How to Choose Homeowners Insurance

If you own a home, homeowners insurance is crucial. Not only does it provide financial protection against damage to your property and personal belongings, but it also covers your liability for injuries and property damage to others. But choosing the right home insurance policy can feel overwhelming, even if you’ve had a policy before. This comprehensive guide will help you understand the basics of home insurance, including the different policy types, and provide tips for selecting the best homeowners insurance coverage for your needs.

Understanding the Basics of Homeowners Insurance

A standard homeowners insurance policy typically covers the following:

• Dwelling coverage: Protects the structure of your home, including attached structures like garages, from damage caused by covered perils. Common covered perils include fire, windstorms, hail, and vandalism.
• Personal property coverage: Covers your personal belongings, such as furniture, appliances, and clothing. If they are damaged or destroyed by a covered peril or stolen, your policy would pay to have them replaced or repaired.
• Liability coverage: Protects you if you are found legally responsible for injuries to others or damage to their property, on and, in some cases, off your premises.
• Additional living expenses: Covers additional costs you may incur if your home is uninhabitable due to a covered loss. Covered costs commonly include hotel stays, meals, and other living expenses.
• Other suctures coverage: Covers any detached structures on your property, such as sheds, fences, carports, and detached garages.

Homeowners insurance policies have limits on covered items and coverage amounts, depending on your preferences, coverage needs, and the type of home insurance policy you choose. They also have a deductible you must pay first before coverage kicks in. And most policies exclude specific perils or require separate coverage for certain risks, such as floods and earthquakes.

Types of Homeowners Insurance Policies

Homeowners insurance policies come in several forms, each designed to meet different needs. The vast majority of homeowners who occupy their homes will choose an HO-3 policy—about 78% in 2020, according to the most recent data from the National Association of Insurance Commissioners (NAIC).

HO-1 (Basic Form)

This is the most basic policy type, covering a limited number of perils, such as fire, lightning, and explosions. Many insurers don’t offer this type of coverage because it doesn’t provide adequate coverage for most homeowners.

HO-2 (Broad Form)

This policy provides more coverage than the HO-1, including additional perils like falling objects, damage from the weight of ice, snow, or sleet, and accidental discharge or overflow of water or steam from plumbing or appliances.

HO-3 (Special Form)

This is the most common homeowners insurance policy, providing comprehensive coverage, including coverage for dwelling and other structures, liability, personal property, additional living expenses, and medical payments to others.

An HO-3 protects your property against all perils except those specifically excluded, such as floods, earthquakes, freezing pipes and vandalism in a vacant building, pest damage, and defective construction. It protects your personal belongings against specific perils named in the policy.

You can choose whether property is covered at its actual cash value or replacement value—the latter provides more coverage in event of a loss, but is generally more expensive. Certain types of personal property, such as jewelry, firearms, and money have policy sub-limits that may not provide sufficient protection for your belongings. For instance, many homeowners with valuable jewelry may choose a jewelry insurance policy in addition to their homeowners insurance policy.

HO-5 (Comprehensive Form)

An HO-5 policy offers the highest level of coverage, including all perils covered by the HO-3 policy, plus additional coverage for personal belongings. It typically comes with higher coverage limits and is best suited for high-value homes or those with valuable personal property.

HO-6 (Condo Insurance)

Specifically designed for condominium owners, HO-6 policies cover personal property, liability, and any improvements made to the unit.

HO-8 (Modified Coverage Form)

This policy is designed for older homes or those with historical value, providing coverage for named perils and replacement costs based on the actual cash value of the home rather than its full replacement cost value.

Factors to Consider When Choosing Homeowners Insurance

When selecting a homeowners insurance policy, consider the following factors:

Coverage

Ensure your policy provides adequate coverage for your home's structure, personal belongings, liability, and additional living expenses. Consider any risks specific to your area, such as floods or earthquakes, and obtain separate coverage if necessary. Also consider the sub-limits on your policy for personal belongings. Purchase a floater for specific items to increase these limits or buy a separate policy for sufficient coverage. If you want to increase your liability coverage beyond the maximum available, consider an umbrella insurance policy.

Deductibles

A deductible is the amount you must pay out-of-pocket before your insurance kicks in. Higher deductibles typically result in lower premiums, but you'll need to be prepared to cover the deductible amount in case of a claim.

Replacement Cost vs. Actual Cash Value (ACV)

Replacement cost coverage pays to repair or replace your home or personal belongings without accounting for depreciation, while actual cash value coverage factors in depreciation, which means it may not be sufficient to replace or repair the damage or loss. Replacement cost coverage typically results in higher payouts but usually comes with a higher premium.

Discounts

Many insurance companies offer discounts for bundling policies, such as auto and home, installing security systems or fire alarms, having a newer or well-maintained home, and being claim-free for a certain period. Be sure to inquire about any potential discounts when shopping for homeowners insurance.

Customer Service and Claims

Choose an insurance company with a reputation for excellent customer service and efficient claims processing. Consider customer satisfaction rankings, such as those reported in J.D. Power’s U.S. Home Insurance Study, and read reviews of the best homeowners insurance.  Also, ask for recommendations from friends or family members to ensure you're selecting a reliable insurer.

Tips for Saving on Homeowners Insurance

• Shop around: Obtain quotes from multiple insurance companies to compare coverage, premiums, and deductibles. This can help you find the best policy for your needs at the most competitive price.
• Bundle policies: Many insurance companies offer discounts if you bundle your homeowners insurance with other policies, such as auto or life insurance. That said, in recent years, rising auto insurance costs have made bundling a less effective discount opportunity, according to the 2022 J.D. Power U.S. Home Insurance Study. This makes comparing home insurance quotes that much more important. 
• Increase your deductible: Raising your deductible can result in lower premiums, but be sure you can afford to pay the higher deductible in case of a claim.
• Improve your home’s security: Installing security systems, smoke detectors, home security cameras, and deadbolt locks can help reduce your premiums by lowering the risk of theft or damage.
• Maintain a good credit score (or improve it): Insurance companies frequently use your credit score to determine your premiums. Maintaining a good credit score can help you qualify for lower rates.

Top Companies Offering Homeowners Insurance

When choosing a homeowners insurance company, consider factors such as coverage options, discounts, customer service, and claims processing to find the best fit for your needs.

State Farm 

State Farm is the largest provider of homeowners insurance with over 18% of the market share in 2022. The company came in above average in J.D. Power’s 2022 U.S. Home Insurance Study. It offers comprehensive homeowners insurance policies and a wide range of discounts. But you need to contact a State Farm agent for a quote; you can’t get a quote online.

Allstate

Allstate provides homeowners insurance with some impressive discounts: up to 10% off your premium for switching to Allstate (and up to 10% off every year thereafter), up to 10% off for early renewal, and up to 5% off for automatic payments, among others. Online quotes are available in some areas.

Chubb

Chubb is a great option for high-value homes or for anyone who wants a home insurance policy loaded with extras. Chubb offers replacement cost coverage standard for your dwelling and belongings, plus extended replacement cost coverage which pays to have your home repaired to its original condition, even if it goes beyond your policy limits.

Liberty Mutual

Liberty Mutual offers homeowners insurance with various discounts, including a 10% discount when you buy online and savings for newly purchased homes. However, the company comes in well below the average for customer satisfaction, according to J.D. Power.

USAA

Exclusively serving military members, veterans, and their families, USAA offers comprehensive homeowners insurance with excellent customer service and impressive discounts. It also makes replacement cost coverage standard on all policies.