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Homeowners Insurance 101: The Best Coverage for the Least Amount of Money

How Home Insurance Works and How to Save Money

TL;DR

Skip down to our tips for how to save money on homeowners insurance and our BIG recommendation.

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Introduction

Buying your home is one of the biggest financial commitments you’ll make in your adult life. Not only will it be the place where you’ll live your life and raise your family, but it will also be an asset that you’ll want to improve upon and protect for decades to come.

Because of this, you’ll want to ensure that you do everything you can to make sure you and your house are protected. That’s why you’ll absolutely need to get homeowners insurance.

Whether you are buying your first home or evaluating options on your current home, there’s a lot to know when it comes to homeowners insurance and how it works. In this post, we’ll walk you through some of the most common questions and show you have you can also save some money in the process.

What is Homeowners Insurance?

Homeowners insurance is a policy that financially protects you, your home, and your personal belongings from damage or theft. It generally consists of two out-of-pocket costs: The premium and the deductible.

What is a Homeowners Insurance Premium?

Your homeowners insurance premium is the amount of money you pay to have active insurance on your property. You can either pay this directly to the insurance company or pay it through your mortgage escrow. Although terms can vary, most homeowners insurance policies will renew every 12 months.

What is a Homeowners Insurance Deductible?

A homeowners insurance deductible is how much money the homeowner would have to pay towards a claim. For example: If you have a $1,000 deductible and a storm causes $10,000 worth of damage, then you would have to pay $1,000 while the insurance company would pay the remaining $9,000.

What is the Typical Cost for Home Insurance?

The average homeowners insurance premium is $1,211 per year according to the National Association of Insurance Commissioners. This is a very general figure and can fluctuate widely depending on a wide range of factors, among others: 

  • State you live in
  • Size of your house 
  • Age of your house
    • Roof
    • Plumbing
    • Electrical
  • Quality of the construction
  • Materials used in the construction
    • Fire resistant materials
    • Non-fire resistant materials
  • Proximity to Fire Department and/or fire hydrant
  • Proximity to the coast 
  • Swimming Pool
  • Credit rating
  • Claims history

Is Home Insurance Mandatory?

For most states in the U.S., you’re not legally required to have homeowners insurance. However, since most homes are technically owned by the bank (since they are under a mortgage), your lender will require that the property is insured.

Is Home Insurance Tax Deductible?

The IRS does not recognize the homeowners insurance as tax-deductible. Unlike your mortgage insurance, you can not include the cost of your insurance premiums if you itemize your deduction when you file your Federal tax return. 

What Does Homeowners Insurance Cover?

A homeowners insurance policy will financially protect you and your home in a variety of ways:

Dwelling / Primary Structure

Also called “hazard insurance”, most policies will protect both the inside and outside of your home against any of the following types of threats:

  • Fire / smoke
  • Storms / hail / lightning / ice or snow
  • Windstorms / tornadoes
  • Theft / vandalism / crime
  • Falling objects (such as tree branch)
  • Accidental damage from water, plumbing, electrical, or household utilities
  • Vehicles (such as drunk driver hitting your home)
  • Riots

Other Structures

If you’ve got other structures on your property such as a detached garage or shed, then they will often also be covered by your homeowner’s insurance and have the same kind of protection. However, you should read your policy and be sure that they are listed in the details.

Personal Property 

Basic items inside your house such as furniture, appliances, clothes, etc. are covered by home insurance. 

Valuable Items 

If you own a lot of high-value items and collectibles (like jewelry or art), then these things may not be covered or will only be partially covered. In that case, it’s highly recommended that you get a special rider or even a separate policy.

Personal Liability 

If something happens to another person on your property, your homeowner’s insurance will cover the medical expense regardless of who is at fault. This could be anything from a slip and fall to a dog bite.

Personal liability will even protect the homeowner if they require legal defense or are hurt while off the property. Most experts recommend having at least $300,000 worth of coverage.

Additional Living Expenses

If you are forced out of your home because of an accident, your insurance will pick up living expenses for you to be able to pay for temporary accommodation.

Guest Medical Expenses 

If you have a visitor and they are hurt in a minor incident, regardless of fault, your insurance will pick up the medical costs generally up to $5,000.  

What’s Not Covered by Homeowners Insurance

Unfortunately, most standard policies will not protect you against every possible threat. Some of the things they usually exclude will be things like:

Replacement Cost vs Actual Cash Value

Because your home and all its processions can depreciate over time, some insurance companies may only be willing to pay you the value of what they’re currently worth rather than what you originally paid for them. This is called “actual cash value”.

If you’d rather receive the full current value of your home and all its items, then you will need to make sure your policy includes “replacement cost”. This means depreciation will not be considered and you will be paid what you originally paid for these items. 

You can even elect to have “guaranteed” or “extended” replacement cost. This will take into account inflation and provide some extra buffer that goes beyond your policy limit. 

What is a Home Insurance Claim? 

A homeowner’s insurance claim is when you file an official request for coverage or compensation against your policy. This could be for any of the reasons already mentioned above: Damage, theft, injury to a guest, etc.

How Do You File a Home Insurance Claim?

Since filing an insurance claim is a transaction that is subject to legal consequences, it should be made responsibly and with complete transparency. Here are the steps you would need to take:

  1. Contact your insurance provider (immediately) and fill out any forms required.
  2. If necessary, contact the police and make an official report.
  3. Allow the insurance company or inspector to review the damage.
  4. Provide any evidence of the value or state of condition before the damage using receipts, photographs, videos, etc.
  5. If at any time you are unclear about the process or a topic, feel free to speak up and ask questions. 

Remember that insurance agents and adjusters are people too and can often make mistakes. That’s why you’ll want to read everything they send you and stay as involved as possible.

Are Insurance Companies Regulated?

There are no federal regulations for insurance, but each company must comply with individual state regulations. The main thing you need to understand as a consumer is that companies are allowed to charge rates up to the point of being excessive, as rates are not allowed to be “excessive.” Rates also need to be “adequate,” such that an insurance company is never at risk of not being able to pay out large amounts of claims.  

Which Home Insurance Company is the Best?

The answer will be highly individualized depending on what people have experienced, but in an industry that is playing within the confines of regulation, what will matter most to you other than what you pay, is their level of customer satisfaction.

How to Find a Home Insurance Agent Locally

Don’t forget that there are probably dozens of local, independent insurance agencies and reps in your area. 

The main positive being that you’ll get the benefit of establishing contact with a real person and possibly working with them for several years to come. While the drawback is that they may not always give you the best deal and you will still need to shop around.

Sites like Angie’s List and others that cater to local service providers can be a great place to start. You can also simply Google “independent homeowners insurance agents near me” to get dozens of local listings.

How to Shop for Homeowners Insurance

  1. Pick out multiple insurance providers to get quotes from
  2. Check with your mortgage lender
  3. Have your prior insurance policy handy
  4. Know the details of your home
  5. Determine how much coverage you want
  6. Make an apples-to-apples comparison
  7. Prepare for the inspector

Pick out multiple insurance providers to get quotes from

You can do this by checking our page of Best Insurance providers.

Check with your mortgage lender 

Sometimes your mortgage lender will have specific requirements about the level of coverage you have to maintain for your homeowner’s insurance. To make sure you’re fully covered, you may want to check your paperwork or simply contact them directly.

Have your prior insurance policy handy

If you’ve already got homeowners insurance and are looking to switch companies, then it will be a really good idea to have it available to compare against the new quotes. At a minimum, you can use it to gauge what levels of coverage you were previously getting, what it cost, etc.

Know the details of your home

Before the insurance company can provide you with a quote, they are going to ask you several questions about your home and its construction.

For starters, they’ll want to know the current market value of your home. You can assist them by providing any of the following:

  • A recent home appraisal
  • Your Zestimate from Zillow
  • Your last property tax assessment

In addition, insurance providers will likely also ask you about the following:

  • What is the square footage of your home?
  • Is the house made of brick or wood?
  • Is your garage attached or detached?
  • Do you have any other stand-alone structures on the property (such as a shed)?
  • When was the last time you got a new roof?
  • How old is your furnace?
  • Do you have a sump pump?
  • Do you have a dog, pool, or trampoline?
  • Etc.

Determine how much coverage you want

In addition to deciding how much liability insurance you’d like, you’ll need to pick between actual cash or have replacement cost for your structure and possessions. This will directly impact the overall cost of your premiums. 

Actual cash will be cheaper since the insurance company would be responsible for paying you a lower benefit. However, replacement cost will provide you with the greatest payout if the worst were to occur.

Make an apples-to-apples comparison 

As you start to receive quotes, don’t just judge them based on the bottom-line price alone. Make sure you go through each one line by line to ensure each quote is the same and they will cover everything you want.

Prepare for the inspector

Once you’ve decided on one quote you’d like to move forward with, the insurance company will likely require that an inspector visits your property before they can finalize the policy. In preparation, make sure everything about your house is in good shape before they arrive and consider making any minor repairs if possible.

How to Save Money on Home Insurance

top 10 tips to save money on home insurance
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As with all insurance policies, there are dozens of variables that can influence the overall cost of your premiums. Here are a few tips for getting the most out of your policy while spending the least amount possible:

  1. Get multiple quotes
  2. Bundle your policies
  3. Be mindful of “rate raisers”
  4. Work on your credit score
  5. Update your house
  6. Make sure your house’s building materials are accounted for
  7. Retired or work from home?
  8. Make your house safe from burglars and fire
  9. Increase your deductible
  10. Negotiate

Get multiple quotes

Never stop after getting a price from just one company. Always get multiple quotes so that you ensure you’re getting the best price. Remember to compare them line by line so make sure they’ll each provide the same level of coverage. 

Bundle your policies

If you can, try to use the same insurance company for your home, auto, and other policies (such as life). By doing this, you’ll save as much as 11.4% on average, and as much as 20%, or a range of $130 – $240 per year based on the national average of $1,200.  

Be mindful of “rate raisers”

Dogs, trampolines, and swimming pools are great to have. But the insurance company will see these as risks and likely increase your premiums. Take this into consideration.

Work on your credit score

Your creditworthiness will also have an impact on what price the insurance company offers you. Therefore, it would be smart to first check your credit report to make sure everything is in order. Take any steps you can to help enhance your FICO score.

Update your house

If you’ve got any planned major improvements such as updating your roof or the furnace, you may want to schedule these projects before you seek a new insurance policy. These updates will likely reduce your premiums.

Make sure your house’s building materials are accounted for

If your house was constructed with fire resistant materials your annual savings can be around 11%, so you will want those accounted for. 

Retired or work from home? 

Some insurance companies offer discounts for people who spend most of their time in the home under the assumption that fewer catastrophic events can happen if someone is home. This can be as much 10% per year in savings.

Make your house safe from burglars and fire

Many insurance companies will offer you a discount if you’ve got a home surveillance system. Thanks to advancements in technology and Wi-Fi, cameras are much cheaper and easier to install than they’ve ever been. However, getting the insurance companies to give you a security discount will require a system that links to the police, not a smart system that alerts you. 

Additionally, if you have an advanced sprinkler system in your home to protect against fire damage that will also drop your insurance rates.  

The net effect of these can be 20% in savings, or roughly $240 per year based on the $1,200 national average.

Increase your deductible

Similar to your auto insurance, raising your deductible will lower your premium. Raising your deductible from $500 to $1,000 can result in 25% savings. On an average policy of $1,200, that is $300 in annual savings. If you do have to file a claim, that increase in deductible will be paid back in 1.67 years, or 20 months. That is an extremely high rate of return.  

Negotiate

In addition to getting multiple quotes, this is the most important thing you can do! Don’t forget insurance agents have a lot of leeway to work with you on the price of your insurance coverage. Take a moment to call them and ask about which discounts you might qualify for.

This leads us to our main recommendation, which is based on our insight into how insurance companies operate.

Smart Money Home Recommendation

There is a large range from adequate rates to excessive rates. What you find when looking at insurance company financial statements and investor presentations is that they typically make a low double-digit percentage profit margin. So, on the average $1,200 per year that Americans pay for homeowners insurance, the profit to the insurance company after accounting for actual claims, expected claims, and customer acquisition costs, would be roughly $150 averaged across their portfolio of policies. 

Why highlight customer acquisition costs?

Can you turn on a TV and not encounter a commercial for insurance? Probably not. That means they are spending A LOT on customer acquisition, and the reason behind that is in very broad terms, an insurance company expects their retention rate to be 70-90% each year.  

Said another way, they expect to lose 10% – 30% of their customers each year and need to replace them.

Two things to highlight here:

  1. It is a lot cheaper to keep the customers they already have
  2. They will pay a lot to acquire new customers in the hopes of retaining them in the future
What does this mean for you?

Insurance companies have a lot of wiggle room to bring down your premium! If we estimate they budget 50%, or $600, for claims, then you have a lot of theoretical room to push down your rate. AND, if you make your house safer by using some of the tips above, they can budget for even lower claims and offer a lower rate!

Insurance companies have a lot of wiggle room to bring down your premium! If we estimate they budget 50% ($600) for claims, then you have a lot of theoretical room to push down your rate. AND, if you make your house safer by using some of our tips, they can budget for even lower claims and offer a lower rate!

The way you should achieve this is by “shopping around” and getting quotes every 12 months and ask your current insurance if they can match the quotes you are being given. You can call the other companies once you get your online quote and say that “company X is offering me a better rate than you are, what can you do?”

It is also possible (we’ve seen this) that a week or two after getting a quote online, the companies will email you with discounts. Why? Because it is cheaper to target a “warm” lead than a “cold” lead. So they will try to provide something enticing to get your business, and you should use this to your advantage. EVERY. SINGLE. YEAR.

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