Unless you work in the insurance industry, you probably have a lot of questions about buying your first home policy. Understanding more about your options and how insurance companies operate should help you get the best possible deal.

Home insurance is a complex issue, but you can make decisions easier by breaking them down into smaller questions, gathering pertinent information, and reviewing your options. While some of the following points might not apply to you, they offer a generalized approach to reviewing and selecting a homeowner’s policy that meets the needs of most people.

Why You Need Home Insurance

Homeowners insurance is a type of multi-line policy that covers residential buildings and items kept at residences while protecting the owners from liability. Homeowners need this type of policy because they:

  • Satisfy insurance requirements set by mortgage lenders
  • Protect owners from liability
  • Pay to replace damaged or destroyed property

Without home insurance, owners could face steep repair costs. Replacing a roof often costs between $2000 and $8000 according to Angie’s List. Imagine spending that much money out of pocket after a storm. With home insurance, you only have to pay a deductible (usually around $500) for your new roof.

Letting home insurance coverage lapse does more than just expose you to high repair costs. It also makes you look like a bigger risk to other insurance companies. When your policy lapses, other insurance will conclude that you either cannot make your payments on time or that you are unreliable at making timely payments. Either way, it can prevent you from getting a good policy at an affordable rate. Some companies won’t approve you for a policy at any price because they see you as a risk that they do not want.

U.S. Insured Catastrophe Losses

$ Billions, 2012 Dollars)
  • $80
  • $70
  • $60
  • $50
  • $40
  • $30
  • $20
  • $10
  • $00
$33.1 1
$37.0 2, 3
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 00
  • 01
  • 02
  • 03
  • 04
  • 05
  • 06
  • 07
  • 08
  • 09
  • 10
  • 11
  • 12
  1. 2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October.
  2. US CAT losses in 2012 will likely become the 2nd or 3rd highest in U.S. history on an inflation-adjusted bases (pvt insured). 2011 losses were the 5th highest.
  3. Record tornado losses caused 2011 CAT losses to surge.

Source: Insurance Information Institute

The recent rise in weather-related property losses due to catastrophes affects both providers and policyholders. Homeowners are particularly affected by unforeseen property damages that are frequently not covered under standard home policies.

What Your Policy Should Cover

Whether you’re a first-time homebuyer or a seasoned homeowner, assessing your coverage needs can be a difficult process.

Chances are that your mortgage company will require you to purchase homeowner’s insurance, so you don’t have a choice. That’s okay because every homeowner needs insurance protection. You just have to know how to compare policies to choose an option that covers your needs at an affordable price.

Before you start comparing policies, though, consider what levels of coverage you need. Most first-time homeowners get the best protection by choosing a policy that:

  • Covers the cost of rebuilding the home
  • Covers their personal belongings
  • Protects them from liability

If a policy falls short, then you probably need to look for a better option. Insurance policies that fall short of these protections leave you open to risk and probably won’t meet your mortgage company’s standards.

Home insurance should cover number events that would otherwise leave you with a large repair bill. A Consumer’s Guide to Home Insurance lists numerous perils covered by home insurance. These include:

  • Fire, smoke, wind, hail, explosions, lightning, and civil unrest
  • Theft and vandalism
  • Falling objects, such as trees
  • Weight of snow, sleet, freezing rain, or ice
  • Ruptured or overflowing heating, air-conditioning, plumbing, and sprinkler systems

Know How to Read Your Policy

According to the National Association of Insurance Commissioners, most home policies have at least six sections that define types of coverage. In most cases, insurance companies will assume that your personal property is worth about 75 percent of your home’s value. That means that if your home is valued at $200,000, a standard coverage plan will generally cover up to $150,000 in personal property coverage. But while it represents the bulk of your policy, personal property coverage represents just one piece of your overall policy. Familiarize yourself with the terms set in all six sections to better understand your coverage levels:

Section A: Physical Damage to Your House

Section A explains how much you will get paid when your house is seriously damaged. If you want to cover the replacement cost of your home, then make sure this section gives you that option. After you agree to the policy, the insurance company will not pay you more than the amount specified in this section.

Section B: Physical Damage to Other Structures

This section covers other structures on your property. This can include sheds, detached garages, and fencing.

Section C: Personal Property Damage

Section C covers the items that you keep in your home. This can include everything from high-end stereo equipment to your children’s clothing. Like Section A, you have some flexibility here, so you want to choose a coverage amount that makes you feel comfortable. Ideally, your policy can replace everything you own after a burglary or extensive damage to the house.

Section D: Additional Living Expenses

Section D tells you how much money you can get from the insurance company when you have to live away from your home.

Let’s say that a storm damages your roof so badly that you cannot live in the house anymore, so your family has to move into a hotel during home repairs. This section specifies how much money you can get for those extra expenses.

This might seem unnecessary, especially to young people who don’t have children, but Section D could potentially save you a lot of money. According to Travel and Leisure, the average daily rate of a hotel room in San Francisco is about $160. Even in smaller cities, such as Denver, you can expect to spend about $100 per night. It doesn’t take long before lodging and food becomes more expensive than your mortgage payment.

Section D protects you from those extra expenses. Remember, though, that the insurance company will only pay up to the amount specified in this section. Anything over that amount is your responsibility.

Section E: Comprehensive Personal Liability

Section E offers comprehensive liability insurance that protects you from lawsuits when you accidentally cause damage to someone else’s property. It also protects you when you get injured on or off your property.

Section F: Medical Expenses

If someone gets injured on your property, Section F of your insurance policy protects you from medical bills and lawsuits. According to the Washington Post the average emergency room visit costs $1,233 (with the possibility of paying as much as $24,000 for something as simple as a sprained ankle), so this is an important part of your coverage.

Identify Coverage Gaps

Unfortunately, standard home insurance policies don’t cover everything that could damage your property. Without extra policies that cover these gaps in coverage, you don’t have any protection against some common disasters.

In September 2013, large areas of Colorado experienced floods that ruined homes and businesses. According to CBS News, more than 7,200 homes and businesses in Larimer and Boulder counties were damaged by the floods. About 1,200 of those affected did not have flood insurance. That mean they will have to pay for repairs on their own.

The good news is that additional coverage helps protect you from disasters not included in your policy.

The bad news is that storm-related coverage gets more expensive every year. Homeowners living in flood prone areas usually rely on the National Flood Insurance Program for affordable coverage. Unfortunately, the Time Magazine reports that costs will rise 25 percent per year until they equal the actual risk of covering homes in flood-prone areas. In other words, someone who paid $500 for a government-subsidized flood policy in 2012 can expect to pay over $1200 by 2016. Some of the most common gaps in standard insurance policies include:

  • Pollution damage
  • Earthquakes, landslides, mudflows, and other land movements
  • Acts of war or overthrow of the government
  • Damage caused by animals, birds, or insects, such as termites
  • Damage deliberately caused to the home
  • Normal wear and tear

How to Shop for Your Best-Fit Policy

1. Consider Coverage Needs in Terms of Your Lifestyle

Your phase of life should heavily inform which level of insurance you opt for.

Young, Single Buyers

A young person who doesn’t have any children might not need as much coverage as a family. When you don’t need to worry about protecting children and other family members, then you can often raise your deductible, save more money, and accept higher risk.

Young Families

If you start a family, then you should consider how your homeowner’s policy affects them. Suddenly, you might not have an extra $500 to spend on home repairs (learn more about this below under Controlling the Cost of Home Insurance).

You might also need more protection from Section D of your policy, which covers additional living expenses if you cannot live in your home . A single young man or woman might not mind spending a week sleeping on someone’s couch, but your children will need a more stable environment, especially after a catastrophe that causes significant damage to their home.

Established Families and Retirees

As your children get older and you near retirement, you can adjust your insurance needs again. Depending on your financial situation, you might want to raise your deductible again so that you can save money on your monthly premiums. With fewer people relying on you for financial and emotional support, you might find that you can take a little more risk.

2. Find Insurance Professionals You Can Trust

If you want a good policy, but you don’t want to do a lot of work to get one at a low price, then you should consider using an independent insurance agent. Independent agents can browse policies from several companies. That lets them give you succinct information about your options so that you can choose a policy without doing much research on your own.

You can check a company’s credentials by contacting consumer agencies in your state. Agencies like Standard & Poor’s can also give you company ratings that will help you decide which ones you can trust.

3. Assess Your Add-on Policy Needs

Many homeowners find that they need additional coverage to protect themselves, their homes, and their personal belongings. Additional and unique policies fill those gaps in coverage. The price of these add-ons can differ greatly depending on where you live, your home’s value, and what you want to cover.

Additional Policy Options

  • Flood Insurance: essential for anyone living in flood-prone areas. The average policy costs about $650 per year.
  • Earthquake Insurance: earthquakes can happen anywhere, but they’re most likely along fault lines. The average earthquake insurance policy costs about $700 a year.

Unique Policy Types

  • Modified Coverage Forms: great for people who own older homes with replacement costs that exceed market value.
  • Condominium Unit Owners Form: insurance specifically designed for people living in condominiums.
  • Dwelling Fire Form: pays for repairing fire damage, but does not pay for liability, personal property, or medical expenses

Other Weather Hazard Protections

  • Guaranteed Replacement Cost Coverage: extends your home insurance coverage by up to 20 percent.
  • Inflation Guard: increases your insurance coverage limit over time.
  • Personal Umbrella Liability Insurance: additional liability protection that exceeds that offered by your standard home insurance policy.
  • Scheduled Personal Property: additional coverage for expensive belongings such as art, jewelry, and furs that exceed the typical personal property coverage of a home policy.

4. Find a Quality Provider

Now that you know what level of coverage you need, you can start comparing companies and policies. Start by using the National Association of Insurance Commissioners website to weed out companies that have received a lot of complaints. The NAIC will tell you whether an insurance company has received complaints about things like:

  • Claim handling delays
  • Claim denials
  • Unsatisfactory settlement offers
  • Canceling policies
  • Poor customer service

You can also contact your state’s Insurance Commission to learn more about the insurance companies that serve your area and a listing of all licensed insurance agents and brokers. You can find contact information for your state on this NAIC map.

5. Know the Right Price

Insurance companies look at several factors when determining how much to charge for home policies. Standard questions include:

  • How old is your roof and plumbing?
  • What is the value of your home?
  • What is your home’s rebuild cost?
  • How old is your home?
  • Does the home have a swimming pool?
  • Does the home have a security system?

The insurance company will also look at your address to determine things like:

  • Whether you live in a high-crime area
  • How close the nearest fire station is to your home
  • Whether you live in an area prone to wildfires, flooding, storms, or earthquakes

All of this impacts the price of your policy.

Once you have several quotes, you should know the fair value of insuring your home. You might have a few outliers (companies that charge extremely high or low prices), but most of them will cluster in a price range.

Beware of companies that offer extremely low prices. They’re attractive to buyers, but they usually have low prices for a reason. Remember that customer service matters, too. If a company doesn’t give you prompt responses now, then they certainly won’t after you’ve already paid for a policy. Always double check the NAIC database before you purchase insurance from a company that seems exceptionally cheap.

Average Premium for Home Insurance Policies *

  • $1,000
  • $900
  • $800
  • $700
  • $600
  • $500
  • 00
  • 01
  • 02
  • 03
  • 04
  • 05
  • 06
  • 07
  • 08
  • 09
  • 10*
  • 11*
  • 12*

Home Insurance premiums are rising in response to higher catastrophic losses.

Source: Insurance Information Institute

Homeowners should be aware that average premiums are going up due to higher rates of property losses nationwide.

How to Lower Your Risk Level and Your Rates

Homeowner coverage premiums might feel outside of your control, but you can do some things to reduce your risk level in the eyes of insurers. If you feel like prices are too high, consider using the following tips to make policies more affordable. Each one can have an impact on how much you pay every year.

Raise Your Deductible

Your deductible is the amount of money that you have to spend out-of-pocket before the insurance company starts picking up the tab. Raising the deductible makes you more responsible and reduces the insurance company’s risk. That usually means you pay a lower rate.

Keep in mind that you do have to accept additional risk when you raise your deductible. Only raise your deductible if you can afford it. If you don’t have enough money to pay for $1000 of repairs, then you shouldn’t have a $1000 deductible.

Assuming that you can afford a little more risk, you can save quite a bit of money. According to a booklet published by the Insurance Information Institute, most insurers recommend a $500 deductible. Raising the deductible to $1000 could lower your bill by as much as 25 percent.

Improve Your Credit Score

Insurance companies assume that people with good credit scores are more responsible than those with poor scores. Maintaining a good credit score makes you look less risky to insurance companies, so they’re more likely to give you lower prices.According to myFICO, you can keep your credit score healthy by:

  • Paying your bills on time
  • Reducing the amount of money that you owe creditors
  • Keeping credit card balances low
  • Checking your credit score annually to find mistakes

Install Extra Security

You could qualify for discounts by installing deadbolt locks, smoke detectors, and a security system in your home. Those willing to spend money on an in-door sprinkler system that puts out fires and contacts the police automatically can save as much as 20 percent.

Get Serious About Home Improvement Projects

You can make your home safer and more appealing with some simple improvements. Putting a fence around a pool, for instance, could lower your insurance premium. Other noteworthy improvements include:

  • Updating your electrical and heating systems
  • Replacing old water pipes
  • Installing a new roof
  • Replacing damaged patios and decks
  • Repairing wood, tile, and linoleum floors

Bundle Your Insurance

Many insurance companies offer discounted prices to customers who purchase multiple policies. Buying your car and home insurance from the same company, for instance, could give you a five to 15 percent discount.

Bundling discounts vary from company to company, so explore your options by asking for quotes that include multiple policies.

Ask About Discounts

You could qualify for insurance discounts for any number of reasons. Members of the military often get discounted rates. Geico, for instance, gives a 15 percent discount to military personnel. You might also get a discount for belonging to an alumni, professional, or travel association. (Some associations have deals with insurance companies that lower costs for their members. Other memberships show insurance companies that you are the kind of client they want.)

Ask companies to give you information about discounts so you can explore all of your options. You don’t want to miss any way to lower your insurance costs. Even if you only save a small amount each year, those discounts add up to big savings.

Don’t Switch Providers Too Often

Insurance companies want to keep their customers, so they often reward loyalty with discounted rates. Switching erratically from company to company can make you look risky. Insurance companies often share information with each other, so they know that you jump from policy to policy.

Never Stop Shopping

Staying with the same home insurance company for many years could lead to cheaper rates. Still, this doesn’t mean you should necessarily stay with the same company for life. If you can get comparable coverage from another provider at a better rate, go for it. By comparing insurance companies every few years, you can make sure that you never pay more for the coverage that you need. Just don’t make a habit of switching providers every year.

The Takeaway: Remember the Basics

You don’t have to be an insurance expert to get a good deal on a home policy. Just remember the basics:

  • Your homeowner’s policy has at least six areas of coverage that you can adjust to match your unique needs
  • Floods, earthquakes, and wildfires are rarely covered, so you might need an additional policy if you live in an area prone to these and other disasters
  • The price of your insurance policy depends on many factors, including where you live and how much coverage you need
  • You can control the price of your policy by making certain decisions about where you live, how you protect your home, and how much risk you are willing to accept
  • Always ask about discounts
  • Bundling your home policy with other types of insurance often gives you cheaper prices
  • Your policy needs will likely change throughout your life, so it’s up to you to decide how much coverage you need during each of life’s phases
  • Always research insurance companies before buying their policies. Fraud does exist in the insurance world. You do not want to fall victim to unscrupulous companies
  • Some licensed insurance companies offer better services than others. Use the NAIC database to make sure you choose a company with few complaints

As long as you keep these basic points in mind, you should be able to navigate the insurance world without too many problems. Whenever you feel overwhelmed, take a step back, review the above information, and approach your options confidently.

Buying home insurance for the first time can feel stressful (as does buying it for the second, third, or fourth times), but you probably have more control over the situation than you realize. Informed, savvy buyers can make better decisions than those who don’t know how to compare options or even get the information that they need to compare policies. That means you’re prepared to make a decision that will protect your home and family without spending more money than necessary.