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How Homeowners Insurance Works

Buying Homeowners Insurance
If you live in a hurricane prone area, investing in storm shutters could save you money and save your windows in a storm.
If you live in a hurricane prone area, investing in storm shutters could save you money and save your windows in a storm.

Now that you've decided you need homeowners insurance, or maybe you're looking for a new policy, it's time to consider an insurance provider. Dozens of carriers operate in every state, so making a choice can be difficult. Your state's insurance department can provide you with information about carriers, prices of policies and laws in your state.

Before you begin to look for a carrier, get acquainted with your house and the area where you live. Do you live in an area that gets a lot of storms? Is your house in a floodplain? Does your neighborhood suffer from a high level of crime or vandalism? Does your house have a history of water damage? Asking these sorts of questions will not only give you a better idea of your home and where you live -- it will allow you to make a more informed decision when choosing an insurance carrier. This can also be a great time to get a home inspection done. A professional home inspection can uncover lurking problems in your home and show you where your home may need retrofitting or improvements, all of which will help lower your premiums.

Once you're confident that your house is in good shape, it's time to start looking. Talk to your friends and neighbors about the insurance carriers they use. If you are moving into a new home, ask the sellers or your realtor for recommendations. It's important to choose a carrier that is reputable and licensed to operate in your state. If you are unsure of how a certain insurance company stacks up against the competition, many Web sites have ratings of insurance companies' financial strength. Here are a few:

Shop around for the right plan -- don't just look at the companies you know best. Some insurance companies sell through their own agents or through independent agents, while others sell directly to customers on the Internet or over the phone, so there are many different places for you to look.

How to Save Money on Homeowners Insurance A $1 million homeowners insurance policy can cost a few hundred dollars a year in some cases. In calculating this cost, an insurance company considers many different factors:

  • Propensity for disasters in the area
  • Building materials used in the home
  • Building costs (including labor)
  • Neighborhood crime levels
  • Size of house and special amenities
  • Condition of home
  • Distance to nearest fire hydrant and fire station

The presence of a volunteer instead of a professional fire department in your community can also affect the price of your policy.

Many of these things are beyond your control, but having a good knowledge of some of them can help you in shopping for a better premium. For example, if your area occasionally experiences severe hail storms, investing in storm shutters and shatterproof glass will make your home less at risk and possibly decrease insurance premiums. In general, taking measures to make your home disaster resistant, whether it's retrofitting the foundation or reinforcing the roof, will keep your home safer and help in getting a favorable insurance policy.

While the above factors can affect the price of your policy initially, other issues can result in an increase in premiums or in a reduction in availability of coverage. These include:

  • A decline in the stock market
  • Several major catastrophes in a given year
  • Increase in number and severity of claims filed with a company
  • Jump in price of building materials and local labor

It's important to do more than just keep your house in good physical condition. Installing a burglar alarm and other home security devices can help to lower premiums and prevent theft. Maintaining a good credit record, bundling services (i.e. getting auto and home insurance from the same carrier), obtaining group coverage through an employer and staying with the same insurance carrier for many years can help to keep rates down. Consider also raising your deductible -- the minimum amount of money you can file a claim for -- and balancing that higher deductible against a lower premium. If you're on a government plan, look for a private insurance carrier as they will often be cheaper and provide more options. Some insurance companies also give discounts (up to 10 percent in some cases) to people who are retired, with the belief that retired people have more time to maintain their homes.

Regular repairs, such as fixing an old roof, can lower your premiums.
Regular repairs, such as fixing an old roof, can lower your premiums.
Photo courtesy MORGUEFILE ©2005-2006 (Photographer: Jeff Williams)

Above all, it's important to know when to use your insurance. Insurance companies will often raise your premium or consider dropping you from the policy if you make too many claims. Even if you have a clean record, decide whether making a claim on your insurance is worth the potential increase in premiums. Insurance companies have become swamped with claims about mold and water damage, and unfortunately even one claim can leave a bad mark on your record. Of course, if you need to make a claim, go ahead and do so. That's why you have insurance. But if you can afford to pay for a $1,000 repair rather than going to your insurance company, it may be in your best interest to do so.

Once you have your policy, your work isn't over. You should continue to keep an eye on your house and your policy. Maintain your home, and make any necessary, minor repairs. And, if possible, review your policy every year, and continue to update the inventory of your house, reappraising valuable items. Some insurers allow for an inflation guard policy, which, when you renew your policy, automatically adjusts your coverage to account for inflation.