Guide to Buying Homeowners Insurance

Guide to Buying Homeowner’s Insurance

As a homeowner, you know that there are many costs associated with ownership. Not only do you have a lot of money invested in the cost of the structure itself, you also have a great deal of personal property, such as furniture, electronics, kitchenware, jewelry, sporting goods, and other items. Insurance is something that you need to have, but hope that you never have to use. A policy may cover your losses from damage and theft, as well as from a variety of natural disasters. If you owe money on your home to a mortgage company or bank, the lender requires you to keep a policy that includes a specific type of coverage.

Why You Need Homeowner’s Insurance

There are three main reasons to have homeowner’s insurance: 1) to insure your structure and personal property against damage or theft; 2) to provide coverage for you to live elsewhere if your home should become unlivable as a result of an insured loss, and 2) 3) to have liability protection in case someone were to be hurt as a result of your personal activities either at, or away from, your residence. Homeowner’s insurance protects you from claims and lawsuits associated with the injury.  If you experience a catastrophic event, such as a major fire you could lose everything you own, including the home itself. Insurance allows you to get reimbursement for your lost personal property and have your home rebuilt or repaired.

Mortgage companies require you to have homeowner’s insurance because they have a stake in the well-being of your house. Check with your lender to find out the coverage that they require. It is a common misconception that your coverage amount should be based on the amount of the loan or the home’s market value. Instead, your home should be insured based on the cost to rebuild it.  Replacement cost may be higher or lower than market value.  If you chose to insure your home for an amount that is higher than the cost to rebuild, you will be paying more for your insurance than necessary.  On the other hand, if you insure your home for less than the cost to rebuild, you may not have enough money to restore your home to its pre-loss condition in the event of a catastrophic event.  Often your insurance agent can assist you with determining the cost to rebuild your home, but it is important to remember it is ultimately your choice to select the amount of coverage you want.  The insurance company will provide a copy of the insurance policy to the lender to verify that you have the proper coverage.

Homeowner’s Insurance Options

Homeowner’s insurance policies vary greatly because there are so many different options that may be included. At the very least, you will need basic coverage that protects you in case of a disaster. There are standard homeowner’s policies that cover specific types of damages.

  • HO-1 is the most basic policy and covers only ten perils. It does not include liability coverage. It is not compliant with mortgage lenders.
  • HO-2 is also called a broad coverage policy and covers a list of 16 perils.
  • HO-3 is the most common homeowner’s policy. It is known as a special form policy because it covers everything except those items listed in an exclusion list.
  • HO-4 is a tenant homeowner’s policy. Often referred to as “Renter’s” insurance, you do not necessarily need to be paying rent for your home in order to purchase this policy. This policy is appropriate for anyone who does not own the home in which they reside.
  • HO-5 is widely considered the most comprehensive homeowner’s policy. It offers the best protection and coverage available.
  • HO-6 is a condominium owner’s insurance for those who want to supplement the insurance provided by the homeowners association.
  • HO-8 is a policy designed specifically for older homes where you are not able to purchase a policy that offers replacement.

If a specific type of coverage is not part of a standard policy, it can usually be added with an insurance policy rider. A rider is also a way to increase the coverage amounts of the policy of your choice.

Choosing the Right Insurance Coverage

When you choose insurance coverage, it is important that you do not underinsure. If a problem were to occur, you must be sure that you receive proper compensation for your losses. Generally, the cost of homeowner’s insurance is not expensive, and it should not cost a significant amount of money to improve coverage if necessary. It is better to be over insured than underinsured.  Newer homes, those built in the last 20 to 30 years, are often covered by policies that provide replacement value. Older homes may actually be more expensive to build if you had to replace them in today’s market.

Special Circumstances

Homeowners need to be aware of special circumstances that may not be covered under a standard policy. For example, damage caused by flood is not covered by Homeowner’s Insurance.  If your home is located in a Special Flood Hazard area, your lender may require you to purchase Flood Insurance in addition to Homeowner’s Insurance.  If you are not located in a Special Flood Hazard area, you can still choose to purchase Flood Insurance, which is offered at a significantly reduced rate in Preferred Risk zones. Flood Insurance coverage are is only available through the Federal Government, but your personal insurance agent may be able to help you to obtain a policy.  Other circumstances that may not be covered include hurricanes and earthquakes. You can often purchase a separate policy or rider for these types of natural disasters; however, you may need to ask for and purchase this type coverage to be fully protected, especially if you live in a location prone to these events.

If you operate a home-based business, or if you are required to provide your own tools or equipment for your job, your Homeowner’s Policy will not provide coverage for these exposures.  You may be able to add coverage for a limited amount of your business property (usually less than $5,000 in value), but you will not be covered for any business liability exposures.  You should ask your insurance agent about a separate policy to cover these risks.

Some personal property items are not usually included as part of a standard policy, or may have limited coverage amounts for specific types of personal property (such as a  limit for jewelry of $2,500, when you may own $10,000 worth of jewelry…you may want to increase the jewelry coverage). These items must be added on to the policy, or have the limits increased to be fully covered. You may need to specifically identify/disclose information regarding each piece. Jewelry (including watches), furs, artwork, firearms, and antiques often fall into these categories. In order to include the item, you may need to have a formal appraisal completed which should also include a photo. If you have special property such as this, you will need to include it when the policy is written, or as it is acquired. If you do not include it in your policy, you could end up finding out that the item is not covered should it go missing or become damaged.

Some policies provide coverage in case you are displaced if your home is uninhabitable due to a catastrophic event, such as a major fire. Some policies do not provide this coverage. If this is a feature that you would like to incorporate into your policy, make sure you ask your insurance agent for a quote to include it.

Buying a Homeowner’s Insurance Policy

There are many companies that sell homeowner’s insurance, making the marketplace highly competitive. When shopping for a policy, you will first need to gather some information. You will need to know the size of your home in square feet, the number of rooms and use of each room of your house, approximate age of your home, the structure type, and any special features of your home. A recent home appraisal is helpful but usually not required.

Make note of special options and safety features that are installed in your home. For example, fire-retardant construction materials, smoke detectors or an alarm system may provide you with reduced pricing. You can review another insurance policy guide online at to learn more about what is covered and what is extra. Be sure that you fully understand the coverage and premiums before you purchase a policy. Remember that if you forget something important, you can make changes or adjustments to your policy after it has been issued.

Home Inventory

You will need to make a home inventory list that accounts for all of your personal belongings. You can make your own document or utilize an online inventory resource.  Include all categories and everything you own. Take photos or videos of each item along with the date that it was purchased and the purchase price. Keep a record of all receipts for major purchases so that you can provide them should the need arise. Once you have completed the list, make a copy of it and keep it in a location outside of your home. A good option is to keep the information on a portable computer drive and/or print out a copy which can be kept in your safe deposit box or with a relative.

It is best to update your inventory yearly. You will also need to update the list any time you make a large purchase, upgrade an appliance, or complete a renovation to your home. Remember that if you ever need to make a claim, you will only receive reimbursement for the value of the item at the time of loss. This means that if you purchased a new laptop computer last year and you make a claim, the price you will probably receive is the depreciated value and not what a brand new laptop would cost if you bought it today. Some policies do offer replacement value, so be sure to review this option when shopping for insurance so that you get what you need and want.

Homeowner’s Insurance Discounts

Many insurance companies provide a variety of other types of insurance policies, such as vehicle and life. There are often discounts available to those who purchase multiple types of policies from the same insurance company. One of the first places to start shopping for a policy is through your current vehicle or life insurer. Your insurance agent will be happy to add another policy to your account.

Another way that you may be able to receive a discount is through add-on features that are designed to safeguard the home. A home security system, a fire alarm panel, and deadbolt locks are all examples of items that could earn you a discount on your policy. Ask your agent what discounts are available to you based on the type of insurance you are purchasing. If you add such a feature later on, be sure to inform your insurance agent so you can receive the discount and associated premium adjustment.

Comparison Shopping for a Policy

It is helpful to shop around to find a policy that meets your needs and fits into your budget. As you compare different insurance companies, be sure to review the same policy options and limits. Homeowner’s insurance companies are abundant and you will find an array of choices online, as well as local agents who can help you make decisions. However, keep in mind that the cheapest policy is not always the best decision. Look at the reputation of the company, the customer service ratings, and the history of making full claim payments in a timely manner. You can do a search online using the words “homeowners insurance company ratings” to find articles that provide this type of information, which may guide you toward specific companies. A cheap policy could end up costing you more in the long run.

Homeowner’s Insurance Buying Checklist

Buying homeowner’s insurance is easier with this handy checklist:

  • Determine your insurance needs
  • Take inventory of your possessions
  • Know the value of your home
  • Review your mortgage lender’s rules
  • Consider policy options
  • Shop for insurance providers
  • Compare policies and prices
  • Include riders for special circumstances and Coverages
  • Get the best coverage at the best price
  • Review your policy every year

Additional Resources Online

We would like to thank JoEllen James, a local insurance agent, for providing her professional input for this Guide.

DISCLAIMER: This guide is provided only for informational purposes and is not intended to be a substitute for legal or other professional advice. This guide does not contain nor is it intended to provide legal or other professional advice for any specific situation and readers should not take action or refrain from taking action, based only on the information provided in this guide. Goldberg & Osborne has attempted to provide accurate and current information in this guide, but cannot and does not guarantee that the information is accurate, complete, or up to date. This guide may contain links and/or search terms that will lead to external websites as a convenience to the reader, but Goldberg & Osborne is not responsible for the content or operation of any website other than its own website. The presence of a link or a search term does not imply and is not an endorsement by Goldberg & Osborne of the website provider or the information contained on any linked website or on any website contained in search results from a search term provided in the guide.