How to Shop for Homeowners Insurance Before You Buy a Home

You are three weeks from closing on a $420,000 house when the quote lands in your inbox: $300,000 of dwelling coverage, a $1,000 deductible, and a 2 percent wind and hail deductible you do not remember asking for. Your first reaction might be to compare the premium to a friend's and move on. That would skip the two or three lines in the quote that decide what you actually get paid after a loss.

This guide follows that quote line by line, in the order that causes the most trouble for first-time buyers. The dollar figures are illustrations to show the arithmetic, not averages or predictions, and your state insurance department can tell you what is typical where you live.

Three different numbers for the same house

Start with the number that confuses the most buyers. The price you pay for the house, its market value, and what it would cost to rebuild are three different figures. The NAIC's Consumer's Guide to Home Insurance notes that replacement cost and market value are not the same, because market value includes the land and depends on the real estate market. Your dwelling coverage is supposed to track the cost to rebuild.

Suppose the $420,000 purchase price includes $90,000 of land value. That leaves $330,000 for the structure at market prices, but a contractor might estimate a rebuild at $360,000 because of labor and materials. The right dwelling limit is the rebuild estimate, not the purchase price and not the lender's loan amount.

The guide also warns about falling too far below. If your dwelling coverage drops below 80 percent of the full replacement cost, the insurer may reduce what it pays on a claim. With a $360,000 rebuild cost, 80 percent is $288,000, so the $300,000 limit in the example clears that line, but only by $12,000. Rebuild costs change, so ask the agent how and when the limit is reviewed, and whether an inflation guard endorsement is available.

What the other coverage lines do

The dwelling limit is only the first line. The NAIC lists six main coverages in a typical homeowners package: dwelling, other structures, personal property, loss of use, personal liability, and medical payments. Other structures covers items such as fences and sheds, personal property covers your belongings, and loss of use pays some additional living expenses while the home is repaired.

Most of those limits are set as percentages of the dwelling limit. The NAIC's typical figures are 10 percent for other structures, 50 percent for personal property, and 20 percent for loss of use, though it tells readers to check the policy because percentages can differ. On a $300,000 dwelling limit, that works out to $30,000, $150,000, and $60,000. You choose the liability and medical payments limits yourself.

Notice that a limit is a ceiling, not a promise. A covered peril must cause the loss. The NAIC gives the example that if an earthquake makes your home unlivable and your policy does not cover earthquakes, it will not pay for loss of use either. That brings us to what the policy is allowed to say no to.

Which policy form you are buying

Quotes name a policy form, and the form decides which perils are covered. The NAIC describes the Basic and Broad forms, which cover the perils named in the policy, and the Special form, which it calls the most popular and which insures your property against all perils except those the policy specifically excludes. Condominium owners buy a unit-owners form that covers personal property and the walls, floors, and ceiling, and townhouse owners may be insured individually or through an association master policy.

The dwelling fire form is the thinnest option. The NAIC says it covers only the dwelling and only a few perils, and it is the type of policy a lender buys if your coverage lapses. If a quote looks far cheaper than the others, check the form before you celebrate.

Replacement cost versus actual cash value

The next line to find is whether the policy pays replacement cost or actual cash value. The NAIC defines replacement cost as the cost to rebuild or repair using materials of similar kind and quality. Actual cash value takes the age and wear and tear into account, and the NAIC says it often does not pay enough to fully repair or replace the damage.

Here is an illustration with a roof. Suppose a hailstorm destroys a 15-year-old roof that would cost $12,000 to replace. If the insurer treats the roof as having a 25-year life and depreciates it in a straight line, it counts 60 percent as used up, so an actual cash value payment would start from $4,800 before your deductible. Insurers use their own depreciation schedules, so the real calculation may differ. A replacement cost policy would start from the $12,000 figure instead. The gap of $7,200 is the part you would pay for with savings.

Because older roofs are often the biggest claims on older houses, ask directly whether roofs are covered at replacement cost or actual cash value, and whether the roof's age changes the answer. Get the response in writing.

Deductibles: dollars, percentages, and wind

The NAIC explains that a deductible is the amount you pay out of pocket before the policy pays, and it applies to each claim. A higher deductible lowers the premium, and the NAIC advises making sure you can afford the deductible if there is a loss.

Here is a simple comparison with invented premiums. A policy with a $1,000 deductible costs $2,100 a year, and the same policy with a $2,500 deductible costs $1,850. You save $250 a year but take on $1,500 of extra risk, so it takes six claim-free years to come out even on average. If you could not comfortably pay $2,500 from savings, the cheaper policy is not the better deal.

The line that surprised our imaginary buyer is the percentage deductible. The Insurance Information Institute explains that insurers in many coastal states use percentage deductibles for storm damage instead of dollar deductibles, and that the percentage applies to the home's insured value. Percentage deductibles typically range from 1 percent to 5 percent. On a house insured for $300,000, 5 percent means the first $15,000 of a claim is yours, and a 2 percent deductible is $6,000.

The Triple-I also distinguishes the two kinds of wind deductibles. A hurricane deductible applies only to damage from hurricanes, while a windstorm or wind/hail deductible applies to any wind damage. The trigger, meaning the event that activates the deductible, varies by insurer and state and is spelled out on the declarations page. If your repair costs less than the percentage deductible, the policy may pay nothing for that claim. Ask for the dollar figure in writing for each quote.

What the policy leaves out

Read the exclusions before you read the price. The NAIC says homeowners policies do not cover flood damage, and that perils commonly excluded under the most popular policy form are flood and earthquake. The National Flood Insurance Program writes most flood policies, though some private insurers sell them too. Many insurers sell earthquake coverage as a separate policy or an endorsement.

FEMA's guidance for real estate professionals adds a timing rule: a 30-day waiting period typically applies from when flood coverage is purchased, with exceptions such as when the initial purchase is connected to making, increasing, extending, or renewing a mortgage loan. If your lender requires flood insurance because the home is in a flood plain, as the NAIC says it usually will, plan for that early. A property does not need to be near water to flood, according to FEMA.

The NAIC also says policies in coastal areas often exclude windstorm and hail, which would require a separate policy, and that most homeowners policies offer limited or no coverage for sewer or drain backups and sump pump overflow unless you add an endorsement. Ask specifically what types of water damage are not covered and whether mold is covered.

The home's claim history and your own

Insurers look at a house's history as well as yours. The NAIC suggests asking how you can find out the claims history of the home before you buy, because it may affect your premium. Most insurers report homeowners claims to nationwide databases such as the Comprehensive Loss Underwriting Exchange, known as CLUE.

The CFPB describes LexisNexis C.L.U.E. as collecting up to seven years of home insurance and personal property claims to inform pricing and underwriting decisions. Consumers can request their own reports and dispute errors. State insurance guidance typically says the current owner has to request a report on their own property, so ask the seller or the listing agent whether they will share a copy, and ask your own agent what claims history the insurer found for the address.

The NAIC adds that in many states insurers use credit history as a factor in whether to sell you a policy and what to charge, so ask how your credit will affect the premium. It also notes that how often you file claims and what type they are can affect your premium and whether the insurer renews your policy. If the damage is not much more than the deductible, you might choose to pay for repairs yourself.

What moves the premium

Once the coverage is right, price differences come from the house and from you. The NAIC lists the cost to rebuild, brick or masonry versus wood frame construction, the distance to a fire department and the quality of local fire protection, and the age and condition of the home. It also lists the claims history of the home and of homes in the area, the deductible you choose, whether you insure your home and autos with the same company, and your credit history in many states.

Features can help or hurt. Smoke detectors, burglar alarms, and sprinklers often earn discounts, while a wood stove, swimming pool, or trampoline can raise the premium. Use that list as a checklist when you tour a house, because a roof that is near the end of its life or an old electrical panel may show up in the price.

Getting quotes you can compare

The NAIC says to decide what coverages and limits you need before collecting quotes, then ask every company for the same coverages and limits and give each the same information. Otherwise the cheapest quote may simply be the thinnest policy. Independent agents can give several quotes, exclusive agents sell one company's products, and direct sales happen online or by phone. Check whether your state insurance department publishes premium comparison guides or a complaint index, which shows complaints relative to company size.

Ask each company how the premium changes with different deductibles, which discounts apply, and how a claim would affect your renewal. The NAIC lists discounts for bundling auto insurance, disaster-proofing the home, a new roof, updated electrical or plumbing, and security devices. Ask for the numbers in writing.

Timing matters because lenders require coverage. The NAIC says most mortgage lenders require homeowners insurance for as long as you have a mortgage, and that if coverage lapses the lender will likely buy it for you at a much higher premium and with narrower coverage. Plan to have the policy bound before your closing date, and confirm what proof your lender needs.

Buy the policy that covers the right rebuild amount, pays replacement cost, and has a deductible you can write a check for, not simply the lowest premium. Shop at least three quotes before closing, and keep your quote comparison sheet with your closing documents.