this policy type covers the belongings and liability of a tenant but not the dwelling itself, since the landlord’s insurance would cover that. HO-4s may also include coverage for additional living expenses.
- HO-5 (Comprehensive Form): True to its name, the HO-5 is the most wide-ranging form of homeowners insurance. It will cover an extensive number of perils on an open-peril basis, often with higher limits than any other policy type.
- HO-6 (Condo Form): The HO-6 is similar to comprehensive homeowners insurance policies, except limited to condominiums. Accordingly, it governs belongings, liability, and some portions of the unit’s structures, with the rest covered by a homeowners association policy.
- HO-7 (Mobile Home Form): A comprehensive home insurance policy designed specifically for mobile and manufactured dwellings.
- HO-8 (Older Home Form): Similar to an HO-3, but optimized for older homes that may have significant depreciation or be part of a historical registry.
Selecting the right policy will ultimately depend on the type of home you have, your budget, and the relevant perils in your local area. Often, the HO-3 will be the best option, but be sure to consult with an agent about everything their insurer offers.
2. You should always compare quotes from multiple carriers
“How much does home insurance cost?” is a question without a universal answer. Policy premiums and deductibles vary significantly by carrier, home construction type, geographic location, the policyholder’s claims history, and even seemingly minor facts like whether the homeowner has a dog.
Since insurers will quote different rates for the same policy types, it’s critical to shop around and see which carrier offers the most competitive prices for specific types of coverage.
The more companies you can compare, the better. Resources from industry bodies such as the National Association of Insurance Commissioners can be helpful along the way, to give you an idea of the average cost each of the major home insurance types (e.g., HO-3s and HO-2s) in your state.
3. Pay attention to your deductible, not just your premium
In calculating the actual cost of your homeowners insurance policy, you must consider more than just the premium. The policy’s deductible will determine how much you pay in the event of a loss.
Here’s how the two major components of a policy’s pricing work:
- Premium: The amount you pay at a regular interval to keep your policy active. In many cases, premiums are paid via lender-required escrow accounts, meaning the insurance is paid for piecemeal within each regular mortgage payment, without any standalone direct payment from the homeowner to the insurer.
- Deductible: How much you must pay out of pocket before the insurer will reimburse your claim. For example, if your deductible is $500, any loss under that amount would not be paid for by your policy. Homeowners deductibles may be calculated as dollar amounts or percentages.
Selecting the right deductible can be tricky. A higher deductible means you will shoulder more of the costs for any loss but will enjoy a less expensive premium; the converse is also true.
Note that in some cases, it may make sense to pay for a loss yourself if you can afford it, so as to avoid the premium increase that will result for your claim and that may end up being more expensive in the long run.
4. Cheaper insurance is not always better
When you shop for insurance, price is likely a top concern. However, the least expensive policy on the market will not always be the best choice, as it might exclude critical endorsements and clauses that, while adding to the total cost of home insurance, provide important protections.
Customizing your policy with endorsements for valuables like jewelry, firearms, and fine art will likely raise your premium but also give you more coverage if any of these items were lost.
Similarly, adding earthquake insurance, a rider for one-off property rentals, or an umbrella policy that greatly increases your liability limits might be a prudent choice depending on your situation. Don’t skimp on coverage if you have valuable property to protect and can afford the additional policy provisions.
5. Replacement cost value is usually preferable to actual cash value
Homeowners policies may offer a choice between replacement cost value (RCV) or actual cash value (ACV) for your belongings. The distinction between the two can seem technical, but it’s relevant to both the cost of your premium and what your policy would pay for.
With ACV, there is a deduction (in the policy’s payout) for the depreciation of the items in question, whereas RCV does not have any such deduction. RCV will pay for the replacement of the lost item with one of equivalent value.
That can make RCV worth the added cost in your premium.
6. Consider adding flood insurance if you live in a high-risk area
The National Flood Insurance Program is a federal initiative that provides affordable coverage to homes in flood-prone areas, with most of its covered residences in Florida and Texas.
A few private insurers also offer flood policies with additional coverage. Note that leaving the NFIP and later rejoining it can significantly raise your premium.
7. Regularly reassess your coverage so you’re not underinsured
The amount of dwelling coverage you will need will primarily depend on the cost of rebuilding your residence after a complete loss, not the original price you paid for the home or even its current estimated value. This figure will change over time, along with the price of materials and labor.
It’s advisable to occasionally reevaluate the amount of dwelling coverage you have to make sure you’re adequately insured. Any time you add a new structure like a deck or make any renovations is an excellent occasion to do so.
8. Be honest about the uses and features of your property
Let your insurer know about whether you plan to use your property for short- or long-term rentals, as doing so might require modifications to your policy and premium or even the purchase of additional landlord’s insurance.
Likewise, disclose the presence of risky features like trampolines or whether you have a pet, as these factors will affect your need for liability coverage.
Not disclosing everything could result in unexpected problems with or cancellation of your policy. Worse, it could leave you without sufficient liability protection if someone is injured on your property.