How to Avoid Common Homeowners Insurance Mistakes

The cost of homeowners insurance is on the rise, with some insurers increasing rates by nearly 15% in 2023, according to S&P Global Market Intelligence. Making the wrong decisions when purchasing homeowners insurance could cost you even more. Here are nine homeowners insurance mistakes to steer clear of, including underestimating your coverage needs, ignoring exclusions, and neglecting to shop around.

1. Underestimating Your Insurance Needs

When you have a covered loss, homeowners insurance generally covers the following:

• Your dwelling: The cost of repairing or rebuilding your home’s structure
• Personal property: The cost of repairing or replacing damaged or stolen possessions
• Additional living expenses: The cost of living elsewhere during home repairs
• Liability: Legal and medical expenses if a visitor is injured on your property

Standard coverage amounts may not offer the protection you need, but you can purchase more of each type of coverage. Your dwelling coverage should equal your home’s replacement cost value (how much it would cost to rebuild your home if it were destroyed). This differs from the home’s market value or the balance of your mortgage. To protect yourself from rising construction costs, you can purchase additional coverage to cover rebuilding expenses exceeding your home’s replacement cost value.

Personal property coverage is typically capped at 50% to 70% of your dwelling coverage; a home inventory can reveal whether you need more. Standard personal property coverage pays you the current value of your items; full replacement cost coverage pays to replace them with comparable new items. Most home insurance policies cap liability for items such as collectibles, jewelry, and computers; extra coverage can protect these valuables.

A lawsuit could put all your assets at risk, so get liability coverage at least equal to your net worth. Home insurance generally offers $100,000 of liability coverage, but you can purchase more. Also, consider umbrella insurance, which provides coverage for claims exceeding your homeowners policy limits.

2. Not Understanding Exclusions

Generally, home insurance doesn’t cover damage caused by earthquakes, floods, sinkholes, landslides, or water backup due to a failed sewer, sump pump, septic tank, or drain. You can buy standalone insurance policies for earthquakes, sinkholes, and floods. Water backup insurance may be available as an endorsement or separate policy from your insurance carrier. Your policy may have other exclusions; read it carefully and ask for explanations of anything you don’t understand.

3. Setting Your Deductible Too High or Too Low

When you file a home insurance claim, the insurer subtracts the amount of the deductible from your payout. Homeowners insurance deductibles may be a set dollar amount (such as $1,000) or a percentage of your dwelling’s insured value. There may also be separate deductibles for flood, earthquake, or other additional coverage.

You can often adjust your deductible higher or lower. A lower deductible means the insurer will cover a larger portion of your claim, but you’ll generally pay higher premiums. A higher deductible can reduce your insurance premiums, but if you have a claim, you’ll pay more out of pocket. Evaluating your budget and your savings can help you strike a balance between affordable premiums and adequate coverage.

4. Not Shopping Around

If you bought your homeowners insurance 10 years ago and haven’t switched since, you could be missing out on savings. Shopping around for a more affordable policy every year or two, or whenever your insurer bumps up your home insurance premiums, could pay off. Contact insurance agents or brokers or visit insurance company websites to get quotes online. Save time by using an online marketplace, where you can submit one application and compare quotes from multiple home insurance providers.

5. Not Checking for Discounts

Regularly checking with insurers for discounts can uncover new ways to save. You might get discounts for loyalty, being retired, or going claim-free for a certain period. Making changes that reduce your home’s risk, such as adding a security system, replacing an old roof, or installing storm shutters, can reduce your rates. You can also save by “bundling,” or purchasing multiple insurance policies from the same carrier. Finally, find out if your employer or membership groups you belong to offer homeowners insurance discounts.

6. Buying Home Insurance Based Solely on Price

Low-priced home insurance won’t seem like such a good deal if you can’t get assistance for a claim. Before buying home insurance, read customer service ratings and reviews online and see if the National Association of Insurance Commissioners has a record of customer complaints about the carrier. Evaluate the company’s financial stability by checking ratings from A.M. Best, Moody’s, and S&P.

7. Not Informing Your Insurer of Major Renovations

Remodeling your home can affect the cost of rebuilding or pose new risks, requiring more coverage. Don’t keep your insurance company in the dark about major updates, or you might find you’re underinsured in the event of a loss. Changes such as adding square footage, installing a pool, building a detached structure, or upgrading your home’s materials typically raise your insurance rates. Renovations such as upgraded heating or plumbing systems, earthquake retrofitting, or a fire-resistant roof could mean lower premiums.

8. Filing Too Many Insurance Claims

Filing an insurance claim can boost your homeowners insurance premiums. Insurers review the Comprehensive Loss Underwriting Exchange (CLUE), a database of home and auto insurance claims, when setting insurance rates. Any claims filed on your home within the past seven years—even if filed by a prior homeowner or with a different insurance company—can mean higher premiums.

Depending on your deductible and the cost of the damage, the payout from a claim may not be worth risking higher insurance rates. If you have a $1,000 deductible, a claim for $1,500 worth of damage only pays out $500. Filing a claim also eliminates any discounts for being claim-free. In general, you should only file a homeowners insurance claim after a major loss.

9. Dropping Coverage Once Your Home Is Paid Off

Mortgage lenders typically require borrowers to carry homeowners insurance to protect the lender’s investment. Once your mortgage is paid off, you could drop your home insurance—but should you? Unless you could easily afford to rebuild your home after a disaster, going without homeowners insurance could cost you much more than it saves.

The Bottom Line

Avoiding common home insurance mistakes can reduce the cost of insurance while still protecting your home. Having good credit can also help you pay less for homeowners insurance. Insurance companies in many states may review your credit-based insurance score when considering your application. Although this differs from your regular credit score, it’s calculated using many of the same factors. Checking your credit score before you start shopping for home insurance can give you an idea of your credit-based insurance score. Maintaining low credit utilization and paying bills on time can help improve your credit scores, which could mean paying less for homeowners insurance.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team is ready to assist you with the best mortgage solutions tailored to your needs.