How to Buy Homeowners Insurance: From an Industry Expert - YA

House With Stone Front Yard
How To Buy Homeowners Insurance - The Experts' Guide

Whether you're buying home insurance for the first time or changing from one policy to another, every homeowner wants affordable coverage for your property.

Mortgage companies won’t lend you money until you purchase home insurance. You will need to secure coverage prior to closing on your new property. If you are buying a house for the first time, then getting your hands on the right insurance company and policy may seem like a daunting task.

That’s where this guide comes into play. Before you start searching for an insurance company, make sure you are familiar with what homeowners insurance actually covers. Collect every piece of relevant information and paperwork, compare and decide on a policy, and finally, select the form of billing plan and sign on the dotted line. 

Here is the experts' step by step guide on how to buy the best home insurance for your property:

Step 1: Select a Policy Type

Determine your policy type by the type of construction of your home and how the home occupancy type. The most common house insured in America is called the single-family detached house with primary occupancy, which would get a standard HO3 policy form. However, there are many other types of property as well, such as property that is owned by you, but rented to others:

Home Type ISO Policy Type
Primary Home HO3 vs. HO5
Townhome HO3 vs. HO6 (rare)
Rental Home DP3 vs. DP1 (rare)
Secondary Home HO3, DP3
Vintage Home HO8
Vacant Home DP1
Condo HO6
Apartment HO4
Mobile Home MHO3, MDP1
Manufactured Home MHO3, MDP1

HO3 - Standard Coverage
HO3 is a type of insurance policy for home insurance that grants protections to the person who purchases this policy against property damage, legal liabilities, and any other expenses typically connected with unexpected catastrophic damage to your home. You can expect most insurance companies to have a standard homeowner insurance offering that is a variant of the HO3 policy. The HO3 is known as the open perils policy since it covers homes for all dangers except for the ones that are specifically listed as excluded in the policy document. Although potential buyers should perform their research into the policy before purchasing it to ensure they completely understand the entirety of the coverage.

HO4 - Renters
Otherwise known as renters insurance, HO4 is a policy form that covers personal property in a rented apartment or home. The landlord or owner’s insurance will minimally cover the renters against damage to their personal property. Along with insuring the renter’s individual property, the policy can potentially provide some liability and medical payment coverage. 

HO5 - Premium Coverage
Also known as the comprehensive form, an HO5 is a policy form for home insurance affords open-peril coverage. Meaning your insurance company will cover damages to your home and personal belongings when it's caused by a situation, or peril, as long as it's not specifically excluded on the policy. The HO5 is different than HO3 in that it includes Personal Property Replacement Cost by default. It also has open peril coverage on both your personal property as well as your house whereas the HO3 only has named-peril coverage for your personal property. 

Similarly to an HO3 policy, HO5 will also include personal liability and medical payment coverage. More comprehensive coverage will usually cost more, and HO5 policies are no exception. You’ll need to consider the additional premium against the value of the extra protection. 

HO6 - Condo and Co-Op
HO6 policies were developed for people who own condos and co-ops. Each condo or co-op association will have its own type of master insurance policy and other varied forms of protection. As either an owner of a condor or co-op tenant, you are allowed to review the insurance policy the association has in place. Make sure you carefully look through the plan before buying this insurance for your unit since you don’t want to risk the chances of purchasing coverages that can overlap with one another or buying too little coverage and leaving a coverage gap. 

Condo owners will require an HO6 policy to cover the parts of the building they are in ownership of, mostly the walls of their unit and everything inside of it. At times a condo association will only be responsible for the common areas of the building, landscaping, bare walls, floor, and ceiling. An HO6 policy will be especially crucial for this situation. Having to insure a co-op differs somewhat. Co-op tenants do not hold ownership over their unit specifically, they own a share of the entire building. Even though co-op owners are considered tenants themselves, they still require an HO6 instead of renters insurance because their ownership is on the line. Similarly to the condo association, co-op association coverage may be limited. 

HO8 - Vintage Home
Also known as the modified coverage, HO8 is home insurance that was made for much older buildings where the replacement costs far exceed the actual cash value of the home. Because of this reason, you can usually see the HO8 policy form frequently used to insure older homes, especially ones that have more than 80 years of age, registered landmarks, architecturally significant homes, and houses constructed of hard to replace materials. HO8 policies could potentially subtract depreciation when it covers for damage. That cost will usually be lower than the replacement cost, so your insurance company will pay far less after a loss. This ensures the overall cost of the HO8 policy goes downward, making it more affordable for vintage homes. The policy also offers other coverages such as personal property, personal liability, and medical expenses. 

DP1 - Vacant - Basic
The DP1 insurance policy is one of the most basic insurance policies made for rental properties in the U.S. This policy is also known as the Dwelling Fire Form 1, DP1 insurance for short. It provides you with very minimal insurance coverage for rental properties. Within the United States, most landlords will have three policy types that allow them to insure their rental properties, with DP1 being one of the first. 

A DP1 insurance policy will offer the most primary coverage of all the rental property policies. Meaning you won’t be getting any bells and whistle by obtaining this policy. Therefore, most of the common reasons for a landlord to purchase this kind of insurance would be to reduce the costs of insurance at the expense of coverage. The DP1 rental home insurance policy is also known as a perils insurance policy. Meaning that every risk that will be insured is accurately placed on the policy itself. The insurance coverage is also limited to the perils that are explicitly stated on the plan. Most commonly, DP1's only cover damage from:

  • Fire, Smoke
  • Wind, Hail
  • Lightning
  • Explosion
  • Aircraft, Vehicles (hitting the house)
  • Volcanoes
  • Vandalism, Riot

DP3 - Rental Home - Landlord
The DP3 policy is similar to DP1, as it’s suited for rental properties, but with more enhancements. A DP3 is capable of preserving both the property and the landlord's furnishing. A homeowner who decides to rent out their property and doesn’t live in it will have to deal with a different set of risks than other homeowners. The insurance industry built a set of plans known as dwelling fire insurance to deal with these risks. 

DP3 policies will usually cover the physical structure of your home such as damage to other structures like a garage or shed damage to personal property, like appliances inside the home, and your personal liability. Note: the personal property coverage is not included by default on your DP3. DP3 is one of the more popular dwelling fire insurance plans because it is written as an open peril basis. Meaning that damage will be covered unless it’s been caused by an incident listed on the policy. 

Furthermore, DP3 policies are also popular because they usually include loss of rent coverage. This coverage is capable of compensating the owner for lost rental income if the damage to the rental property makes it uninhabitable. For example, if a hurricane were to tear off the roof of the home you rented, and the tenants have to find a place to temporarily stay. This loss of income will be covered by the DP3 policy while repairs are underway.

DP3 policies are usually written with a replacement value basis. Meaning your insurance company will pay the full cost of replacing your property until it hits the limits of your policy instead of subtracting depreciation. 

MHO3 - Standard Manufactured/Mobile Home
MHO3 or the Manufactured Homeowners 3 policy form is known as a comprehensive policy that is capable of covering a manufactured or mobile home and personal property for various risks, such as fire, property damage, water damage, wind, lightning, and theft. The MHO3 policy will also include individual property, limited other structures, and loss of use. You won’t be allowed to live inside the manufactured home until it’s been repaired to reasonable standards. Medical payments and personal liability are also covered in this policy. Optional coverages will vary from each insurance company, so you’ll have to speak to them to see what can be included. 

MDP1 - Basic Manufactured/Mobile Home
MDP1 or the Manufactured Dwelling Property 1 policy form is also known as the Basic Form policy. This coverage was made to be very specifics when covering certain risks and will not allow much room for expansion on it. The MPD1 policy was created to cover homes in tenant occupancy but is capable of housing the primary owner as well. 

Step 2: Understand Coverage Requirements

If you have a mortgage, your lender will require you to have homeowners insurance. Before you buy, understand the coverage components. While there are many types of coverage in a home insurance policy, the big three are your home, your belongings, and your liability.  

  1. House Structure: Get Replacement Cost

    The first line in your home insurance policy is usually called Coverage A: Building/Dwelling Coverage. The coverage amount is the value to rebuild your home from the ground up. Rebuild costs are not the same as the market value of your home. Imagine your home burns to the ground. The insurance company will rarely write you a check to purchase a similar home elsewhere. Instead, they will require you to rebuild a similar style home. Replacement cost is the estimated cost to rebuild your home, including labor, materials, construction permits, etc. 
     
  2. Personal Property: Included, but check sub-limits 

    In your home insurance policy, you will likely see a line called - Coverage C: Personal Property. What is personal property?

    Think of picking up your home, turning it upside down, and shaking it like a present. Everything that falls out is personal property. What they don't tell you is that most homeowners policies have special sub-limits for about 13-15 categories of your property:

    homeowners insurance coverage C special limits

    The sub-limit on jewelry means you only have coverage up to $1,500 for jewelry theft or up to $1,500 for damaged computer equipment. You can add on more coverage in any of these categories, for a price. For jewelry, if you have high-value items, like an engagement ring, you need to schedule the item separately. 
     
  3. Personal Liability: Lawsuits

    In homeowners insurance, Coverage E provides personal liability coverage. In America, we take pride in the right to sue anyone for anything. Josh might be your best friend today, but see what happens when he slips on the ice in your driveway and can't walk for three months. Hopefully, you are never on the receiving end of a lawsuit, but just in case, make sure you have liability coverage to protect your entire net worth. If you have more than $500,000 in net worth, look into buying an umbrella policy - super cheap for the extra protection it provides. Think of "net worth" as everything you own, not counting your primary home and retirement accounts.
     
  4. Perils: Covered vs. Excluded

    Homeowners insurance covers many perils, but not everything. Here are the most common claims that are covered:

    home insurance common coverage

    Specific perils not covered by default can be added for extra premium:

    home insurance optional coverage add-ons

    and some perils can never be covered

    home insurance common coverage exclusions
     
  5. Your Roof: How is it Covered?

    A normal asphalt shingle roof should be replaced about once every 20 years. If you have an older roof, your home insurance may only cover the roof at Actual Cash Value (ACV). A fancy way of saying you aren't getting a full reimbursement to put on a new roof in a claim scenario. Say your roof is 19 years old, and you have a hail storm that damages the roof to the point that it needs a full repair. The insurance company is not going to cut you a check for a brand new roof if it is covered at ACV, because you were going to have to replace the roof in the next five years anyway. They will give you a check that represents the remaining useful life of your roof. If the roof is 19 years old, has a 25-year useful life, costs $15,000 to replace, and you have a $1,000 deductible, you are only going to get a check for (25-19)/25*15,000 - $1,000 = $2,600. If your roof is covered at Replacement Cost, you are getting a check for $15,000 - $1,000 = $14,000. In this common example, the Replacement Cost Coverage on your roof was worth an extra $11,400. Check how your roof is covered when getting quotes. 

Step 3: Get Home Insurance Quotes

Now that you're an expert on home insurance coverage, it's time to go shopping! Shopping for home insurance can be confusing. There are many ways to find quotes, but no matter what path you take, you will eventually end up at a home insurance agent (like me). No one can sell you insurance if they are not licensed. There are many lead generation sites out there that advertise the ability to compare quotes, but in reality, they cannot sell you insurance without an insurance license. They can sell your information to licensed insurance agents or insurance carriers, though. If you like online shopping (we do!), always check that the website you are using is a licensed insurance agency or carrier before submitting your personal information. 

While 90% of homeowners start their insurance shopping online, the majority end up finalizing the purchase offline. Here are the three ways you can buy your homeowners insurance

  Pros Cons Where
Online  Fast, Efficient, Chat, Competitive Price No Face-to-Face Young Alfred, Hippo, Swyfft
Over the Phone Easily Ask Questions, Competitive Price Slow, Requires Phone Call GEICO, USAA, Liberty, Farmers
In-Person Face to Face, Relationship Slow, Schedule Interview, One Price State Farm, Allstate

You also can choose which type of insurance agent you would like to work with:

  • Independent Insurance Agent - These insurance agents work with many different insurance carriers and can provide multiple options (usually 5-25) for customers looking for a quote. Independent insurance agents can shop around and customize your package in more ways because they have more product offerings at their fingertips. They are usually a little more "insurance savvy" than their counterparts below. Their independence can be your greatest asset in finding fair and affordable coverage. Hundreds of insurance companies work with independent agents.
  • Captive Insurance Agent - Captive means they work for a single company. They can only offer you one option for coverage. The price may be competitive, or it may be overpriced, but it is their only option, so they have to sell it! On the plus side, captive insurance agents will be intimately familiar with the product offered by their specific company. The four large remaining captive carriers are State FarmAllstateUSAA, and Farmers.

Step 4: Cost of Homeowners Insurance

Many factors affect the cost of homeowners insurance, but the location is probably number one. While the average homeowners premium in the US is $1,173/year,  the average homeowners premium in each state can vary dramatically:

  Average Cost
Florida $1,993/year
Texas $1,991
Louisiana $1,945
Oklahoma $1,879
Kansas $1,531
Mississippi $1,508
Rhode Island $1,446
Connecticut $1,411
Colorado $1,383
Massachusetts $1,379
Nebraska $1,360
Alabama $1,358
Minnesota` $1,323
Arkansas $1,312
New York $1,287
South Carolina $1,284
Missouri $1,253
North Dakota $1,200
Georgia $1,152
New Jersey $1,149
Tennessee $1,149
South Dakota $1,096
Wyoming $1,088
Montana $1,081
North Carolina $1,075
Kentucky $1,062
Illinois $1,033
Hawaii $1,014
California $986
Indiana $983
Alaska $982
Maryland $982
New Mexico $982
Virginia $946
New Hampshire $941
Iowa $919
Pennsylvania $913
Michigan $908
West Virginia $907
Vermont $873
Maine $843
Ohio $819
Washington $811
Arizona $810
Delaware $780
Wisconsin $750
Nevada $737
Idaho $692
Utah $673
Oregon $643

Source: Insurance Information Institute

Step 5: Understand Coverage

Customize. A lot of people miss this step, but it is crucial. Once you have a quote that you like, play around with the deductibles and add-ons to customize the coverage and price to your liking. At Young Alfred, our average carrier has 1,474,560 policy combinations you can choose from on your homeowners insurance. While no one has time to review a million options, try at least considering the following nine big ones before clicking buy:

  1. Deductible (aka AOP Deductible): The deductible you will pay out of pocket before the insurance company pays for damages. Most common are $500, $1,000, and $2,500. The dollar amount represents your deductible for everything on your policy unless there are special deductibles for certain types of loss (see below).
  2. Wind/Hail Deductible: wind and hail claims are the most common homeowners claims, so it is no surprise that carriers will give you a discount by raising this deductible. Just know you are increasing the deductible on your most likely loss scenario. The most common deductibles here are 1% and 2%, where the percentage applies to your Coverage A: Dwelling/Building limit. So if you have $300,000 in coverage on your home and a 2% Wind/Hail Deductible, that means if you have a $10,000 wind claim on your roof, you are paying for $6,000, and the insurance company only pays $4,000. 
  3. Hurricane Deductible: this is more relevant for the coastal states - Florida, Texas, Alabama, Georgia, North Carolina, South Carolina, Mississippi, Louisiana, New Jersey, and some areas of Virginia, New York, Maryland, and Connecticut. The most common deductibles here are 1%, 2%, 5%, and 10%. If you can avoid it, please don't buy the 5% and 10% deductibles unless you can brush off a 5 figure hit to your bank account. 
  4. Water Backup Coverage: recommended coverage by Young Alfred. This will protect against the backup of water through a drain or faucet in your home. Water backup is not a covered peril by default in most home insurance policies.
  5. Additional Jewelry Coverage/Computer Coverage: Certain categories of your personal belongings have special sub-limits. You can add-on coverage on a per-item basis (schedule an engagement ring - needs appraisal) or on a blanket basis (add $6,000 in coverage for computers - no appraisal unless one item is over $5,000). Here are the special sub-limits that are most common in your homeowners policy:
  6. Identity Theft Coverage: With cybercrime on the rise, identity theft can be an affordable add-on to help with the restoration of your credit/identity in a hacking scenario. Identity theft coverage will not reimburse monetary loss from the actual crime, but cover fees in reasonably restoring your identity.
  7. Water Damage Coverage: Most people get this included by default, but areas along the coast, and especially older homes, often only get $10,000 in coverage or none at all. If you are in Texas or Florida, pay close attention to this coverage.
  8. Equipment Breakdown: Helps with HVAC repairs if something breaks down during its useful life. It does not cover normal wear and tear of your HVAC equipment.
  9. Service Line: If a city water line under your front yard breaks, it is technically on you to fix it (as it is your property). Service line coverage is not included in your standard homeowners policy unless you add it on with Service Line Coverage. 

Step 6: Ask for Discounts!

Any insurance agent worth their salt will include all discounts available from the beginning. Common discounts are:

  • Smart Home Discount
  • Bundle Discount (if you also purchase an auto policy)
  • Paid-in Full Discount
  • Advanced Shopper Discount
  • Security/Fire Alarm Discount
  • Senior Discount
  • Retired Discount
  • New Home Purchase Discount
  • Roof Update Discount
  • Wind Mitigation Discount
  • New Construction Discount
  • Roof Hail Resistant Materials Discount
  • Storm Shutters Discount


Step 7: Pay for Home Insurance

You got your policy and are ready to buy! There are three ways to check out:

  1. Pay with Mortgage/Escrow (most common) - you can buy home insurance with just

    - Your Mortgage Loan #
    - FULL LEGAL NAME of your Lender
    - Lender Address

    Example:

    #421275329623398
    My Mortgage, Inc. ISAOA/ATIMA
    550 Mortgage Lane
    City, ST 00000


    The above is a commonly formatted mortgagee clause. You can ask your lender/loan officer for it and buy the policy with only these pieces of information. Make sure to set your start date to line up with the closing of your new home purchase. 
     
  2. Pay with EFT (Checking Account) - this is a standard no hassle/low fee way. 
     
  3. Pay with Credit Card - while you will get those points, you also may get some extra fees. Some carriers do not charge credit card transaction fees, but the majority do, so it's better to choose option 1 or option 2 above. 

The Final Steps

Once you purchase, you aren't done. You still need to sign your application. The signed application is what the insurance company keeps on file to show you have entered into the agreement and have provided accurate information. If you are paying with escrow, it is up to your title agent to make sure the bill is paid. If you are paying via credit card or EFT, it is up to you. And of course, read up on how to ace your upcoming home inspection

Congrats on being a homeowner. Hopefully, my guide helped you understand how to buy homeowners insurance. If you're looking for top quotes in your area, I'm the home insurance expert. Happy to help!

Get Home Insurance Quotes

At your service,
Young Alfred