More than just rates: How to compare homeowners insurance policies
Buying a homeowners policy for the first time — or shopping around for a new one — can be a challenging experience. Homeowners insurance can seem very complicated, particularly when most of us just want good coverage for our home for common disasters from a reputable insurer at a good price.
The first step in a hunt for homeowners insurance is to gather quotes from various insurers to compare them. But how does one even begin that process to help us find the right insurer for our situation? Here are the key things you need to know to begin that process, along with advice on how to bring them together to request meaningful quotes and compare them.
Know your coverage
There are many varieties of homeowners insurance, each of which covers different aspects of the home. If you're comparing quotes from insurers, you have to make sure that the coverage between them is similar.
The most significant difference between the various policy types are perils and open perils.
A policy that covers you against named perils includes a list of potential disasters that the insurance will cover. Named perils usually include the most common things, like fires, lightning, theft, vandalism, hail and riots. However, the exact list varies from policy to policy.
A policy that covers you against open perils covers everything that might damage your home except for the things listed in the policy. Things that are commonly excluded include earthquakes, pet damage, government actions and insect damage.
In general, an open perils policy is a better option as it covers you against a much broader swath of perils. However, there are specific perils that you would like to have coverage against. Often, you can pay more to have specific perils added to a named perils list or removed from an open perils list as an addition to your policy.
Another factor to consider is whether these coverages extend to just the physical structures on the property (damage to your actual home) or whether they also include the possessions inside. Some policies offer open perils coverage to the structure but only named perils coverage to possessions inside.
It's important to note that almost all home mortgages require you to be carrying an open perils policy on the structure of the home. Be sure to include this factor when shopping around for home insurance.
In short, you want to make sure that the things covered in each policy are similar when comparing quotes.
The deductible is the amount of money you're responsible for paying out-of-pocket when you make a claim. For example, if you have $5,000 worth of damage to your home and have a $1,000 deductible, the insurance company will pay only $4,000 — you'll be responsible for the other $1,000. Damage to your home that is below the deductible value will have to be paid entirely by you. Remember, homeowners insurance is there to protect you in a devastating situation, not to cover every minor issue.
In general, the higher the deductible on your policy, the lower the annual premium. However, you shouldn't have a deductible that's higher than what it would be easy for you to cover. Suppose you have a $5,000 deductible but don't have easy access to $5,000 at all times; you could be in a serious pinch if something happens to your home unexpectedly.
It's a good idea to request quotes with identical deductibles, but make sure that the deductible amount you're requesting is something you can handle.
Another point of comparison is the limits of the policy. Every homeowners policy states an upper limit of how much money will be paid out in those particular situations. For example, your policy might have a liability insurance limit of $500,000, meaning it pays out up to $500,000 if someone were harmed on your property.
What you should be concerned with is that the limits on the policies you're comparing are similar and that those limits align with what you would need. If your house were to burn to the ground and all possessions inside were destroyed, how much would you need to replace the structure? How much would you need to replace all the items inside, or at least enough of the items to reclaim what's important in your life?
It's undeniable that lower limits mean less expensive insurance for you. But the last thing you want is to have a devastating incident and not have enough insurance coverage to recover your life. Make sure the limits cover the things you care about, then keep that amount consistent across the policies you compare.
Know the reputation and stability of the insurer
Another important factor to consider is the reputation and stability of the insurer. You don't want to save a few bucks on an insurance company that ends up being difficult to deal with if you need to make a claim, or a company that's in dire financial straits.
One way to assess a company's long-term financial health is to find out what grades independent insurance rating firms give to those companies. If you're considering getting a quote from a company, find out what financial strength ratings the company receives from the major independent insurance rating firms like Standard & Poor's, Moody's, Fitch and AM Best. You can usually find these with a Google search, and most companies will promote their ratings if they're good. It's a good idea to stick with insurers that have an A rating or better.
What about assessing the company's customer service? One great place to look is at J.D. Power, which does an annual study of customer satisfaction among major home insurers in the United States. If a company scores at least a 4 out of 5, it means that it provides excellent customer service. It is a good idea to be wary around insurers with lower ratings — 2 out of 5 or below.
You should also make sure that the insurer is licensed to operate in your state. You can find this information on your state's homeowners insurance website, which should enable you to easily look up all insurers in the state.
A good game plan
It's a good idea to filter out poor companies before you even request quotes. Check out the companies and narrow the places you get quotes from down to ones that are financially stable and have good customer service reputations.
When you request quotes, be sure that the features are as similar as possible. To get the most accurate comparison, get quotes with identical deductibles and very similar coverage and limits.
Doing this pre-work will ensure that when you receive your quotes, you will know that the companies are reputable and are offering similar insurance packages.
When comparing homeowners insurance, you want to make sure that the core elements are similar among the policies you're looking at. Decide what coverage you need and what limits you want, then request quotes based on those factors. When you're comparing policies, the most important considerations are the deductible, annual cost, reputation and the insurer's stability.