Closing on a home usually takes about a month, but it can feel like a year.
There’s so much to do:
- Finalizing the loan
- Getting the inspection
- Arranging the move
- Setting up utilities
- Hiring a lawyer
- Negotiating with the seller about repairs
The list goes on and on.
You’ll also need home insurance. Many home buyers, in the flurry of activity surrounding the purchase, simply call their auto insurance agent and ask for a standard policy.
This works out fine for many people. Other new homeowners, however, will want to know more about their homeowner’s insurance policy. They want to know what their policy will cover and what it would exclude.
It makes sense: Your new home will be one of the biggest investments you’ll ever make — both financially and personally since the home will likely be central to your family’s life.
So let’s take a closer look at how homeowners insurance coverage works, how to find the right coverage for your home, and how to save some money along the way.
Homeowner’s Insurance Guide
- What It is
- How It Works
- What It Covers
- Deductibles & Caps
- Saving Tips
- Other Add-Ons
- Best Companies
What Is Homeowners Insurance Coverage?
The median price of a new home now exceeds $200,000. If some kind of catastrophe struck your home — a fire, a tornado, or a mudslide, for example — you could lose most or all of your investment.
The same goes for your possessions if someone broke in and stole your personal property. On top of that, you could be found financially liable if a visitor got injured in your home or yard.
Homeowners insurance coverage exists to protect you and your property from these kinds of losses.
In exchange for this protection, you pay a premium each year.
On average, Americans pay about $1,200 a year for homeowners coverage.
When you think about it, homeowners coverage can be a pretty good deal. You can leverage a large amount of protection in exchange for a relatively small sum of cash.
It’s a much better deal than the insurance you’d pay on your smartphone, for example. Those premiums often surpass 10 percent of your phone’s value each year.
Ideally, you’ll never need the protection your homeowner’s policy provides. If some kind of peril did put your property at risk, you’d want to know exactly what to expect from your homeowner’s insurance company.
To answer that we’ll need to look closer at the mechanics of homeowners coverage.
How Does Homeowners Coverage Work?
On the surface, homeowners insurance works like just about any other kind of coverage.
You buy a policy and pay its premiums and then file a claim if something goes wrong — if hail damages your roof or if an uninsured motorist plows into your porch, for example.
Beneath the surface, however, there’s a lot more going on, and knowing how your coverage works can help you make sure it fits your home and your budget.
The Elements of Your Coverage
Just like auto coverage, homeowners insurance coverage packages several different policies to protect your investment:
- Your dwelling: Insurance companies will refer to your home itself as your dwelling. For most homeowners, dwelling coverage serves as the centerpiece of your policy and a point of reference for the cost of your additional coverages.
- Other buildings: If you have a workshop or a detached garage, your policy will have a separate element of coverage to protect them. Often, coverage for other buildings will be set to a percentage of your dwelling coverage.
- Personal property: Anything you can remove from your home — furniture, small appliances, electronics, or collectibles, for example — should be covered by your policy’s personal property coverage. This coverage would be essential after a break-in.
- Liability: Injuries happen. A visitor could trip on that uneven paver or get scalded on the hot water you like to keep turned up to 140 degrees. If a judge found you liable for someone’s injury at your property, your liability coverage would kick in.
- Other medical expenses: Some policies help you pay medical expenses for guests in your home who get injured. This coverage is different from liability coverage because you’re choosing to pay, not being ordered to.
- Additional expenses: What if high winds sent a tree branch through your kitchen roof and you needed somewhere else to live while waiting for repairs? Your homeowner’s coverage could help here, too, by paying for other accommodations.
The amount of the coverage you buy, and the way you choose to set them up, will directly impact your premium. This can also affect your experience if you ever needed to file a claim.
Let’s dig a little deeper to see how these separate coverage can work for you.
A Closer Look at the Elements of Homeowners Coverage
Again, no one wants to file a claim. Sooner or later, though, many homeowners have no choice. Not even the best-built house can withstand the power of Mother Nature.
And, sadly, sometimes it’s other people who cause the damages, either by accident or as an act of vandalism.
When you need help paying for repairs that resulted from a covered peril, knowing how your policy works can save a lot of time and trouble.
Your policy should be large enough to replace your main dwelling if necessary.
But insurance policies don’t usually cover all possible causes of damage.
Instead, they tend to limit coverage to causes such as:
- Falling tree limbs
- Lightning strikes
- Water damage, but not usually from floods.
This isn’t an all-inclusive list but only a representation of a typical policy. Before buying coverage, you should find out exactly what your policy would cover.
You can find coverage to protect your dwelling from just about anything, named or unnamed, but it would cost significantly more. We’ll get into these distinctions below.
Also, be aware your homeowner’s policy exists to protect your property from damage caused by an external event. Your coverage will not pay to replace a worn-out HVAC system or an upgrade to your old copper pipes.
To get protection against expenses related to wear and tear, look into home warranties.
The word “detached” may be the most important word in your coverage for buildings other than your dwelling.
A garage, office, or tool shed you’ve built onto your home will still be covered by your dwelling coverage. This type of coverage protects separate structures.
And it’s not just about buildings. Your coverage could protect fences, driveways, gazebos, mailboxes, in-ground pools — anything built onto your property that can’t be removed and used instantly somewhere else.
Things you own that can be removed and used easily somewhere else should be covered by the personal property element of your coverage.
Break-ins happen all too often, and most homeowners who have to file a claim will need this coverage. And it’s not always a thief to blame. Sometimes the same perils that damage your dwelling can also damage or destroy personal property.
Unless you state otherwise, your personal property protection will likely represent a percentage of your dwelling coverage.
You’ll want to let your insurance company know if you have an unusually valuable collection of coins, jewelry, rare books, musical instruments, or some other expensive items which could be stolen or destroyed.
You can help your insurance company in advance by keeping an inventory of everything you’d like replaced if damaged, destroyed, or stolen. Take pictures and write down serial numbers, too.
An app can make this process much easier now.
Liability coverage in your homeowner’s policy works as it would with auto or renters insurance: It protects you financially if someone gets hurt because of something you did (or didn’t do) on your property.
Injuries can happen when you least expect them. They can happen to people you’d never expect to get hurt. They can take place in areas of your home you didn’t anticipate.
For example, you may know the attic stairs are steep, so you’d always warn anyone who ventures up them to be careful. Same for the dilapidated garage you’d like to tear down. You keep it padlocked and almost never go in there.
Despite all the precautions warnings, some kids in the neighborhood may get into the garage, or somebody may get hurt in some completely different way.
Liability coverage won’t prevent injuries, but it can protect you financially if someone wanted you to pay for hospitalization. If someone sued you and won, a judge could order you to sell assets in order to pay damages.
The more you entertain guests, the more attention you should pay to your liability coverage in your homeowner’s policy.
Other Medical Expenses
Sometimes when an accident causes injury to someone in your home, you’d like to help pay the resulting medical expenses.
In these cases, you aren’t accepting full responsibility, and you’re not being ordered by a judge to pay. You just simply want to help, or you feel like it’s the right thing to do.
Your homeowner’s policy can have your back in times like this, but only to a point. Many policies cap this kind of coverage at $1,000. You can also opt-out.
Additional Living Expenses
This is one of the simpler parts of a homeowners policy. You can use it to pay for a hotel or a short-term lease while you wait for your home’s repairs after a covered peril such as a fire or storm damage.
Most insurers reimburse you for the money you spend on alternate accommodations, but they won’t pay upfront for the expense.
They also won’t typically reimburse you for extravagant expenses. If you live in a 2,000-square-foot ranch house in a subdivision, the insurance company will notice if you’ve rented the penthouse suite at a 5-star hotel as alternative accommodations.
This coverage is optional with many policies.
How Deductibles and Caps Affect Homeowners Premiums
Homeowners hoping to save money on annual premiums often target their deductibles. Accepting higher deductibles can help you get lower premiums.
Before making the decision to increase your deductibles, be sure you’re able to pay them if needed. For example, your premiums will be noticeably lower when you have a $5,000 deductible on your dwelling coverage instead of a $500 deductible.
You could save hundreds of dollars each year on this kind of policy. But, if you needed your coverage to rebuild your porch after the weight of the snow from a winter storm buckled the beam, your policy wouldn’t pay until you’d spent $5,000 out of pocket.
If you couldn’t come up with $5,000, your insurance wouldn’t help you. All the money you’d spent on premiums would suddenly seem like a waste.
One of the small ironies of home coverage is that homeowners who have the least ability to pay a high deductible opt for higher deductibles because of the price break they can give you.
Like so many things in life, opting for the cheapest policy can wind up costing more.
Caps on Coverage Can Help and Hurt
Capping your coverage can have the same effect. Lowering payout caps will usually lower premiums, saving you money on your coverage each year.
The decision to cap coverage typically affects personal property protection or liability coverage more than dwelling coverage which should always have the ability to replace your structure.
A low spending cap can leave you exposed. For example, if someone breaks in and takes your home entertainment system, your small appliances, your laptop, and a lot of your furniture, you may not be reimbursed for everything you lost.
Capping your liability coverage too aggressively could cause even more problems.
Chances are nothing like this would happen to you, but if someone had a life-changing injury at your home and held you responsible, you’d need robust liability coverage to protect your assets.
The more assets you have, the more you should be concerned. Many insurance companies now offer umbrella policies. These liability-specific policies can help protect you across multiple properties — your home, auto, boat, or RV coverage for example.
How to Save on Homeowners Insurance Coverage
Raising deductibles and lowering annual spending caps will shave money from your premiums, but these decisions can cost you a lot more if you needed to file a claim.
So how should you save money on your homeowner’s policy while still having the right protection in place for your investment?
Finding Just-Right Coverage
This is going to sound contradictory after just saying you shouldn’t adjust your deductibles and payout caps just to save money on your premiums.
But bear with me for a second because this is an important distinction: You should adjust your home insurance deductibles and spending caps to match your property’s specific needs and to match the way you use your property.
In doing so, you can save money along the way. By getting just enough coverage but not too much, you’re avoiding paying for insurance you don’t actually need, and this is one of the best ways to save money.
Here’s a real-life example: If you were having 20 people over for dinner, you wouldn’t buy food for 40 people. Sure, you may overestimate your guests’ appetites and end up with a refrigerator full of leftovers. But you wouldn’t intentionally overspend.
Insurance works the same way, but it’s harder to know when you’re overspending on your coverage since a policy tends to be abstract, at least until you need it.
Let’s look at each element of a homeowners policy individually to remove some of the mystery and find out how you can customize each element:
This coverage should be the centerpiece of your policy, and you should have enough coverage to replace your home if needed.
However, you could still opt for a higher deductible on your dwelling protection.
Here’s why: You don’t want to get into the habit of filing too many claims. A long history of claims for small repairs can give insurance companies a reason to increase your rates.
With online databases insurance companies share, this reputation can follow you around.
A higher deductible will compel you to take care of small repairs yourself and save your insurance protection for the big problems — storm damage, fire and smoke damage, structural damage from a covered peril such as an out-of-control car crashing into your foundation.
Some people prefer to treat their dwelling coverage like a catastrophic health insurance plan with higher deductibles, lower premiums, and little expectation for using the coverage unless your home’s structure, safety, and general usefulness are in jeopardy.
This approach isn’t for everyone, and you’ll need to decide for yourself how you’d like to use your coverage. But a higher deductible on your dwelling makes more sense than some other money saving options.
On the other hand, you shouldn’t limit your coverage amount on your dwelling itself. You’d need your insurance company to replace your entire investment if it comes to that.
Below, we’ll get into some distinctions in your coverage that can help you save without necessarily limiting your policy’s ability to protect your investment.
Detached Structures Coverage
A standard policy will calculate coverage for your property’s detached structures or “other structures” based on your dwelling coverage.
For most people, this works well. If your property falls outside this norm, be sure to ask your insurance agent about adjusting this coverage.
For example, if you’re buying a condo with a yard the size of a ping-pong table, you could probably get by with less coverage for detached structures and save a little money in the process.
You’ll want to be sure, though. If your condo complex requires you to maintain your driveway, your fence, small outdoor storage shed, or some kind of outdoor seating area or patio, you may need more insurance coverage than you think.
Someone with a large yard and multiple exterior buildings may actually need more than the average amount of detached structures coverage.
Again, this decision comes down to how you plan to use your insurance coverage. If you see filing a claim as a worst-case scenario, you can save some money each year with higher deductibles on your detached structures.
You shouldn’t, however, limit your coverage amount since you may need it to replace an entire building.
Personal Property Coverage
Insurance companies deal with a lot of claims for personal property protection. The value of your property and the way you expect to use coverage should determine how you set up this coverage.
Just like with other elements of your homeowner’s policy, your personal property coverage will be based on your dwelling coverage.
Standard policies usually set your personal property coverage between 25 and 50 percent of your main dwelling coverage. Depending on the value of your property, you may want to opt for the lower end of this scale and save a little money.
But if you have a lot of nice stuff — top-of-the-line audio equipment, high-efficiency, and professional-grade appliances, a TV screen that rivals the screens at the multiplex — you should consider maxing out your coverage.
You should know that standard personal property coverage will not typically guarantee coverage for high-value collectibles such as jewelry, coins, rare vinyl records, musical instruments, rare books, or antiques.
You’d need to get some kind of supplemental coverage to protect the money you have invested in these sorts of items.
Once again, the way you use your property should dictate your decisions about liability insurance at home.
Some people seldom have guests. They won’t be hosting a birthday party with a trampoline or a swimming party for teenagers. If they have company at all, it would be one or two people for dinner.
If this sounds like your life, you could possibly save some money by lowering your liability coverage.
But, be sure you leave some room for the unexpected. Nobody plans for someone to slip and fall, get burned, sprain an ankle, or fall into a sinkhole. Unfortunately, though, these things can happen, and your liability coverage can make a huge difference.
On the other end of the spectrum, you’ll want to discuss liability with your insurance company before hosting a big event like a yard sale, a neighborhood block party, or a car wash. You may be able to arrange a temporary increase in coverage during these events so you don’t have to increase coverage year-round.
Also, if you teach martial arts lessons in the garage or piano lessons in the parlor, make sure you have the right kind of liability coverage in place. If you earn a sizable amount of income in your at-home business, you may be able to write off this additional coverage as a business expense on next year’s taxes.
Too much liability coverage costs too much, but not having enough can cost even more when you need protection.
Other Medical Expenses
For most companies, this is an optional add-on for your homeowner’s policy. It exists to finance your goodwill in case someone gets injured and you feel responsible.
For example, if a friend cuts herself on your rusted scissors and needs a Tetanus shot, you could offer to pay for the doctor’s visit. Then you could ask your homeowner’s insurance company for reimbursement.
Usually, companies cap your coverage around $1,000, and this coverage adds very little to your annual premium. You’ll need to keep some kind of documentation to prove the expense was necessary.
Additional Living Expenses
As we’ve discussed, this supplemental coverage reimburses you for the money you have to spend on living expenses while your home is being repaired.
You may need to rent a hotel for weeks and eat out every meal while crews repair fire damage, for example.
If you know for a fact you could stay with family or friends for an extended period, you could lower this element of your coverage. If you don’t have a strong support system nearby, though, consider keeping strong coverage here.
One thing to keep in mind about this coverage…
Insurance companies will cap reimbursements, so don’t spend more on accommodations than necessary.
For instance, your insurance adjuster may decide you could have gotten by for $150 a night at the Holiday Inn instead of $500 a night at the boutique bed and breakfast you chose.
That being said, the insurance company doesn’t tend to care where you choose to arrange alternate accommodations. So if you decided to live at the beach instead of beside the Interstate while crews fixed your home, that may be OK.
Just to be clear, and this is always a good idea: Be sure to check with your adjuster in advance before assuming the company will reimburse your expenses.
Named Peril vs. Open Peril
So we just discussed how to match your homeowner’s coverage to your home and life by adjusting coverage amounts and deductibles.
Now let’s take a look at a more specific adjustment you can make to your coverage: deciding whether to buy a named peril or an open peril policy.
A named-peril policy protects your investment against specific causes of damage, all of which will be named in your policy.
This list of perils tends to be long enough to include common problems like fires, weather damage, and structural damage from foreign objects like tree limbs and automobiles.
Of course, no list can predict any and every possible peril. Life is just too unpredictable. Even the most obscure sources of damage seldom surprise an insurance adjuster.
With a named-peril policy, you’re trusting that any damages your property suffers will fit the description of a named peril.
An open peril policy allows a lot more interpretation. In fact, no matter the cause — as long as it’s not specifically excluded — your policy should help you recover.
Open peril policies cost significantly more, so if you’re trying to save money on your annual premiums, a named-peril policy will be the way to go.
Neither a named peril nor an open peril policy typically protects you from flood damage. You’d need special flood insurance to protect your property from flood damage. We’ll get into that more below.
Replacement Value vs. Cash Value
When you’re shopping for home insurance, minor distinctions may not get your attention. They would become a bigger deal if you needed to file a claim, though.
Take the distinction between replacement value and cash value for your personal property:
- Replacement value: Your homeowner’s policy could replace your stolen, damaged, or destroyed property with new stuff.
- Cash value: Your policy could reimburse you the actual value of your property. In other words, it could pay the amount your property could have earned if you sold it.
As everyone knows, a 5-year-old computer costs less than a brand new computer. If you spread this distinction across all of your personal property, you’d see a huge difference in the way your insurance company helps you recover.
A replacement value policy can pay out a lot more, and as a result, it costs more in annual premiums. But even replacement value coverage won’t replace your items without spending some time investigating your loss.
A lot of companies default to cash value, then reimburse you the difference between replacement value and cash value after you’ve replaced your stuff.
You can help this process go more smoothly by keeping an up-to-date inventory of your property. It takes time, and it’s not much fun, but you’d be glad you created an inventory if you needed to file a claim. Keeping the inventory — along with receipts for your large purchases — in a fireproof safe can make a terrible time a little more hopeful.
And once again, it’s important to remember that rare valuables — such as a Château Cheval Blanc from 1947 in your wine cellar — won’t be protected well by a standard homeowners policy. You’ll need to make special arrangements with your insurance company.
Comparing Quotes and Qualities
The days of making phone calls to arrange coverage and to file claims, thankfully, has passed us by. You can now get homeowners coverage online from a wide variety of companies.
You can also compare quotes online.
Here are a couple of pointers as you shop around:
- Compare comparable quotes: Since insurance policies can and should adapt to your needs, make sure the quotes you’re comparing offer the same (or very similar) coverages. It’s easy to forget these differences when you’re in a hurry.
- Consider a company’s quality: A low premium can mean low-quality coverage. Make sure you’re getting reliable coverage by checking a company’s ratings with A.M. Best or one of the other independent insurance rating agencies.
Look for Policy Discounts
Most people know about bundled policy discounts where you get a discount by having more than one kind of insurance with one company.
Here are some homeowners-specific discounts you can ask about:
- Home Security Discount: A modern, professionally monitored home security system can help prevent break-ins, which prevents damage to your home’s exterior and prevents claims on your personal property protection. That’s a lot of prevention, and your underwriters will show their appreciation with lower premiums.
- New Roof Discount: Newer roofs offer more protection from weather damage, meaning many insurance companies offer discounts as an incentive.
- Non-Smoking Discount: By not allowing smoking in your home, a fire at your home becomes statistically less likely. Underwriters can respond to this by lowering your premium.
- Annual Payment Discount: By paying upfront for your coverage each year you can qualify for a lower rate with many companies. If your mortgage company offers an escrow service, you can get the best of both worlds: Monthly installments added to your mortgage payment that accumulates to pay the following year’s insurance premium upfront.
- Gated Community Discount: Security measures in a gated community can reduce your risk for break-ins. Ask your agent about this discount if you live in a gated community.
- Modern Home Discounts: Newer homes, or older homes with modern upgrades to the wiring and plumbing, can lead to discounts on your premiums.
Many companies provide more specific discount programs you can investigate as you compare policies.
Limit Claims If Possible
Filing fewer claims can help keep your homeowner’s insurance premiums lower, and they can lead to a discount with many carriers if you stay claim free for a specific period of time.
If you need to file a claim because your home’s structure or safety is in danger, you should most definitely file a claim. That’s why you have insurance to begin with.
But if it’s a less significant problem and you could fix it yourself or pay for it without putting other financial needs at risk, you can benefit in the long run from lower rates.
Not All Insurance Products Protect Your Investment
New homeowners will start to receive a lot of insurance offers in the mail. Generally speaking, you can ignore most of these offers and do your insurance shopping independently.
We won’t go through these products individually, but since a couple of them have confusing names, it’s important to point them out:
- Private Mortgage Insurance (PMI): Most lenders require you to buy PMI if you’re borrowing 80 percent or more of your new home’s value: If you’re buying a $200,000 house and will put $20,000 down, for example. The premiums for this coverage will be added to your mortgage payment, but this insurance does not protect you. It protects your lender in case you default on the loan while it still has a large balance.
- Mortgage Life Insurance: This kind of coverage protects your lender from a loss if you died with a large unpaid balance on your home loan. It can also protect your family from being responsible for paying off the home. This kind of precaution makes sense, but you can get better and more flexible coverage for less with a term life insurance policy.
Special Home Insurance Products for Special Situations
As we indicated above, a standard home insurance policy won’t address all your needs. You’ll need some extra attention to protect yourself from:
Because floods can destroy just about every aspect of your home, standard policies exclude flood damage from coverage. Instead, you’ll need a dedicated flood insurance policy.
Unless you live in a flood-prone area as defined by the federal government, you probably won’t need flood insurance.
Since flood coverage costs so much, the government can help.
Loss of Expensive Valuables
Collectors of antiques and other rare and valuable items should make specific coverage plans with their insurance company.
If you’re particularly worried about a particular item or set of items in your home, you should discuss the issue with your insurance agent to find out for sure how your coverage would work if you needed it.
You should also arrange for extra security such as a safe or a secured room to limit the likelihood of loss. Be sure to keep records of your valuables — serial numbers, photographs, and receipts — to help your adjuster if you ever have to file a claim.
High Liability Situations
If you open a business in your home or rent your home out several weeks a year through VRBO.com or Airbnb.com, make sure your insurance coverage protects you from liability.
The same goes for hosting large events such as wedding receptions or fund-raising events in your home.
Best Home Insurance Companies
The best homeowner’s insurance company for you may not be the best option for someone else because your coverage should be customized to your needs.
As a result, any list of “best companies” will need to leave some room for error.
That being said, the following companies stand out in the field and should be good candidates for your shortlist.
- Travelers: With more than 160 years of specializing in property protection throughout the nation, The Travelers Company has become an expert in homeowners protection. A national presence matters with homeowners companies because a regional company can get overburdened by a large-scale natural disaster such as a hurricane.
- Liberty Mutual: Liberty Mutual specializes in customizing policies, and as you know from this post, customization can lead to savings. About 7 percent of the nation’s homeowners partner with Liberty Mutual.
- Progressive: With such a large and ever-present marketing strategy, Progressive needs no introduction. Progressive specializes in customer service and ease of access online.
- Farmers: Farmers Insurance also specializes in property protection. Farmers offers a lot of discounts for safety and security features on your home.
- Amica: A few years ago, Amica would’ve been considered a lesser-known company. It has grown rapidly in recent years, partly through word-of-mouth. The company excels at responding quickly and efficiently when you file a claim. It won’t be the cheapest option, but it’s one of the best.
- Allied: Nationwide Insurance backs Allied Insurance Co.’s policies, which means you can tap into bundled policy discounts if you already have Nationwide policies. Allied makes our list because it’s a strong customer service record and reasonable rates.
- Erie: Speaking of customer service, Erie Insurance stresses customer experience and quality coverage.
If the company you’re considering didn’t make our list, that’s OK.
It may still be a great fit for you. Just be sure you’ve checked it out with:
- Independent rating agencies: A.M. Best, Moody’s, Standard & Poor’s — these agencies rate insurance companies on their quality. Higher grades mean the company has a more solid financial footing and should be around to pay your claim if necessary.
- Customer service ratings: You shouldn’t consider only customer reviews on TrustPilot, Facebook, blogs, or other platforms. But these reviews can alert you to problems with a company, especially when you start to see trends.
- Word of mouth: If you’re new to your neighborhood, ask around with your neighbors to see whether they’ve been happy with their homeowner’s insurance policies. You can learn a lot from other people’s experiences.
Buying a home will keep you busy from entering a contract until you’ve moved in. You should still set aside some time to shop for home insurance, though. The time you spend can pay off for decades to come.