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Comparing Homeowners Policies

Many people think homeowners insurance is pretty simple. The truth is, understanding the ins and outs of a policy and other issues can be a challenge. To choose a good policy that's within your means, you need to know what to look for.

Compare apples to apples

To effectively compare homeowners policies, you need to compare policies that are alike. Before you can do that, though, you have to make some decisions about the coverage you're looking for. Several standard homeowners forms or policies are available to you, so start by choosing the one that best suits you. If you're like most homeowners, you'll find that the HO-3 form provides the most attractive package of coverage. There are a number of basic questions you should consider, such as:

  • How much coverage do you need for personal liability and medical payments? Your coverage in these areas should be sufficient to protect your assets if someone files a claim or lawsuit against you.
  • How much coverage do you need for your home itself? Your mortgage lender and even your insurer may require a minimum amount of coverage, but that may not be enough to replace your home if disaster strikes.
  • How much coverage do you need for the personal belongings in your home? That depends on the types of property you own and the value of your items, so one of your first steps should be to do a complete household inventory.
  • What special coverages do you want that aren't part of the standard package? Adequate coverage may require endorsements (attachments) to your policy or even separate insurance policies. For example, if you have a valuable coin collection or a fur coat, you may need to amend the basic policy to cover them fully.
  • What out-of-pocket deductibles are you comfortable with? Deductibles typically apply only to the coverage on your home and personal property, not to your personal liability.

It's probably best to have a qualified insurance agent or broker help you sort out these and other coverage questions. The answers you come up with will give you a framework for comparing policies and allow you to eliminate ones that don't meet your needs. That will make the rest of your job a lot easier.

Compare premiums

The premium is obviously important when you're comparing policies. After all, your main goal is to get the coverage you need at the lowest possible price. This is especially true when you're on a tight budget, though no one wants to pay more for coverage than necessary. You should get premium quotes from at least three reputable insurers and compare the results. Before giving you a quote, a company representative will ask you a series of questions about the coverage you're seeking and other matters. If you're working with an agent or broker, he or she will select the insurance companies and provide them with your information. Another option is to use an independent on-line quote service.

The quotes you receive will depend on the specifics of the coverage you're seeking. Many other factors will also affect the cost of your insurance, such as the location of your home, the age of your home, the type of construction, the distance to your local fire department, the amount of your deductibles, and any discounts you may qualify for. But even though most companies use the same variables to arrive at their quotes, don't expect the quotes to be the same or even similar. Annual premiums for comparable coverage can vary by hundreds of dollars among companies. Each company's rates are based on its own areas of specialization, customers, and claims-paying history.

Compare coverage and service

Comparing policies requires that you look at the whole package. If the quotes you get are for policies that provide comparable coverage, the lowest-priced policy may offer the best overall value. However, that's often not the case. Sometimes a more expensive policy may actually be a better deal when you consider issues other than cost. Though homeowners policies are standardized to some extent, it's important to look closely at each policy because the details of coverage may vary. You should also compare the insurance companies behind the policies. Here are some key issues to explore with the help of an insurance agent or broker:

  • How long has the company been selling homeowners insurance?
  • How do private rating firms rate the company based on financial stability and other factors?
  • What level of customer service can you expect from the company? For example, does the company have a reputation for paying claims in a timely manner?
  • How long do you have to file a claim after a fire, theft, or other loss?
  • Will the company cancel your policy if you miss a premium payment, or will it just send you a late notice?
  • Will the company deny coverage or cancel your policy after a certain number of claims? For example, will the company cover you only once for liability claims that result from your dog biting someone?
  • Are you covered only up to a certain limit for your home itself, or will the company cover the full cost to replace your home? Is it guaranteed replacement cost coverage, even if the price of labor and building materials has gone up (sometimes this requires an endorsement)?
  • What about damage to your home that results in a partial loss (e.g., one room burns)? Do you need a certain amount of coverage on your home to be fully covered for these partial losses? Ask about coinsurance requirements, too.
  • How much coverage does the policy provide for your personal property (there is usually a total coverage limit, as well as separate limits for furniture, jewelry, and other types of property)? How much will it cost you to raise these limits and/or add coverage for other items?
  • Is coverage for your personal property based on replacement cost value or actual cash value (depreciated value)? It's usually actual cash value, so how much extra will it cost if you want replacement cost coverage?
  • Can you raise your coverage for personal liability, medical payments, and additional living expenses above the standard limits? How will doing so affect your premium?
  • How do different deductibles for dwelling and property coverage affect your premium?
  • What perils does the policy exclude from coverage (covered perils are pretty standard on the HO-3 form, but sometimes you'll find variations)? For example, does the company exclude windstorm damage because you live in a high-risk part of the country?
  • Does the company offer all of the optional endorsements you're looking for, and at what extra cost (e.g., an inflation guard endorsement, earthquake insurance, watercraft coverage)?
  • How do the company's discounts stack up against its competitors (e.g., discounts for installing a security system or insuring your home and car with the same company)?