How To Buy Homeowners Insurance - A Complete Guide
Welcome to the complete guide to buying home insurance. First, know there are two types of homeowners:
- A new homebuyer needs to purchase home insurance for closing.
- A current homeowner switching carriers or starting coverage due to:
✅ Home insurance price increase
✅ Bad claims experience
✅ Non-renewal notice
Check Young Alfred's list of A-rated home insurance carriers of 2021 for potential options in your area.
It doesn't matter if you are buying home insurance for the first time or switching policies after 30 years -- you will love our guide on how to buy the best home insurance.
Step 1: Select the Right Type of Home Insurance Policy
Your home's structure and who occupies the house will determine the type of insurance policy you need:
|Home Type||ISO Policy Type|
|Primary Home||HO3 vs. HO5|
|Townhome||HO3 vs. HO6 (rare)|
|Rental Home or Landlord||DP3 vs. DP1 (rare)|
|Secondary Home||HO3 vs. DP3|
|Apartment or Renter||HO4|
|Mobile/Manufactured Home||MHO3 or MDP1|
Step 2: Understand Your Lender's Home Insurance Requirements
Your lender will require you to have homeowners insurance. There are many types of coverage within your home insurance policy:
- House Structure: Ask for Replacement Cost
The first line in your home insurance policy is Coverage A: Building/Dwelling Coverage. This coverage limit covers the value to rebuild your home from scratch. Rebuild costs are not the same as the market value of your home. If your home burns to the ground, the insurance company will rarely write you a check to purchase a similar home elsewhere. Instead, they will require you to rebuild the same style of home. Replacement cost is the estimated cost to rebuild your home, including labor, materials, construction permits, etc, from the foundation up.
- Personal Property: check sub-limits
Your home insurance policy has a line called - Coverage C: Personal Property.
Imagine lifting up your home, turning it upside down, and shaking it until all the loose contents fall out. Everything that ends up in your yard below is your personal property and it is covered by Coverage C. Pro tip: most homeowners policies have special sub-limits for 13-15 categories of your contents:
The sub-limit of $1,500 on jewelry means any single jewelry item only carriers $1,500 of coverage for theft. You can add more coverage in any of these categories. For high-value jewelry items, like an engagement ring, you need to schedule the ring separately.
- Personal Liability: Lawsuits Against You
Coverage E in your home insurance provides personal liability coverage. You can't predict when someone will sue you for damage or injury that occurs on your property or an incident you are responsible for away from home. Make sure you purchase enough liability coverage to protect your entire net worth. If your net worth exceeds $500,000, consider buying an umbrella policy - cheap cost for the extra layer of protection.
- Covered vs. Excluded Perils
Home insurance covers many perils. The most common types of damage covered:
You can purchase coverage for specific perils excluded by default for extra premium:
However, some types of damage can never be covered:
- Your Roof: How is it Replaced
The roof is the most common home insurance claim. Asphalt shingle roofing needs an update every 20 years. When you purchase home insurance, if your roof is older than 15 years, your insurance company may only offer coverage at Actual Cash Value (ACV). Not having replacement cost on your roof can reduce your claims payout on a roof claim by over 70%. Check how your policy to learn how your roof is protected.
Step 3: Get Home Insurance Quotes
While 90% of homeowners start their insurance shopping online, the majority end up finalizing the purchase over a phone call offline - we are changing that. Here are the three ways you can buy your homeowners insurance online:
|Pros||Cons||Where To Go|
|Online||Fast, Efficient, Chat, Competitive Price||No Face-to-Face||Young Alfred, Hippo, Swyfft|
|Over the Phone||Easily Ask Questions, Competitive Price||Slow, Requires Phone Call||GEICO, USAA, Liberty, Farmers|
|In-Person||Face to Face, Relationship||Slow, Schedule Interview, One Price, One Carrier||State Farm, Allstate|
Know the different types of insurance agents and select the right insurance agent for your needs:
- Independent Insurance Agent - Independent insurance agents work with many different insurance carriers and can provide multiple home insurance quotes -- usually from 3-20 companies. For homeowners looking to get a fair shot at their business, the independent agent might be a good fit. Independent agents are a little more knowledgeable than their counterparts below. Their experience across many products and insurance companies can be your greatest asset.
- Captive Insurance Agent - A captive insurance agent works for a single insurance company. They can only offer you one coverage option. The price can be competitive, but if you don't fit their target risk profile, it will likely be overpriced. Given it is their only option -- they have to try and sell it either way! The four large remaining captive carriers are State Farm, Allstate, USAA, and Farmers.
Step 4: Know The Cost of Homeowners Insurance
Many factors change the cost of homeowners insurance, but the location of your house is probably the most significant driver of price. While the average homeowners premium in the US is $1,211/year, the average homeowners premium in each state can vary dramatically:
|US State||Average Annual Cost|
Source: Insurance Information Institute
Step 5: Understand Home Insurance Coverage
Customize. A lot of people miss this step, but it is crucial. Once you have a quote that you like, play around with the deductibles and add-ons to customize the coverage and price to your liking. At Young Alfred, our carriers average 1,474,560 policy combinations to choose from on your homeowners insurance. While no one has time to review a million options, try at least considering the following nine big ones before clicking buy:
- Deductible (aka AOP Deductible): The deductible you will pay out of pocket before the insurance company pays for damages. Most common deductibles are $500, $1,000, and $2,500.
- Wind/Hail Deductible: wind and hail claims are the most common homeowners claims, so it is no surprise that carriers will give you a discount by raising this deductible. Just know you are increasing the deductible on your most likely loss scenario. The most common deductibles here are 1% and 2%, where the percentage applies to your Coverage A: Dwelling/Building limit. So if you have $300,000 in coverage on your home and a 2% Wind/Hail Deductible, that means if you have a $10,000 wind claim on your roof, you are paying for $6,000, and the insurance company only pays $4,000.
- Hurricane Deductible: this is more relevant for the coastal states - Florida, Texas, Alabama, Georgia, North Carolina, South Carolina, Mississippi, Louisiana, New Jersey, and some areas of Virginia, New York, Maryland, and Connecticut. The most common deductibles here are 1%, 2%, 5%, and 10%. If you can avoid it, please don't buy the 5% and 10% deductibles unless you can brush off a 5 figure hit to your bank account.
- Water Backup Coverage: recommended coverage by Young Alfred. Water backup coverage will protect against the backup of water through a drain or faucet in your home. Water backup is not a covered peril by default in most home insurance policies.
- Additional Jewelry Coverage/Computer Coverage: Certain categories of your personal belongings have special sub-limits. You can add-on coverage on a per-item basis -- get an appraisal to schedule an engagement ring, or on a blanket basis -- add $6,000 in coverage for computers - no assessment unless one item is over $5,000.
- Identity Theft Coverage: With cybercrime on the rise, identity theft can be an affordable add-on to help with the restoration of your credit/identity in a hacking scenario. Identity theft coverage will not reimburse monetary loss from the actual crime, but cover fees in reasonably restoring your identity.
- Water Damage Coverage: Most people get this included by default, but areas along the coast, and especially older homes, often only get $10,000 in coverage or none at all. If you are in Texas or Florida, pay close attention to this coverage.
- Equipment Breakdown: Helps with HVAC repairs if something breaks down during its useful life. It does not cover normal wear and tear of your HVAC equipment.
- Service Line: If a city water line under your front yard breaks, it is technically on you to fix it as it is your property. Service line coverage is not included in your standard homeowners policy unless you add it on with Service Line Coverage.
Step 6: Ask for Discounts!
Any insurance agent worth their salt will include all discounts available from the start. Typical discounts available to homeowners are:
- Smart Home Discount
- Bundle Discount -- with a car insurance policy
- Paid-in Full Discount
- Advanced Shopper Discount
- Security/Fire Alarm Discount
- Senior Discount
- Retired Discount
- New Home Purchase Discount
- Roof Update Discount
- Wind Mitigation Discount
- New Construction Discount
- Roof Hail Resistant Materials Discount
- Storm Shutters Discount
Step 7: Pay for Home Insurance
You got your policy and are ready to buy! There are three ways to purchase or bind coverage:
- Pay with Mortgage/Escrow - most common and often required by your lender to avoid fees:
- The full legal name and address of your lender
- Your mortgage loan number
Your Mortgage Company, LLC, ATIMA/ISAOA
1620 First Mortgage Street
City, ST 96321
The above is called the mortgagee clause and is on your home insurance declaration page. Ask your lender/loan officer for the mortgagee clause, and then you can purchase coverage without a credit card or bank account. Set the start date of your policy to line up with the closing of your new home purchase.
- Pay with EFT (Checking Account) - an excellent alternative to paying with a credit card as the fees are often lower.
- Pay with Credit Card - while you will get credit card points, you also might be paying for them with extra credit card fees. A subset of insurance companies do not charge credit card transaction fees, but the majority do -- so it's better to choose Escrow or EFT (bank account).
The Final Steps
Once you purchase, it isn't over. You still need to sign your application! The signed form is what the insurance company keeps on file to show you have entered into the agreement and have provided accurate information. If you are paying with escrow, it is up to your title agent to make sure the bill gets paid. If you are paying via credit card or EFT, it is up to you. And of course, read up on how to ace your upcoming home inspection.
Congrats on being a homeowner. Hopefully, my guide helped you understand how to buy home insurance. If you're looking for top quotes in your area, I'm the home insurance expert. Happy to help!
At your service,