Homeowners Insurance Buying Guide

    Homeowners Insurance Buying Guide

    Homeowners insurance isn’t on most folks’ minds until their homes sustain damage, or they get sued for an injury on their property. Then, having enough coverage—and a responsive and fair insurer—can make the difference between financial security and catastrophe.

    It’s not necessarily a bad thing to stick with your current carrier. But we recommend that you look around periodically for better rates. Our ratings of 14 major insurance groups is a good place to start, and you may find a suitable carrier among them that charges you less. That’s likely to be a concern for homeowners in the near future because premiums in many places may be rising.

    Trends Affecting the Cost of Homeowners Coverage

    Pricing for the coverage of your dwelling—a major portion of your homeowners policy—is based on the cost to repair your home if it’s damaged or to rebuild it if it’s destroyed.

    Contrary to what some may think, home insurance premiums aren’t related to home prices, so the real estate inflation that many areas have experienced in the past year won’t affect home insurance costs. But these other recent trends could have an impact.

    • Pandemic-related shortages: Building materials have been in short supply at the same time that demand for them by contractors and do-it-yourselfers has spiked. The result is price inflation. Lumber prices, for instance, tripled between April 2020 and June 2021. Supplies of computer chips, the “brains” of many home components, also have been strained; so have inventories of appliances. All these forces affect the cost to rebuild or repair homes—and, in turn, to insure them. In fact, the Texas Department of Insurance went so far as to warn policyholders in May to expect increases in their premiums because of the higher cost of lumber.

    • Natural disasters: Home building prices also have been affected by large-scale natural catastrophes in recent years. Major floods in the Southeast and wildfires in Western states have further ramped up demand for building materials, raising prices to rebuild. “Added reconstruction costs always occur after a hurricane, flood, or wildfire smashes through a region,” says Stacey Giulianti, co-founder of Florida Peninsula Insurance, an homeowners insurance company in Boca Raton. And that can mean higher premiums.

    • Increase in claims: In states that have experienced substantial catastrophes over a period of years, insurers have been permitted by state regulators to raise rates to compensate for those claims and for the higher risk. The increases can affect even homeowners in the region who haven’t filed claims. Sometimes the rise in claims prompts insurers to leave an area or drop policyholders, forcing those homeowners to find new coverage.

    In such an environment, you may be wondering how to cover your home properly, lower your premiums, and deal with your current insurer—or find a new one. These tips may help. 

    Find a Good Insurer

    The best test of an insurer is how well it handles claims. In our summer 2018 homeowners insurance survey—answered by more than 81,000 Consumer Reports members—almost 7,000 respondents told us how satisfied they were with their experience when they had a claim. Companies’ damage estimates were among the best predictors of customer satisfaction. Lower-rated insurers tended to have a greater percentage of customers who disagreed with their damage estimates and felt that their final settlement was too small.

    See our homeowners insurance ratings for details on the top-rated homeowners insurance companies.

    In our survey, more than 10,000 Consumer Reports members said they’d changed carriers in the previous three years. More than half of those who switched said they did so because they got a better price.

    Some state insurance departments publish rate comparisons. Floridians, for instance, can go to the Florida Office of Insurance Regulation website; Californians, to the California Department of Insurance website. You can also get quotes from an independent agent who sells policies from several insurance companies. (Find one through Trusted Choice, which is affiliated with numerous such companies.) Comparison-shopping sites such as Insure.comNetQuote, and SelectQuote are also good places to look for coverage.

    Note, though, that our top-rated companies—USAA (for military members, veterans, and their eligible relatives) and Amica—use their own agents, and their homeowners insurance isn’t included in shopping sites. You’ll have to apply directly with each of them to get quotes.

    Get the Right Coverage

    There are no state-mandated requirements for homeowners coverage (as there are for auto insurance in most states), and a mortgage lender may require you to insure for only 80 percent of the replacement value of your home. But being underinsured could leave you on the hook for a significant sum, especially if you need to completely rebuild. 

    Buying too much coverage isn’t worthwhile, either. It’s a mistake, for instance, to assume you need coverage equal to your home’s market value. That value includes the land your home rests on, which will remain even after a catastrophe. That’s why in most cases your home’s market value will be higher than the cost to totally rebuild it.

    Rule of thumb: Buy enough insurance to cover the labor and materials to completely rebuild your home, called the replacement value or replacement cost. Your insurance agent can help you figure out that amount. Mention unique features to ensure that they’re accounted for, including improvements you’ve made during the pandemic.

    Standard homeowners insurance policies include “loss of use” coverage. It pays a set amount per day for you to live outside your home during construction. Greg Martin, president of Think Safe Insurance, an insurance broker based in Brandon, Fla., says that if building components are hard to find, rebuilding could take longer than usual. That means you could end up spending spend more time than normal outside your home. “You may want to review this coverage with your agent to make sure that you have enough moving forward,” he says.

    Cover Your Assets

    Options, add-ons, and separate coverages will increase the cost of a standard policy. But they could save you a lot of money in the long run.

    Keep in mind as you shop that some carriers may include these extras in their basic coverage and that others could charge an added premium. The National Association of Insurance Commissioners offers a homeowners insurance shopping worksheet (PDF) as part of its free shopping guide to help you approximate apples-to-apples comparisons. 

    Here are add-ons to consider.

    • Extended replacement cost: This will pay 20 to 25 percent above the limit of coverage if building costs soar after a major disaster. Benefits can vary, depending on the state and insurance carrier, so be sure to check the details before purchasing. Be aware that this coverage is based on using standard building supplies, says Loretta Worters, a spokesperson for the Insurance Information Institute, an insurers’ trade group. If you want to replicate custom features, such as stained-glass windows or antique wood floors, you’ll need to purchase additional riders or buy another layer of coverage called a restoration-cost policy, Worters says. Often, insurers that sell policies for high-end homes offer guaranteed replacement cost coverage; it’s a more pricey coverage that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit, Worters says.

    • Inflation protection: Make sure your policy includes an “inflation guard” feature or rider that automatically raises your coverage to reflect annual increases in homebuilding costs.

    Earthquake, hail, and windstorm: In our 2018 homeowners insurance survey, 6,940 CR members said they’d filed a claim in the previous three years. According to those claimants, hail was the leading cause of damage. Depending on your state, you may have to pay a separate deductible for hail damage or buy stand-alone coverage. The same is true for earthquakes and high-speed windstorms.

    • Contents replacement cost: A standard policy may reimburse only the depreciated, or “actual cash value,” of stolen or damaged home contents. To avoid having to pay the difference when replacing possessions, opt for replacement cost coverage. Document the contents of your home by making a video inventory of your possessions, and store it somewhere safe, such as in the cloud or on a thumb drive kept in a safe deposit box.

    • Additional valuables: Homeowners policies typically put dollar limits on what an insurer will pay to replace valuables such as furs, firearms, jewelry, and home-based-business property. For instance, you’d get at most $2,500 to replace stolen jewelry. (These lower limits often apply only to theft.) So buy a “floater” to supplement coverage on costly items. Raising the limit on jewelry coverage to $5,000 from $2,500, for instance, costs about $17 annually with State Farm.

    • Sewer backup: This coverage would protect you if, say, a municipal line failure caused sewage to back up into your home, Worters says. (Sewage backup could also be caused by tree roots growing into the sewer line.) The cost is $40 to $100 per year; policy limits run between $5,000 and $25,000. Insurers don’t offer it in every state, though, Worters says. Typically your homeowners insurance policy does not cover a septic system on your property, though it will cover damage to your home due to a malfunctioning septic system, or septic problems that caused overflow into your home. Damage to your home from a sump-pump malfunction would be covered, too, but the pump itself isn’t covered, so you’re responsible for the cost to fix it. 

    • Ordinance, or law and endorsement: These can provide the extra coverage required to pay for the cost of rebuilding in compliance with updated local building codes, as can be the case when repairing or replacing an older home.

    Boost Your Liability Protection

    The liability insurance limit included in homeowners policies (to cover costs and damages resulting from lawsuits) usually starts at $100,000. But depending on where you live, you could be sued for almost all your assets— including investments, real estate, and personal property. So increase your liability limit if the value of your assets exceeds $100,000.

    Your safest bet is to buy coverage worth at least as much as your assets. Umbrella or excess liability coverage can provide this added protection. It increases your liability protection beyond the limits of your home and auto policies in case you’re sued for accidental injury or property damage. It can also cover additional perils, including lawsuits against you for libel or slander. To get it, you may have to raise the liability coverage limits on your auto and home policies first.

    A $1 million umbrella liability policy generally costs a few hundred dollars per year. Buying more umbrella coverage can be cost-effective. State Farm, for instance, says that on average, raising $1 million in coverage to $2 million costs 75 percent of the additional premium.

    Consider Flood Insurance, Even in a Low-Risk Area

    Homeowners policies will cover flooding only if it’s caused by a pipe or another system that breaks in your home. Protection against flooding and mud flows originating from the outside must be covered by flood insurance. 

    That coverage can be a very worthwhile purchase, even if you don’t think your property is vulnerable. The National Flood Insurance Program (NFIP), sponsored by the federal government, says that more than 40 percent of the flood losses it paid from 2015 to 2019 were for properties outside of high-flood-risk areas. 

    The NFIP underwrites most flood policies in the U.S.; you can buy that coverage through most insurance agencies that sell homeowners and car insurance. The standard NFIP policy insures dwellings for up to $250,000 and contents for up to $100,000; it’s sold mainly through private agents. You also can buy additional coverage through a private flood insurance carrier.

    The median annual cost for homeowners in a high-risk area is $797, according to the NFIP. It’s $516 in other areas. For renters in high-risk areas, it’s $298 for belongings only; elsewhere, it’s $216. Go to the NFIP’s FloodSmart website for an estimate of what it will cost to cover your home.

    Find Ways to Lower Your Premium

    Try one or more of these ways to bring down the cost of your premiums.

    • Bundle coverage: Purchasing your homeowners and auto coverage from the same company can provide savings of up to 30 percent overall. You could save more, too, if you bundle your boat or motorcycle. “Bundling insurance policies also can simplify your bill paying and record-keeping,” Worters says.

    • Raise your deductible: Higher deductibles equal lower premiums. Going to a $1,000 deductible from $500, for instance, can shave up to 25 percent off your premium, the Insurance Information Institute says. And going from $500 to $2,500 saves 30 percent or more. 

    • Make home improvements: Replacing old plumbing and adding a security system and water- or gas-leak detection sensors can each provide insurance savings of 2 to 6 percent or more. Replacing a roof with an impact-resistant one can save up to 35 percent in some states. Cutting back dry brush around dwellings and outbuildings in a fire-prone area can earn you a 5 percent break on your premium. But, Worters says, in wildfire-prone California it’s rare to see this discount. 

    Be Savvy About Submitting Claims

    Making multiple claims in a short period will probably trigger a rate increase or even cause your insurer not to renew your policy.

    “Making three claims in two years, for instance, shows you have a proclivity for claims,” Worters says.

    Half of surveyed CR members who filed a claim in the previous three years said they saw no subsequent premium increase. Only 12 percent had hikes of $200 or more annually. That suggests that there’s not much of a downside to filing a single claim. If you file infrequently, an insurer isn’t going to raise your rate or decline to renew your policy as a result, Worters says.

    Still, avoid making claims of just a few hundred dollars above the deductible. Doing so might erase discounts you’re getting for remaining claim-free. If you’re dealing with an independent agent, discuss the pros and cons with them before you report. 

    What If Your Insurer Drops You?

    Insurers drop customers for a variety of reasons. There are several ways that can happen.

    • Cancellation: If you’re a new policyholder, an insurer can cancel your policy for any reason within the first 60 days. After that, it can cancel you only if you don’t pay your premiums, are found to have lied on your application, or have become a greater risk, says the National Association of Insurance Commissioners. The might happen, for instance, if the insurance company finds out you’ve installed a trampoline or obtained a dog breed that’s not covered by your policy. You have to be given notice of cancellation; that period varies by state.

    • Nonrenewal: Your insurer can decide not to renew your policy after it expires. Sometimes that has to do with your filing too many claims; even small claims are red flags if they’re filed too frequently. But your insurer also can decline to renew you for reasons that have nothing to do with you—for example, if it has determined that it’s no longer making a profit insuring homeowners in your area. Typically your insurer will give you at least 30 days’ notice if it’s not renewing your policy.

    If you’ve been dropped and can’t find coverage from a private insurer like those in our ratings, talk to an agent about your options. Or contact your state insurance department, which may be able to provide a list of insurers that cover your area. Many states also sponsor high-risk homeowners insurance pools to cover those who can’t find insurance elsewhere. They’re called Fair Access to Insurance Requirements Plans. You can find phone numbers for each state’s FAIR plan here. This coverage is typically more costly than what you’ll find in the private market.

    Even if you end up in a FAIR plan, try looking periodically for less costly insurance with a private carrier. New insurers may emerge, and existing ones may decide to take another shot in your area, and with homeowners who fit your profile.

    See Our Homeowners Insurance Ratings

    Our homeowners insurance findings—covering Allstate, Farmers, Hartford, Liberty Mutual, Nationwide, State Farm, Travelers, and seven other major insurance groups—reflect Consumer Reports members’ experiences, not necessarily those of the general population. The Reader Score reflects overall satisfaction with homeowners insurance and isn’t limited to the factors listed under Survey Results. Ratings for companies within a group might vary.

    Each rating category under Survey Results—damage amount, agent courtesy, timely payment, promptness of response, simplicity of the process, and ease of reaching an agent—reflects average scores on our six-point satisfaction scale ranging from “completely satisfied” to “completely dissatisfied.”