Choosing a home insurance company and policy is a major step for any homeowner - and it doesn't get any less challenging the more you do it. Learn what you should take into consideration before making the big choice.
This article will discuss:
How to shop for homeowners insurance
You will want to compare multiple home insurance companies before making a final decision. When the end goal is to find a reputable company that can provide the right coverage for your home and bank account, you generally don't want to go with the cheapest home insurer.
Each home insurance company has a different claim resolution process, financial backing, customer service quality and policy price. All of these factors can affect your experience with your home insurer differently and need to be considered carefully.
How to choose a home insurance company
Before you buy a home insurance policy, you'll want to find an insurer that is both reliable and affordable. When researching providers to get quotes from, look at factors like:
How quickly your homeowners insurance company can resolve your home insurance claim is going to be a big decision point. If your home was destroyed by a fire, you're going to want to have your claim reviewed and paid out as quickly as possible.
The best way to find an insurance provider's claims efficiency is by doing a bit of homework. Consumer survey companies such as J.D. Power and Consumer Reports can provide carefully compiled and reviewed rankings of the strengths and weaknesses of different home insurers.
It's worth noting that, according to the National Association of Insurance Commissioners (NAIC) - which measures a company's complaints relative to its size - AIG, Auto-Owners Insurance and Erie receive fewer complaints than their competitors.
Reviewing the financial soundness of a home insurance company when shopping for quotes is an important, but often overlooked, part of picking a home insurance policy. Insurers can go bankrupt like any other business. You don't want to pay premiums to an insurer that is close to insolvency.
An excellent way to find the most stable home insurance companies is to check out what the independent rating agencies have to say about them. According to the Insurance Information Institute (III), the key financial rating companies you should look at are:
- AM Best Company
- Fitch Ratings
- Moody's Investors Service
- Standard & Poor's Insurance Ratings Services
Standard homeowners insurance coverage is usually fairly standard across providers. Therefore, the price of a policy is going to be one of the biggest competition points you take into consideration between home insurance companies.
Take the opportunity to compare home insurance quotes to find the best balance between cost and coverage you can get. You can look at your state's average annual premium to find out if you're paying more for insurance than your neighbor.
All of the above-mentioned factors combine into the most important one: how happy you are with how your home insurance company treats you.
Research online reviews of each company you're considering. Reading about how they fulfill their customers' needs, especially for claims similar to any you have had in the past, can give you insight into how you can expect to be treated. According to J.D. Power's 2021 Home Insurance Study, USAA, Amica Mutual, AAA, Erie and State Farm have the best overall customer satisfaction ratings.
Word of mouth is also a valuable tool. Talk to family, friends, neighbors and coworkers about their experiences with their home insurance companies.
Regularly review your policy
Your situation can change over a year, so we recommend reviewing your policy annually. You may have remodeled your home or made other changes to it, which could impact your premium. Companies can also change their policies. If one company wasn't a fit for you in the past, it may be a fit for you now.
See how much you can save when companies compete for your business.
Home insurance pricing and coverage factors
Insurers use many factors to determine the cost of your homeowners insurance policy. For example, the characteristics of your home, your location and your personal profile can affect your premium. Other factors include:
- Square footage of the house
- Your credit history
- Cost and quality of the home's materials
- How close you are to a water source and fire station
- Chance of natural disasters in your area
- Crime rate in your neighborhood
- Any remodeling or renovations you've done
- Your personal claims history
- Condition of the roof
- Marital status
If you remodel your home, we recommend letting your insurer know. Renovations can potentially raise or lower your premium. Insurance companies can also track some of these factors themselves, such as your credit history, crime rates and the chance of natural disasters in your area.
You should also have enough coverage to rebuild or replace your house and its contents.
Many insurers offer discounts when you buy a homeowners insurance policy. The most commonly offered discounts are:
- Bundling. If you bundle a home insurance policy through the same provider as your life or auto insurance, you can reduce the yearly premium of both policies.
- Security. Home insurers see security systems as a good sign of low risk. Installing deadbolt locks and/or a home alarm system can save you some money.
- Fire prevention. If you have smoke detectors or high-tech sprinkler systems installed, most home insurance providers likely offer a discount for that.
These are just some of the home insurance discounts that are available. When speaking with an agent, ask about what other discounts you're eligible for. The home insurer's website should be able to give you details on what discounts they have, as well.
What is the best home insurance policy to buy?
The best homeowners insurance policy for you depends on how much coverage you need and what claims payout method you want. Not all homeowners policies are created equal. You will want to make sure that your coverage and claims payout method match what you need and not just fall under the cheapest policy.
Home insurance policy types
The two most common home insurance policy types are the HO-2 and HO-3. The HO-2 tends to be cheaper than the HO-3, but the coverage you get with the HO-2 rarely makes it worthwhile.
An HO-2 policy covers the following risks:
- Fire and lightning
- Wind and hail
- Snow and sleet
- Damage caused by the weight of ice
- Falling objects
- Riot or civil commotion
- Vandalism and theft
- Damage caused by vehicle or aircraft
- Water damage from burst or overflowing pipes
While this may seem like decent coverage, it's important to know that the HO-2 is a "named peril" policy. This means it will only cover risks listed in the policy. If a peril is not on your HO-2 insurance policy, you're probably paying for it yourself.
The HO-3 is very different. It's what's known as an "open peril" policy. This means that unless the peril is excluded in writing in your home insurance policy, it's covered. The most frequent exclusions on an HO-3 policy are:
- Many other natural disasters
In the end, an HO-3 policy is usually the best way to go. The scope of what an HO-3 policy covers makes it the most common policy type purchased by homeowners.
National disaster insurance
A standard homeowners insurance policy does not cover floods or earthquakes. However, you can buy flood and earthquake insurance separately. Many insurance companies will offer an optional coverage for earthquake protection. To find out if you need earthquake insurance, you will need to know the level of risk of earthquakes in your area. Flood insurance can be purchased separately through FEMA.
Replacement cost vs. actual cash value
After you have chosen your policy type, you'll need to choose one of two ways it pays out after a claim: replacement cost or actual cash value (ACV).
- Replacement cost. Replacement cost policies pay out the full cost of repairing or replacing your dwelling or contents up to your policy's dollar limit. Most standard home insurance policies work with replacement cost.
- ACV. ACV policies pay the current cash value of your dwelling or contents, minus any depreciation in the event they're damaged or destroyed.
Many home buyers prefer replacement cost because in the event of a possession getting destroyed, it will be replaced with the same or equal value item. Some homeowners will go with ACV because the policy premium tends to be cheaper than a replacement cost policy.
Homeowners insurance riders
A standard home insurance policy will cover your belongings up to a limit. Expensive jewelry, art or antiques, for example, may not be covered. Home insurance riders increase coverage limits so that you're better protected. We recommend adding riders if your policy limit is below the value of your belongings.
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