What is it?
If you own a home, you probably already realize that you need homeowners insurance. The security and peace of mind derived from knowing that your home and property are protected might far outweigh any cost to you. Moreover, if your home is mortgaged, your lender may require that you have homeowners insurance. But acknowledging that you usually have to have homeowners insurance is only the first step. Now you should shop around for the right insurance company and the particular home policy that gives you the best overall value for your money. This involves evaluating and comparing both the companies and the specific policies they offer in terms of a variety of different factors. You will need to do your homework to make the right choices, and even after you select a home policy, there will be work to do. You should conduct periodic reviews of your policy and the company behind it. Based on the results of this review and on any changes in your own circumstances, you can decide whether to replace your home policy or keep it as is.
Tip: Although you are ultimately responsible for selecting and maintaining your own homeowners insurance, there are a variety of additional resources you can consult to help you with the process. These include financial planners, insurance professionals, CPAs, and your state insurance department.
Caution: This discussion of homeowners insurance policies applies specifically to owner-occupied single-family homes. Apartments and condominiums may involve additional issues.
Choosing an insurance company
In general, a homeowners insurance policy is only as good as the company behind it. The factors on which you should base your choice of an insurance company are not much different for homeowners insurance than they are for health insurance, auto insurance, or any other type of insurance. In fact, if you already have existing policies with a certain company and have been satisfied with them, you may want to purchase a home policy with that company as well. Of course, that decision would depend on whether the company offers a home policy that meets your particular needs.
Tip: Another incentive to take out multiple policies with the same insurance company is that many companies offer multipolicy discounts if you purchase more than one policy with them. If so, you may need to look no further. If not, you need to explore the vast field of remaining insurance companies and narrow the pool down to one. Base your final selection largely on how closely the home policies offered by each company match the cost, coverage, and other criteria you have established for the home policy you want.
Other considerations should include the company's integrity and financial soundness. Integrity may depend on such qualitative factors as a company's reputation for providing superior products and service to its clients, as well as its reputation for paying claims in a timely, professional manner. Financial strength is based more on the same quantitative measures you might use to evaluate a company in which you were thinking of buying stock.
These measures might include annual figures on the company's sales, revenue, capital growth, and dividend payments to shareholders. You can hire a CPA to help you assess an insurance company's financial soundness, or you can obtain a rating of the company from a ratings service organization.
Tip: Many insurance professionals recommend that you consider only large insurance companies, or at least companies that specialize exclusively in insurance.
Comparing and evaluating homeowners policies
There are a wide variety of home policies designed to meet the needs and circumstances of different types of homes and homeowners. The relationship between the insurance company you select and the particular home policy you choose can go either way. Having already selected your company, you may want to look exclusively at the different home policies available through that company. Or, having formulated a specific idea of the type of home policy you want, you can weed out companies accordingly and settle on the one that offers what you deem the most suitable home policy.
In any case, you will need to compare and evaluate different policies at some point. This requires that you examine variations in coverage, cost, and other issues from one specific policy to the next. Armed with this information, you can select the one policy that's best for you. The following are the important guidelines you should follow when comparing and evaluating home policies. Most of these fall under the heading of either coverage or cost. Keep in mind that it's impossible to separate coverage from cost when dealing with insurance. You should always weigh the protection provided by a given home policy against how much the policy will ultimately cost you. The policy with the most coverage is not necessarily the best one, just as the least expensive policy is not necessarily the worst.
What property does the policy cover?
The coverage provided by a home policy can range from the very basic to the most comprehensive. In general, the more comprehensive the coverage, the lower your risk. However, you need to assess your own particular coverage needs before you can pick the policy that is best for you. The range of coverage that you require will depend on the property you want to protect and the circumstances you want to guard against. Thus, ask yourself two simple questions as you are comparing and evaluating home policies: (1) What specific types of property are covered by each policy? (2) What specific events or circumstances are covered by each policy?
In terms of property, most home policies cover your home itself (the actual building in which you live), the furniture within it, and additional structures, such as garages and toolsheds. Obviously, automobiles will require a different type of insurance policy altogether. For more information, see our separate discussion on Automobile Insurance. Other motorized vehicles, such as boats and snowmobiles, may or may not be covered. Additional variations between policies may come into play with other forms of personal property, such as cash money, silverware, computers, guns, jewelry, antiques, and collectible. A home policy may provide coverage for some, all, or none of these belongings. You should carefully read the exclusion section of each policy to determine which items are covered and which are not. If you own valuable property that you feel needs insurance, eliminate the policies that don't cover it. If you like a particular policy that doesn't cover everything you want insured, you can usually add the excluded items to the policy as listed property.
What events and circumstances are covered by each policy?
There are a variety of events that can result in loss of or damage to your home and personal property. Those known as "perils" may include theft, vandalism, fire, flood, earthquakes, tornadoes, and even the most unlikely occurrences, such as lightning and war. Ideally, our homeowners insurance should protect us against everything from a major catastrophe to a minor incident. However, while most policies cover theft and vandalism, very few will shield you from all the dangers just listed. The coverage offered may depend on the chances that a particular peril will befall you. For example, if you live on the Florida coast, you may be hard-pressed to find a policy that includes hurricane coverage as part of its standard coverage.
Read each policy to find out which perils are covered, and base your final choice of a policy partly on the likelihood of different things happening to you. Unless you live in California or other earthquake-prone areas, you may not need to worry about earthquake coverage. However, you may want to avoid policies that leave you exposed to perils about which you have legitimate concerns. Keep in mind, though, that for an additional cost, you may be able to add coverage for certain excluded perils. Or you can purchase separate policies to fill in the gaps left by your primary home policy. Fire insurance and flood insurance are common examples of supplementary insurance policies used to round out a home policy. Aside from perils, there are other circumstances that can result in loss and that may or may not be covered by a home policy. Check, for instance, to see if a policy covers you for hotel and other additional living expenses that you might incur while repairs are being done on your home. Also, does the policy cover the medical expenses of people injured on your property by you, a family member, or a pet? You may need to take out separate personal liability insurance for such coverage. And finally, while most policies cover property damage in general, certain damages may not be covered depending on the cause. Again, go over each policy carefully.
What are the amounts of coverage?
Exactly how much home insurance coverage do you want or need? $30,000? $150,000? You might want the maximum amount of coverage you can possibly obtain. After all, the greater your coverage amount(s), the lower the chance that you will be saddled with out-of-pocket expenses if disaster strikes your home or property. The tradeoff is that higher coverage amounts will generally mean a more expensive home policy. From a practical standpoint, you simply may not be able to afford the premiums you would have to pay for the coverage amount(s) you desire. Additional factors in your decision about coverage amount(s) should include the level of risk you're willing to assume, what items you want to insure, and what those items are worth. Why do you need high coverage amounts if you don't own any particularly valuable property?
Once you have determined the coverage amount(s) appropriate for you, check the dollar limit(s) set forth in each policy you are considering and narrow the field accordingly. Bear in mind that some policies will have one maximum dollar amount for total loss and separate dollar limits for specific kinds of losses and damages.
Tip: If your home is mortgaged, your lender may require that the total dollar amount of your home coverage be at least equal to the amount of your mortgage.
How much does the policy cost?
The cost of a home policy, in the form of premiums, will be a big consideration as you compare and evaluate policies. You should start by determining what you can reasonably afford. This should be a relatively easy task if you have included home insurance payments in your monthly or yearly budget. The budget will allow you to see at a glance how much you have reserved for this kind of insurance so you can eliminate those policies that you simply can't afford.
Once you have done that, you need to look at cost in close relation to coverage. The price of a given policy will directly depend on the type(s) and amount(s) of coverage, and vice versa. In some cases, however, cost may be disproportionate to the coverage provided. Your comparisons will enable you to get a sense of when cost seems commensurate with coverage. In general, if two policies offer the same coverage but one is more expensive than the other, you might want to go with the cheaper one. There are many reasons why two identical or similar policies may have different costs.
An insurance company sometimes needs to charge more for a policy than it's worth in order to cover claims payments and other expenses. More importantly from your standpoint, many policies add surcharges and/or give you discounts based on certain hazards or safety features. The presence of smoke detectors, burglar alarms, and dead-bolt locks in your home may lower your total cost, as might your home's proximity to a fire hydrant or fire station. You may also be eligible for discounts if your home is relatively new or made of brick. On the other hand, if you smoke and don't have alarms, or if you live in a crime-ridden neighborhood, your policy may be subject to surcharges. Discounts and surcharges can greatly affect the overall value of a home policy and should definitely be weighed in the balance.
What about deductibles?
Closely related to the broader issue of cost is the question of the deductible, if any. The deductible is the amount that you have to pay toward damage or loss of your home/personal property before your insurance company begins to pay claims. The relationship between the deductible and the total cost of a home policy is simple. If you have a $100 deductible, your policy will cost more than one with a $500 deductible because of the greater probability that your company will have to pay claims. Again, there's a tradeoff. Higher deductibles result in reduced premiums but put you at greater risk for out-of-pocket expenses and may therefore cost you more in the long run.
Deductibles may vary widely from one home policy to another and can make a big difference in the overall value of a policy.
Tip: Remember to look not only at the deductible dollar amount specified in each policy, but also at the type of deductible. It could be a straight annual deductible or a per-occurrence deductible. The type of deductible may affect the total amount that you end up spending on deductibles.
Replacement cost versus actual cash value
There are two different methods that an insurance company can use to assess your loss and determine how much to pay you for a claim. Replacement cost is the amount it would take to replace or rebuild your home or repair damages with materials of similar kind and quality, without taking into account depreciation in value over time. Actual cash value is the amount it would take to replace or rebuild your home or repair damages after allowing for depreciation. If your 30-year-old home were destroyed, the actual cash value method would be based on the age and condition of the home, whereas the replacement cost method would not be.
For obvious reasons, the replacement cost method generally works to your advantage. It can allow you to receive an insurance settlement in excess of the depreciation-adjusted value of your home or the depreciation-adjusted cost of damage. But a replacement cost home policy will often be more expensive than an actual cash value policy, so it doesn't always offer the best value for your money. In any case, as part of your evaluation process, you should determine which of these methods each home policy employs.
Caution: The section just discussed applies only to loss of, or damage to, your home itself. Most standard home policies cover your other personal property (the contents of your home, etc.) solely on an actual cash value basis.
When should you replace your homeowners policy?
Replacing a homeowners policy could mean switching to a different policy within the same insurance company, or changing to a different company altogether and adopting a new policy with them. In general, you should think about replacing your home policy under one or more of the following conditions.
You enhance the value of your home through home improvements
Perhaps you built a garage, a porch, an extra bedroom, or a swimming pool in the backyard. Any of these improvements could require a new policy with higher coverage amount(s).
Your home depreciates in value over time
If this happens, you may want to consider a new policy with a lower coverage amount(s) based on the depreciation-adjusted value.
You acquire and/or sell personal property
Perhaps you've bought a set of antique furniture and sold your valuable baseball card collection. This scenario would call for a new or revised policy that adds coverage for the items bought and removes the items sold from your coverage.
You move
Since your old home policy was designed for your old home, you'll need an entirely new policy tailored to your new home and geographic location.
Your neighborhood goes downhill over time
If your neighborhood becomes crime ridden or drug infested, you may want to consider a new policy that provides additional coverage.
Your financial circumstances change
If your money situation changes, either because you've lost your job or won the lottery, you may want to modify your coverage according to what you can now afford.
Disaster strikes
Say your home gets destroyed by a tornado but your old policy didn't cover tornado damage. You may decide to replace the old policy with one that does cover tornado damage so as to prevent the same thing from happening again.
You haven't been satisfied with the policy and/or the company
Maybe you miscalculated your finances or misgauged your coverage needs and found out that the policy you chose wasn't appropriate for you after all. Or perhaps you just haven't been happy with the way the insurance company has handled the policy, processed your claims, and treated you as a customer.
Your premium skyrockets through no fault of your own
Even though you never filed a claim, you find out that your premium has increased. This could be because the company had to raise premiums across the board in order to cover its claims and other expenses. If the new cost of your policy now seems disproportionate to the coverage it provides, it may be time for a change.
Your insurance company's quality rating plummets
This could be a sign that the company is in financial trouble or has done a poor job handling client claims. This could be your cue to take your home insurance business elsewhere.
When should you keep your existing homeowners policy?
In general, you should keep your existing homeowners policy as long as you are happy with the policy and the company, and as long as there have been no significant changes in your circumstances or coverage needs.
