How to Choose the Right Home Insurance Plan
Buying a home, especially in today’s hot market, can be tough. Between signing on with an affordable agent, finding the right home, getting your offer accepted, and getting the deal across the finish line, it would be understandable if you were exhausted by the time you got the keys.
But closing on your new home is just the beginning. Now that you’re a proud homeowner, one of your most urgent responsibilities is to protect your new investment. One of the easiest and most effective ways to do that is through a good home insurance policy.
However, not all home insurance policies are created equal. So how do you shop for the right home insurance policy for your needs, and what should you be looking for? Let’s go over the basics.
Know the stats
Before you start shopping for home insurance, assess the main risks to your home — because that’s exactly what your insurance carrier is going to do. Where you live has a significant influence on your home insurance rates, as well as what kind of policy you’ll need.
For example, if you just moved across the country to an area that’s vulnerable to wildfires, earthquakes, or floods, you can expect to pay more for home insurance than someone who doesn’t. You may also need special supplemental policies. The same rule applies if you live in an area that experiences a lot of break-ins or other property crimes. Knowing your risks and vulnerabilities will guide you toward the best policy.
Assess exactly what you need covered
Next, try to estimate the total value of what you need to be covered by your home insurance policy. Start by estimating the replacement cost of your home. You can do this by multiplying your square footage by the average local construction cost, or you can get an in-person home appraiser to come in. (If this sounds like too much work, your insurer will be happy to handle this valuation.)
Home insurance doesn’t just cover your house; it also covers personal belongings like clothes and furniture, so make sure you include those items in your assessment. Do a detailed inventory of all your belongings, with special attention to valuable items like jewelry, artwork,
While you’re going over your home, also note special features that could be relevant to your policy. For example, homes with security systems are usually eligible for lower home insurance rates, since they have that extra layer of security built in. If you have peripheral structures like pool houses, guesthouses, or storage sheds, they might require supplemental coverage.
Think about what kind of policy you need
There are two main types of homeowner’s insurance: actual cash value (ACV), and replacement cash value (RCV). Let’s touch on some quick definitions and each policy type’s advantages and drawbacks.
Actual cash value (ACV)
Let’s say a natural disaster strikes your home, and the roof is destroyed. If you have an ACV policy, you’ll be reimbursed for the actual cash value of the roof at the time it was destroyed — that is, the original cost of the roof, minus depreciation.
The drawbacks here are clear. If your roof cost $20,000 a decade ago but lost 8% of its value a year through depreciation, you’re looking at 20% reimbursement, or $4,000.
Replacement cash value (RCV)
Sticking with that scenario, let’s say your roof is destroyed in a natural disaster. If you have a replacement cash value policy, you’ll be reimbursed for the cost of replacing that roof today. So even if it costs $35,000 to replace a ten-year-old roof that originally cost $20,000, you don’t have to worry about going into your own pocket to cover it.
While it’s evident that RCV coverage is far more comprehensive and practical, it’s also quite a bit more expensive than ACV coverage. Choosing between these two policy types will come down to your personal risk assessment, and how much you’re comfortable paying in monthly premiums.
This is a good time to mention that you should also make sure you’re eligible for a homeowner’s insurance policy. If you’re renting, or in the leasing period of a rent-to-own property, you should get renter’s insurance.
Comparison shop
Now that you have an idea of what you need coverage for, and what kind of home insurance policy you want, it’s time to gather some quotes. Experts suggest getting quotes from at least three companies to get a sense of the market.
One key point here is to make sure you’re getting quotes for the specific policy you need. Double-check that the coverage amounts and deductibles on each policy are the same and that any additional coverages you requested have been included in the quote.
Once you have all the quotes in hand, look them over. But don’t be too quick to just take the cheapest one. First, do your due diligence.
Research the reputation and financial stability of your leading candidates.
You can look into a company’s reputation by looking at company ratings on sites like J.D. Power, which incorporates real feedback about cost and value, customer service, and the claims process. You should also look at other online reviews to see how they handle communication, disputes, and unique situations like selling a house that has an open claim. If the insurance company you’re looking at has a poor rating for claims handling or cost, that’s a serious red flag.
Secondly, check online to make sure the insurance company you’re looking at is on solid financial ground. To put it bluntly, a company that’s poorly run or on the brink of bankruptcy may not be reliable in an emergency.
Whittle down your costs
Insurance companies often provide various discounts on home insurance policies. For example, it is common for policyholders to receive discounts for bundling their home insurance with their automobile coverage.
Some other common discounts that are offered are discounts for non-smokers, newly constructed homes, a past claims-free record, home upgrades, or home safety features. If you meet any of these conditions, make sure you mention it to your agent!
The savings don’t just apply to your premiums. Similar to moving expenses, you might be able to deduct your home insurance premiums from your taxes — if you meet certain specific conditions. In the case of home insurance premiums, you can only claim a partial tax deduction if you work from home, you rent the place out, or if you filed a claim and it didn’t cover your entire loss.
