When shopping for home insurance, there’s much more to consider than how much your coverage will cost.

You need to buy the right type of policy.  You need the proper level of protection, plus special provisions for valuables such as jewelry, your computer equipment and other possessions.  You might also need additional coverage for such things as earthquakes or flooding. 

Lending institutions usually require mortgage customers to purchase homeowners insurance.  Don’t rely on the coverage levels mandated by your bank or mortgage company.  Those levels are designed to protect the house itself, but not necessarily your possessions.  That’s why it’s important to check with your agent or insurance company to make sure you have adequate coverage.

The terms of standard home insurance policies have been defined by the Insurance Services Office (ISO), so standard coverage is not going to vary from company to company, although rates will. There are three primary types of situations that enable a homeowner or renter to be eligible for a policy:

• Owner-occupants of private homes: Individuals and families who own the private home in which they reside.
• Tenants of residential premises: People who rent or lease the premises where they reside.
• Owners and owner-occupants of residential condominium units: Individuals and families who own private condominium units used for residential purposes.

Homeowners policies can also provide limited property coverage for incidental occupancy, which is the use of the residential premises for purposes not residential (such as a home office or studio). This can be done only as long as two requirements are met: the premise must be occupied principally as a dwelling, and the premise cannot be used for any business purpose other than the incidental occupancy.

Basic policies

Each homeowners policy provides a combination of property and liability coverage and covers loss of use resulting from damage. There are several basic types of home insurance policies:

HO-1

• Note that HO-1 policies have been discontinued in most states.
  
• Basic homeowners policy.
  
• Covers your house and possessions against 10 different perils.

HO-2

• Broad homeowners policy.
  
• Covers house and contents against 16 perils.

HO-3

• Special homeowners policy.
  
• Covers all perils except those specifically excluded by the policy.

HO-4

• Renters policy.
  
• Covers 16 named perils and includes liability coverage. It does not insure the dwelling itself.

HO-6

• For owners of co-ops or condominiums.
  
• Provides personal property coverage, liability coverage and specific coverage of improvements to the owner’s unit. Insurance provided by the owner’s association normally covers most of the actual structure.

HO-8

• Policy for older homes.
  Covers the same perils as HO-2 but pays only for repair costs or actual cash value, since replacement cost could make the policy costly.
• Well-suited for older homes whose market value is considerably less than the cost to rebuild them.

Every homeowners policy has three preliminary sections (declarations page, general agreement, and definitions) as well as two coverage sections (Coverage A, B, C, or D).

In the preliminary section, the declarations page contains the policy number, period of coverage, insured’s name and address, agent’s name, limits that apply to the coverage, additional insureds (if any), premium amount, etc.

The general agreement works as a preface to the entire policy and states that the insurer’s coverage and obligations to the consumer depend solely on the insured’s ability to pay the premiums and comply with the policy’s guidelines.

The definitions section contains multiple parts.

The first part explains that “you” and “your” in the policy refer to the named insured, while instances of “we,” “us,” and “our” refer to the insurance company. The second part lists and defines commonly used terms associated with the policy and the coverage.

Starting an application

When you apply for homeowners insurance, you’ll provide a great deal of information.  The insurance company will ask you about your current occupation and employment history, marital status, previous addresses, date of birth and Social Security number. The insurer will check your criminal, credit, and insurance history to see if you are a "good risk." The insurance company also will look at your "loss history" to see what kinds of home insurance claims you've made in the past.

Then you’ll have to decide what type of homeowners policy you want, your preferred deductible, and how you’ll pay for the coverage (in full or in installments). Your agent or insurance company will determine how much it would cost to replace your house and many of the items inside.  For more expensive property, such as jewelry and computer equipment, you will need special coverage in addition to the basic policy.

Analyzing your home

Many factors go into determining the premiums for a homeowners policy.  The age of your home, the materials used to build it, where it’s located, the square footage, and the number of rooms all play a role.

How do you heat your home?  What’s the overall condition of the house?  How many people live in your home?  How close is your home to the nearest fire station and fire hydrant?  The answers to these questions also help determine how much you’ll pay for your homeowners policy.

The insurer will be able to give you an estimate for rebuilding your house in the event of a total loss. Remember, this is the rebuilding cost based on local construction costs, not the market value of your home.

Ways to save

If your home is equipped with an alarm system, smoke detectors and deadbolt locks, you could save money.  Those items help make your home safer and more secure.  If you have an in-ground pool or a trampoline, you might pay higher premiums. Removing trees from striking distance of the residence can also help save cash. You can also expect to pay more if you are located in a higher risk area, such as a coastline. Your insurance company will also want to know if you plan to use the home for any business purposes, of if you plan to rent all or part of the house, both of which can increase liability.

Armed with all this information, insurance companies determine how much to charge you for insurance.

Your policy´s dollar limits are important.

If you insure your house for $100,000, that´s the most you will get if it is destroyed, even if it would cost more to replace it. The Declarations Page on the front of your policy shows how much coverage you have. Talk with your agent or company representative if you have any questions about your insurance limits.

Don´t wait until you have a claim to learn your policy´s limit.

Replacement cost coverage for your personal property

The extent of coverage provided on various homeowners policies depends on the loss settlement clause. This clause identifies property that will be valued at actual cash value, and property that will be valued at replacement cost.

Before buying homeowners insurance, you need to understand the difference between "replacement cost" and "actual cash value."

Homeowners policies automatically cover household contents — furniture, clothes, appliances, etc. — up to 40 percent of the amount your house is insured for. This means if you insure your house for $100,000, its contents are insured for up to $40,000. You can get more coverage by paying a higher premium. This automatic coverage pays only the actual cash value of damaged, stolen, or destroyed household goods. Actual cash value is an item´s replacement cost, minus depreciation.

Replacement cost policies give you more protection than actual cash value coverage. For example, what happens if a burglar steals your six-year-old television set. With actual cash value coverage, you get only what you would expect to pay for a six-year-old television set. With replacement cost coverage, the insurance company pays to replace your TV with a new set similar to the stolen one.

Guaranteed replacement cost coverage pays for the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit.

Extended replacement cost coverage pays a certain amount above the policy limit to replace a damaged home, generally 120 or 125 percent. It is similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction.

Take inventory

Many people learn after a fire or storm they didn´t have enough personal property coverage. Taking inventory will help you decide how much insurance you need. It also will simplify claims.

Your inventory should list each item, its value, and serial number. Photograph or videotape each room, including closets, open drawers, storage buildings, and your garage. Keep receipts for major items in a fireproof place.

The Insurance Information Institute has helpful free software that will help you make a home inventory at KnowYourStuff.org.

What other protections does my policy provide?

Homeowners policies regularly provide other types of coverage, including off-premises theft protection and unauthorized use of your credit cards. Make sure you understand which provisions are included in the standard coverage you elect to purchase and which might require supplemental premiums.

Supplemental coverage

Homeowners policies cover specific risks.  Depending on what you own and where you live, you might need to supplement your policy with special coverage.

Flood insurance

Homeowners policies do not cover flood damage. The National Flood Insurance Program (NFIP) offers flood coverage in many areas. Local insurance agents sell NFIP flood policies and can tell you about the program in your area, or you can contact the NFIP at (888) 379-9531 or at floodsmart.gov.

If a mortgage lender determines a home is in a special flood hazard area, the borrower might be required to purchase flood insurance.

Earthquake insurance

If you are concerned about earthquakes, you can get coverage with a separate policy.

Extra coverage (endorsements)

Homeowners policies contain exclusions and limitations for some types of personal property that are particularly susceptible to loss. Some homeowners policies place a specific dollar limit on certain property such as jewelry or antiques.

You might want more coverage for certain items than your policy provides. For an extra premium, you can buy endorsements that expand or increase the coverage on these items. Some of the most common endorsements cover jewelry, fine arts, camera equipment, coin or stamp collections, computer equipment, and radio and television satellite dishes and antennas. To insure that these types of items are properly covered, look into a "scheduled personal property endorsement."

A scheduled personal property endorsement is characterized by broad coverage and flexibility. This policy can be purchased separately as a “personal articles floater” policy or endorsed to your homeowners policy. A floater policy designates coverage for items that are likely to experience frequent movement from one place to another such as (but not limited to) cameras, jewelry, musical instruments, golf equipment, silverware, furs, etc.

Personal umbrella liability insurance

If you want more liability coverage than a homeowners policy provides, you can buy a separate umbrella policy. Because policies vary, make sure the agent or company fully explains the coverage.

Higher deductibles, lower premiums

Your home insurance deductible is the amount you pay for covered damage before insurance kicks in. You can generally choose a higher deductible in order to lower your premiums if you don’t mind taking on the added risk. Ask your insurance agent to give you price quotes for a range of deductibles to see how much you’d save.

Usually a deductible is a flat rate, such as $1,000. But many insurers are introducing “percentage deductibles” around the country, especially for policies covering earthquakes, hurricanes and windstorms. These policies make you liable for 1 to 5 percent of your home’s insured value before the insurance company pays. So, if you have a 2 percent deductible and your home’s insured value is $250,000 (remember, that’s the cost to rebuild, not your home’s market value), you’d have to pay the first $5,000 in damages.

Some homeowners are switched from flat-rate to percentage deductibles at renewal time and may not be aware of the change. Make sure to read special notices sent by your home insurer and your “declarations page” at renewal time, or call your agent to check on what kind of deductible you have.

Bad credit could cost you

Some insurance companies might charge you higher premiums if you have problems with your credit history.  Insurers say past experience has shown people with financial problems pose a greater risk.

Former California Insurance Commissioner John Garamendi thinks basing insurance premiums on credit scores is wrong. “Over the last year, we have witnessed a dramatic turn in the homeowner insurance market leaving some homeowners unable to find affordable insurance and still others struggling to secure any coverage on the open market,” says Garamendi.  

“An insurance score is different from a credit score,” explains Jeanne Salvatore of the Insurance Information Institute. “An insurance company uses credit information, together with your insurance history, to predict whether you are more or less likely to file a homeowners claim,” adds Salvatore. “This allows them to provide insurance to more people and to offer it at a lower cost to those who qualify.”

Remember to do extensive research into the various homeowners policies before deciding which one is right for you. Your home and its posessions are an investment which deserves the very best, so shop around and select the coverage that provides the most accurate coverage for your needs.

For Texas

In Texas the state insurance board specifies the types of policies listed below.

HO-A

• These policies provide extremely limited actual cash value coverage of your home and its contents. Only the types of damage specifically listed in the policy are covered. The HO-A is a standardized Texas policy.

HO-A amended policies

• These provide more extensive coverage than the base HO-A policy but less coverage than an HO-B. HO-A amended policies are not standardized. Coverage provided by these policies may differ by company.

HO-B

• These policies provide replacement cost coverage for most types of damage, except those specifically excluded in the policy. The HO-B is a standardized Texas policy.

HO-C

• These policies provide the most extensive coverage but they are more expensive than other types of policies. The HO-C is a standardized Texas policy.

Approved alternative policies

• These policies offer varying levels of coverage. Companies can sell alternative policies only if the policy form is approved in advance by the Texas Commissioner of Insurance. These policies are not standardized. Coverage may differ considerably from one company to another and from the coverage provided in the standardized Texas homeowners policies.

A side-by-side comparison of coverages within Texas home insurance policies is available online from the Office of Public Insurance Counsel.