How to Get the Most Affordable Homeowner’s Insurance

Homeowners insurance works much like auto insurance, except that it covers hazards to your home. And it may cover an even wider variety of events than an auto policy, if only because those events have potentially more variety. For that reason, how to get the most affordable homeowner’s insurance can be a more complicated process than shopping for other types of insurance.

The cost of homeowner’s insurance can vary from a few hundred dollars to several thousand dollars per year. It all depends on the value of your home, the hazards that are prevalent in your geographic location, and the risks specific to your own use of the property, among other factors.

Let’s do a quick overview of what homeowner’s insurance is, what it does, and what you can do to get the most affordable coverage.

What Does Homeowner’s Insurance Cover?

Probably the best understood coverage provided by homeowner’s insurance involves the physical structure of your home. For the most part, that’s any improvements to the property, including the house itself, outbuildings, and surface amenities, like the driveway, fencing, and landscaping.

That doesn’t extend to the land itself, since that can’t actually be replaced. For that reason, the coverage provided by the policy will be based on the value of the improvements, minus the land it’s constructed on.

According to the Insurance Information Institute some of the common hazards covered include:

  • Fire or lightning
  • Damage from windstorm or hail
  • Explosions
  • Riots or civil commotion
  • Damage caused to the property by aircraft or vehicles
  • Smoke damage
  • Theft, vandalism or malicious mischief
  • Volcanic eruptions
  • Falling objects (think tree branches or trees themselves)
  • The weight of ice, snow, or sleet, causing damage to the building
  • Freezing of a plumbing, heating, air-conditioning or automatic fire protection system or of a household appliance
  • Sudden and accidental damage from an artificially generated electric current

Policies also typically cover accidental discharge or overflow water or steam from indoor sources, like plumbing for a sprinkler system. As well, it will cover sudden and accidental tearing apart, cracking, burning, or bolting of a steam or hot water heating system or an air-conditioning or automatic protective system.

What a homeowner’s insurance policy typically doesn’t cover You may be surprised to learn that the policy won’t cover damage related to flooding or earthquakes, two hazards common in certain parts of the country. You can buy coverage for those hazards, but you’ll need to do with a separate policy specifically designed for that purpose. This includes flood insurance and earthquake insurance.

Other Homeowner’s Insurance Provisions

Homeowners insurance policies also provide the following additional types of protection:

Contents. One of the most important purposes of home is that it’s a place to store your personal belongings. Damage to the home can also result in damage or destruction of personal possessions. For example, a fire can also destroy any items located in the portion of the home that’s been burned.

A typical homeowner’s insurance policy will add a provision for covering your personal belongings. Those will usually be valued at a percentage of the value of your home. For example, if your home is insured for $300,000, there may be a provision for personal belongings equal to 50% (or some other percentage) of the value of the home itself.

Liability. As the owner of your property, you’re potentially liable should someone be injured on the premises. Policies include a provision for lawsuits for bodily injury or property damage to other parties. The provision will cover both the amount of the lawsuit and the cost of legal defense. Most policies will also protect against injury or damage caused by members of your household and your pets.

The amount of liability coverage is set as a flat amount. It can range from $100,000 to several hundred thousand dollars. But you can add additional coverage into the millions by adding an umbrella policy. That’s an excellent strategy if you’re high net worth individual, making you a target for larger lawsuits.

Additional living expenses. If your home is damaged by a hazard and cannot be occupied, you’ll need to make other living arrangements while it’s being repaired. A homeowner’s insurance policy will include a provision to cover hotel accommodations, restaurant meals, and even other living expenses during the reconstruction.

Optional Policy Options

You can also customize your homeowner’s insurance policy to cover certain risks specific to how you will use your property. For example, if you rent out part of your property, you’ll need to purchase a special insurance policy to cover risks unique to rentals.

You may also need to add special provisions if you plan to operate a business out of your home, store certain equipment on the property, or use the home as a second residence.

Levels of Homeowner’s Insurance Coverage Amounts

The actual dollar amount of coverage for your home is calculated using three methods:

  • Actual cash value
  • Replacement cost
  • Guaranteed or extended replacement cost

Actual cash value is usually the least expensive coverage. The policy amount is based on the cost to replace the home and contents, after a deduction for depreciation. That last point is a potential trap.

Let’s say you have $100,000 worth of contents in your home. Based on depreciation, the insurance company determines in a claim five years later that the depreciated value of those contents is just $20,000. That method may satisfy accountants ss reasonable, but it won’t allow you to replace your contents.

Replacement cost is the better option. Under this method, the policy pays the full cost of repairing or rebuilding the improvements and replacing your contents. There is no deduction for depreciation.

Guaranteed or extended replacement cost is the highest level of coverage, but also the most expensive. Under guaranteed replacement cost, the full cost of repairing or rebuilding the home will be covered, even if it exceeds the basic policy limits. The provision is designed to protect against rising building costs.

An extended replacement cost method allows for an increase above the basic policy amount based on a certain percentage. For example, if the basic policy limit is $300,000, and there is a 25% extended replacement cost enhancement, the policy will pay up to $375,000 for the complete destruction of the property.

Is your head spinning yet?

I’m sorry if that seems like a lot of detail, but if you want to save money on your homeowner’s insurance policy, you’ll need to know exactly what it involves. The last thing you’ll want to do is to cut your premium by eliminating an important policy provision.

How to Get the Most Affordable Homeowner’s Insurance

As I said at the beginning, the cost of a good homeowner’s insurance policy can vary dramatically based on any of the factors above. But fortunately, there are plenty of ways to make the premium more affordable.

Maintain the Right Level of Coverage

If your property is valued at $400,000, and $300,000 of that represents improvements, that’s your base property damage policy amount. You’ll need to adjust that for actual replacement costs. In many areas of the country, the cost of rebuilding part or all the improvements can exceed the market value of the home. That’s why a replacement cost or guaranteed or extended replacement cost policy is the better choice.

But don’t go insuring the property for an inflated number, say $500,000 just in case. You’ll end up paying more for the policy for no real benefit.

At the same time, don’t overvalue your contents. If the reasonable replacement cost is $50,000, don’t overestimate them at $100,000. The same is true with liability coverage. It should be based loosely on your financial net worth. If that net worth is $250,000, you’ll probably be over-insured at $1 million.

Choose a Higher Deductible

Nearly all insurance policies include a deductible, which is basically a coinsurance provision designed specifically to lower your premium. The higher the deductible, the lower your premium will be.

You may be able to reduce your premium costs by 50% or more by increasing the deductible from $1,000 to $5,000. Just make sure you have enough cash in your emergency fund to cover the deductible in the event of a claim.

Geography Matters

How much you’ll pay for homeowner’s insurance varies by state. For example, Florida has the highest premiums in the country, Oregon the lowest.

You may not be able to do much about which state you live in, but there are certain locations that may be more or less expensive than others. For example, a house located near the coastline of Florida will likely have a higher premium than one located further inland, due to the much higher risk of wind damage and other coastal hazards.

Property Amenities

Certain amenities will lower the cost of your premium, while others will increase it. For example, safety features like smoke detectors and fire extinguishers will get you a discount. But having a swimming pool or certain breeds of dogs considered to be aggressive will increase your premium. Make good choices with the factors you can control.

Your Credit Rating

Lending institutions aren’t the only organizations checking your credit before doing business with you. Insurance companies do as well. The better your credit is, the lower your premium will be. Even if your credit is fair or poor when you initially take the policy, work to improve it to lower your premiums in the future.

Bundle Your Policies

Insurance companies commonly offer discounts for combining one insurance policy type with another. For example, a common bundle includes having both your homeowner’s and auto insurance with the same company. Having both can result in a significant discount on either policy.

Shop Between Companies

Premium rates on homeowner’s insurance are not standard across the industry. Each insurance company has its own risk experience in a particular market area, resulting in a wide variation in premium rates.

Just as you would for an auto insurance policy, get quotes from several different companies before settling on the best home insurance company that will get your business. But make sure you’re comparing identical policies between providers. For each company, you get a quote from, make sure it’s for the same level of coverage and number of provisions included in the quotes from others. A premium is only truly cheaper if it offers the same level of coverage.

Final Thoughts on How to Get the Most Affordable Homeowner’s Insurance

As you can see, homeowner’s insurance fits somewhere between auto insurance and health insurance on the complication scale. Be sure you’re familiar with the types and amounts of coverage you’ll need in your policy, then take the necessary steps to get the lowest premium possible.

Just be sure you don’t become so obsessed with a low premium that you get a deficient policy. That’ll be a hard lesson to learn if you’re faced with a major claim, and learn that you don’t have adequate coverage. The time to make those decisions is when you buy your policy. There’s no do-over when disaster strikes!

This content is brought to you by Jeff Rose, CFP® from®

Photo: Shutterstock

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