How to buy homeowners insurance

Homeowners insurance is the best way to protect your house, your belongings and your peace of mind.

If you have a mortgage, it's probably mandatory.

But it's easy to get confused trying to figure out what coverage you need, what limits you should set and which provider to go with.

Here's how to choose the right coverage, deductibles and limits — and how to find an insurance company that will provide them at a competitive rate.

A homeowners insurance policy covers your home's physical structure and contents, but it also protects you in other ways.

Basic coverage

• Dwelling coverage: Pays to repair or rebuild your home and attached structures, like a garage, appliances and permanent fixtures.
• Personal property coverage: Covers your belongings, from furniture to electronics.
• Liability coverage: Can protect you if someone injures themselves at your home — whether slipping on a wet floor or being bit by your dog. It can cover lost wages, medical bills, lawyer fees and more.
• Additional living expenses: provide funds for temporary housing and other expenses if you need to relocate while your home is being repaired after a covered event.

Add-ons and riders

Many policies allow you to add additional coverage:

• Other structures: Can extend financial protection to fences, tool sheds, detached garages, in-ground pools and other structures not included in dwelling coverage.
• Jewelry and valuable items: Your personal property coverage will cover some items but the limit on valuable items is usually pretty low. If you have artwork, jewelry or other items that exceed that limit, you should consider additional coverage through a floater or endorsement.
• Water backup or sump pump overflow: If your house has a sump pump, you'll need extra coverage to repair malfunctions or sewage back-ups..
• Identity theft: You can add coverage to help restore your identity in the event of fraud or cyberattack.
• Guaranteed replacement cost: This endorsement ensures your insurer pays to repair your home regardless of the cost, so long as the damage stems from a covered event.
• Ordinance or law: If you have to upgrade to meet local housing codes, this endorsement will help cover the cost.

The amount of homeowners insurance you need is different from how much you paid for your house. Figuring out how much dwelling insurance is a good place to start, with other kinds of coverage usually a percentage of that.

Construction costs

One way to estimate your dwelling coverage limit is to multiply construction costs in your area by your home's square footage. For example, if construction costs in your area are $100 per square foot and you have a $1,000 square foot house, you'll want a policy that offers at least $100,000 in dwelling coverage.

Personal property coverage

Experts suggest setting personal property coverage limits that are between 50% and 70% of your dwelling coverage. In the above example, then, you'd want $50,000 to $70,000 in personal property insurance.

Make sure that's enough, however: Take an inventory of your possessions and their value and decide if the two figures match. If not, you may need to add a floater or a rider for particularly valuable items.

Actual cash value (ACV) vs. replacement cost value (RCV)

One of the first things you need to do when picking a policy is deciding if you want to cover items based on their actual cash value (ACV) or replacement cost value (RCV).

Imagine your television is stolen. If you have ACV, you'll only receive what it's worth minus the depreciation, or value it's lost over time. If you get RCV, you'll receive enough of a payout to buy a brand-new television.
ACV is cheaper, but you could easily wind up paying the difference out of pocket for a replacement.

USAA offers RCV standard with all policies, making it one of our top picks for homeowners insurance.

How much liability coverage is enough?

Most policies offer at least $100,000 worth of liability coverage. But if your net worth is much higher than that, getting umbrella insurance can add a lot more protection — most start at $300,000 worth of liability coverage.

Once you've decided how much coverage you need, you can start requesting quotes from insurers — online, over the phone or in person with an insurance agent.

To get an accurate rate, however, you'll need to have some information on hand:

• The property's address and how long you've lived there
• The year the house was built
• Information about people and pets living there
• It's proximity to the nearest fire station
• The poof's structure and age
• Plumbing and HVAC systems, types and age
• Construction materials and foundation type
• Security and safety features, including smoke detectors and burglar alarms
• Whether there is a garage, shed, pool or other external structures
• Details on any claims you've filed
• The date you want your policy to start

Lemonade's simple-to-use online interface makes it easy to get a quote quickly. It's also a good option for affordability and quick claims resolution.

Nationwide offers a variety of discounts, including for new homeowners and for installing security and safety devices.

Comparing at least three companies is the best way to get a good deal. Make sure any provider you're considering is licensed in your state and that you're looking at comparable policies.

Here are several factors you should consider:

Coverage options

Do all the providers have the coverage limits, deductibles and riders you need? Do you need to buy flood or earthquake insurance in addition to your homeowners policy?

Discounts

Do the insurers you're looking at offer rate reductions for new homes or for homeowners who pay in full? Will you get a discount if you bundle your car and home policies with the same provider? Homeowners insurance rates are on the rise but the right discounts can add up.

Digital presence

Being able to get a quote online without giving up too much information makes things a lot easier. Being able to file claims, make policy changes and get questions answered online is a gamechanger. Look for an insurer with a robust web presence and mobile app.

Customer service

To get an idea of how current customers feel about an insurance company, you can check out J.D. Power ranking for homeowners insurance companies and look at how many complaints they've received with the National Association of Insurance Commissioner's Complaint Index. You can also check their score with the Better Business Bureau complaints

Financial strength

You need to feel confident your insurer will be able to pay on your claim when the time comes. A.M. Best rates insurance companies based on how likely they are to be able to meet their financial obligations A grade of A or better is a good indication it can pay out claims.

Depending on what provider you choose you can buy a policy online or with an agent.

Either way, you'll set up a start date for coverage: If you're buying a house, that's usually the day you close. If you're just changing providers, make sure there's no gap between when your previous policy expires and the new one begins.

If you have a mortgage, you may need to make payments through the escrow account your mortgage payments go to.

There are a few different ways to save on homeowners insurance:

Raise your deductible

The higher your deductible, the lower your premium will be. Make sure you can afford the additional out-of-pocket costs, however.

Improve your credit score

In most states, insurance companies can factor your credit history when deciding to approve you or set your rates. To raise your credit score, pay bills on time and in full, avoid taking out more loans and check your credit reports for errors,

Bundle home and auto insurance

Have a car? Taking out auto and homeowners policies with the same provider can save you up to 25% off.

Make some home improvements

Making your home more resistant to damage can help lower your rates, whether that's adding wind-mitigating features, redoing the roof, adding a burglar alarm or installing sprinklers. As your current or prospective insurance company how much these updates could save you.

Shop around

Insurance companies assess each house and each owner differently. If you think you're getting a raw deal from one company, try a few more. If you're having problems finding reasonable coverage, ask neighbors who they use.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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