Chances are your home is your biggest investment. Maybe you’re building a nest egg of equity and look forward to cashing it in one day. Or maybe you plan on keeping your home in the family for generations. Either way, I know your home means a lot to you. So it’s important to secure it.
Thankfully, home insurance is home security. It secures your prized investment against unforeseen perils like storm damage, burglars and theft, and personal liability should someone harm themselves on your property.
But there’s so much conflicting information out there. So the question is: “How can I shop for homeowners insurance confidently and sanely?” After all, you’ll be paying for your policy for years, for one. And in the event of a real emergency, your home insurance is your lifeline.1
The answer is: Use our 5-step plan of action. In this homeowners insurance guide, I’m going to show you how to:
- Prep for your home insurance hunt
- Put together the right homeowners plan for your home
- Choose the right amount of coverage
- Use online tools to comparison shop for the best HO-3 policy
- Pick the right insurance company
FYI: Comparison shopping might feel like it’s been around forever, but it really started in the 1990s when insurers like Progressive started giving shoppers quotes from up to three competitors — by phone! Today, you can still find some pretty amazing home insurance savings — except now they’re on the provider’s website.
Step 1: Prepping for Your Home Insurance Hunt
Home insurance is funny because, while it’s definitely good for you, your bank or lender requires it if you want to take out a mortgage. So it’s kind of like eating spinach when we were kids. We knew it was healthy, but that still didn’t make it go down any easier.
If you view home insurance like spinach, choosing your policy is going to be a chore. You’re just going to type “cheapest home insurance today” into Google, click on the first link, and go with that.
That would be a mistake. Here’s why.
First, price isn’t the only factor you need to consider when settling on a home insurance plan. Getting the right coverage for your home is hugely important, too. Second, researching home insurance basics isn’t tough. You can learn a lot in a little bit of time.
But the biggest incentive to take home insurance seriously is this. Understanding your policy — digging into your coverage options and figuring out the right amounts for each — will give you full agency over your home if or when you have to file a claim.
Pep talk over.
Here’s your first (and only) homework assignment. Before we get into the nitty-gritty of how much home insurance you need, I’d like you to have the following information handy:
Your home’s square footage
Your home’s market value
A rough inventory of your valuable possessions (items and costs)
All ready? Now for the fun stuff!
Homeowner’s Tip: If you want an even better idea of how much coverage you need, you should also have a general idea of construction costs in your area. A local insurance agent should be able to help you with those. While these rates can skyrocket from year to year (from 2020 to 2021 costs rose by a whopping 17.5 percent),2 they mostly go up incrementally.3
Step 2: Putting Together the Right Homeowners Plan for Your Home
Ever pick up something at the store, get to the cash register, and realize what you’re buying is significantly more expensive than you thought? Kind of makes you feel like a deer trapped in headlights, doesn’t it?
Well, if it’s a $100 shirt you thought was $40, that’s one thing. But what about a house you thought you could rebuild for $350,000 actually costs $450,000 after a fire?
How do you make sure this never happens to you? Easy. Choose the right coverage.
Let’s take the home from the example above. Say it’s worth $350,000 and half of it is leveled by one of those freak weather systems we’re seeing more and more of these days. The math is easy. You need $175,000 to rebuild, right?
Actually, it depends on what kind of dwelling coverage you have. (Dwelling coverage is the part of your homeowners policy that protects your home.) Here are three scenarios that should make this crystal clear.
1. You Have Basic Home Insurance
If you have basic home insurance and your home is 12 years old, your insurer would take the value of your property at the time you lose it ($350,000), figure in depreciation for things like age and condition, and then subtract that amount from your reimbursement. Sound reasonable? Look again.
If you were expecting $175,000 to rebuild half your house, you might only get $145,000 because, hey, your roof and basement are in pretty bad shape and why should insurance foot the bill to build them back new? Bottom line: you’re short about $30,000.
That’s your first option. We call this reimbursement plan Actual Cash Value (ACV), by the way. Bookmark it because it will come up again.
Type of Property Insurance: Actual Cash Value (ACV)
Did You Know: The most common type of policies, HO-3 home insurance policies, cover a specific range of accidents. The most common “covered perils” are: storm (lightning, tornado, and hail included), fire and smoke, and theft and vandalism. Flood, earthquake, and mold coverage are always extra.
2. You Have Premium Home Insurance
Ok, now let’s take the same scenario, but add some slightly beefed-up property protection. This time your insurance company is giving you enough money to build back your home at its current market value without depreciation. Let’s do the math.
Your home is worth $350,000. Half of it was a total loss. You get the full $175,00.
Sound better? It is. Except building costs have gone up 10 percent since you bought your home. And you didn’t figure in what it would cost to redo your electrical wiring to code. In other words, you’re still short $15,000.
This is your second option. If you’re searching for it online, look for Replacement Cost coverage.
The end of the world? Well, it’s a significantly rosier forecast than your first option. Still, if you’d added Building Ordinance coverage (covers rebuilding to code) and inflation protection (covers rising costs of construction), you’d probably be singing from your brand new rooftop.
Type of Property Insurance: Replacement Cost (RC)
3. You Have Top-of-the-Line Home Insurance
This time around you have the works: Replacement Cost coverage, Building Ordinance coverage, and inflation protection. You’re paying a little more every month, but you increased your deductible a bit to offset a little of the cost of your airtight HO-3 policy.
Ok, let’s try this one more time. Disaster strikes. You’re 100 percent protected. Your contractor’s offer proves this. It’s right on the money.
Reconstruction is going great until you discover an issue with your foundation. The good news is that the damage is covered, which isn’t always the case with foundation repairs.
Even better news? You chose Extended Replacement Cost coverage for your home, our third option. ERC says that even if rebuilding goes over your dwelling limit, you’re covered. In this case, the unexpected foundation damage cost $40,000. And guess what? You don’t have to pay a cent.
Type of Property Insurance: Extended Replacement Cost (ERC) with Building Ordinance Coverage and Inflation Protection.
Actual Cash Value versus Replacement Cost Coverage
|Type of Coverage||Damage||Depreciation||Deductible||Payout|
*Property depreciation won’t affect your payout.
FYI: Time for a new roof? The Insurance Institute for Business & Home Safety recommends building roofs to Fortified roof standards for maximum protection against storms.4
Step 3: Choosing the Right Amount of Coverage
To calculate how much coverage you need, you’ll need two figures handy: the square footage of your home and local building costs.
Notice how I didn’t ask for your home’s value. That’s because the coverage we need and the value of our home aren’t the same thing.
To make this concrete, let’s take our $350,000 home. In one scenario, local building costs are $150 per square foot. If our home is 1,750 square feet, that would give us $262,500 to rebuild from scratch. If we’d set our coverage cap at $350,000, in other words, we’re more than covered — even if we throw in another $15,000 to build to code.
Now let’s take the same-sized house and figure in the 24 percent spike in construction costs we saw between 2019 and 2021 (forget local demand for a second). That would give us $186 per square foot multiplied by 1,750.
What did you end up with? I ended up with $325,500, which means when we figure in the extra costs of rebuilding to code, we’ve gone over budget. (We haven’t even figured in possessions yet, by the way, which is a separate process with its own limit.)
Bottom line? Lay the groundwork before you go online. How much will it cost to rebuild your home and replace your valuable possessions? The more accurate you are with these calculations, the fewer nasty surprises you’ll have down the line.
Homeowner’s Tip: Replacement Cost coverage works the same way for your things as it does for your home. Say you’ve got a Cove security system that you bought in 2017 for $199 and need to replace in 2022, when the same system goes for $229. With RC, you’d get the full amount. With ACV, you’d get $199 minus depreciation, or about $100.
Step 4: Using Online Tools to Comparison Shop for the Right Home Insurance Policy
Now for the fun part: shopping.
There are a few ways to go about quote hunting. I recommend starting with a carefully curated list of home insurance recommendations from our experts who have actually tested the services they’re writing about.
And one thing that can really make shopping for home insurance easier is a first-rate online quote generator. My top picks for getting online quotes are Lemonade, Nationwide, and Progressive, in that order.
Lemonade uses AI (and great design) to make the whole quote gathering process as effortless and customizable as possible. You’ll be in and out with a Lemonade insurance offer in a few minutes — as long as they cover your state. Availability is one drawback with Lemonade at the moment.
Nationwide has one of the most customizable quote engines I’ve tested. Nationwide’s basic insurance plans also come with inflation protection built in, which will definitely help out with rising building costs.
Progressive is a little different. It’s part quote builder, part comparison engine. (Progressive isn’t doing this pro bono. They have an arrangement with 13 other major insurance underwriters.) Progressive’s engine is great for getting a fairly granular taste of what’s out there, but when push comes to shove, I prefer digging deeper insurer by insurer. But here’s my full report on Progressive home insurance, if you’re curious.
Shopping online is fast and easy, but it isn’t the only way to get a home insurance quote. Companies like State Farm and Nationwide pride themselves on their massive fleet of flesh-and-blood agents. If you’re more of a people person, having an agent talk you through a quote can be a good place to start.
FYI: If you’re looking to get an idea of the average homeowners premium in your area, American Family Insurance has a pretty nifty online calculator. Likewise, if you want a pure comparison engine, Lord Alfred will serve you up some possible candidates you can use to pad out your list.
Step 5: Picking the Right Insurance Company
Once you’ve put together a few quotes (I’d say shoot for three), it’s time to get down to brass tacks.
Compare your options line by line. Make sure you’ve added all the coverage you need. Tally up the costs. If you have questions — you will and should have questions — chat with an agent by phone, in person, or online.
There are also a few other things you can do.
Other people’s experiences will never be an exact mirror of yours, but if three out of five neighbors on your block swear by the same insurance company, that’s saying something.
Check Out Customer Satisfaction
Data analytics powerhouse J.D. Power publishes the results of its home insurance customer satisfaction survey once a year. They not only cover overall customer satisfaction, they also measure how happy customers were with their insurers’ digital and claims experience. Unlike Better Business Bureau ratings, which can be all over the place, a top score on J.D. Power is really saying something.
Look for Bundles
Up top, I said price wasn’t everything. That’s true. But after you’ve whittled your list down to one or two companies you really like, consider the bundling options they offer. The most common bundle is auto and home. Using one company for both types of insurance won’t just streamline your bookkeeping, you can also save a lot of money.
Did You Know: Looking for a stand-out auto and home insurance bundle? State Farm insurance bundles — with savings of up to 35 percent — are an excellent place to start.
Plenty of homeowners consider home insurance something of a burden with a ton of fine print they can’t even understand that protects them against bad things that never seem to happen.
If that’s you, I totally see why you might look at it this way. Home insurance policies aren’t optional unless you own your home outright (your bank won’t give you a mortgage without one) and sometimes they need a little deciphering. But I’d still suggest making friends with your policy. You’ll feel much better paying a premium you hand-picked yourself and know inside out.
That said, friendships need cultivating. Do your homework. Think carefully about how much it would cost to rebuild your house in the event of a total loss and choose an insurance plan that guarantees you’ll get there.
Once you know what you’re looking for in a homeowners policy, online tools (and flesh-and-blood agents) can help you narrow down your search. If you’re still on the fence, talk to friends and neighbors. Chances are you’ll find someone who’s filed a claim and has an experience to share.
Finally, one thing that is proven to make people happier is saving money. Bundling in your auto and home insurance is a great way to do that, and to take some of the sting off a premium you’ll probably be paying into retirement and beyond.
FYI: In 2021, Geico Insurance topped JD Power’s charts for the best digital experience. Progressive and Farmers were the runners-up.5
First, figure out how much coverage you need to fully insure a rebuild. Next, research individual insurers and gather quotes (we’ve got some good recommendations up top). When you’re all done comparing, pick the policy that’s the best value for money.
No, these days you can get offers online. However, with some insurers you’ll need to contact an agent to finalize your quote.
You can use calculators to get a broad idea of how much insurance costs in your area. For anything more than that, you’re going to need to get your hands dirty with actual quotes from a short list of insurers.
Big question. Very generally speaking, you need enough coverage to build back your home at current building costs (i.e., with inflation and price hikes figured in). If your home is older, you may need extra coverage to rebuild to code.
With ACV, you’ll need to figure in depreciation, so you’ll always be getting less than what you need. (For large expenditures, like your roof, ACV can leave you thousands of dollars short.) RCV, on the other hand, pays out at the current market value, meaning you won’t have to go digging in your pockets to rebuild your house or buy back your stuff.