Homeowner's Insurance: Cut Your Premium in Half

Fire, flood, earthquakes, hurricanes, wind, falling trees and burst water pipes are just some of the hard-to-predict events that could damage or destroy your home and its contents. Or someone could take a spill down your stairs and decide to sue you. And, of course, don’t forget about thieves, who could ransack your abode and steal your valuables.

No matter where you live, having the right kind of home insurance — and enough of it — is both costly and vital. Yet with a little effort, you can cut your premium in half. But first …

Why You Might Want to Spend More on Homeowners Insurance

Most policies cover homes and personal property (the items inside your home) for actual cash value (ACV), which is based on what they’d be worth today, considering wear and tear. If the roof is 12 years old, it will be valued at that amount — not what it will cost you get a new roof.

To insure the full cost of replacing your home and possessions, you need to buy a more expensive replacement cost policy. While replacement cost policies will run you in the range of 10% to 20% more than ACV policies, experts generally recommend them because they’re more likely to get you back to where you were before your home and possessions were destroyed. There’s a more extensive (and expensive) version of this coverage called guaranteed replacement cost, which will cover the cost to rebuild your home as it was before it was damaged, even if that costs more than the value of the property (though there are limits on this).

If you have a cash value policy and disaster strikes, the check you get from the insurer will be for a lot less than you’ll need to rebuild. Think about that roof. Every house in the neighborhood needs a new one. There’s a high demand for roofers, the cost of labor and materials has gone up, and if you’ve got a cash value policy, you’ll only get reimbursed for the value of your 12 year old roof. However, it will probably cost you thousands more to get a new one.

With cash value coverage, you’ll take a hit on your personal property losses as well, since you’ll only be reimbursed for the depreciated value of each piece of personal property.

Is It Really Guaranteed Replacement Cost?

You might think that if you spend the extra money for guaranteed replacement cost insurance, the policy will actually pay the entire replacement cost. Not necessarily. Some companies will pay the actual replacement cost; others limit their payment to 125% or 150% of the face value. Be sure you know exactly how your policy defines this coverage.

A ballpark figure on your home’s value is a useful starting place, but that won’t tell you how much it’s going to cost to rebuild. You’d be wise to get a professional estimate of the replacement cost of your home. Ask insurers, get a friendly local builder to give an estimate based on current local conditions and crunch the numbers with an online replacement cost calculator. You can then use those figures to make sure you insure your home for 100% of its replacement cost.

Also check if your policy has automatic inflation protection, which increases its face value each year based upon construction costs in your area. It’s another way to make sure your home remains sufficiently insured.

Although they’re not identical, home insurance policies are standardized to some extent. Still, they can be complicated. Take the time to understand what the various policies will cover and what they won’t.

What Determines Your Homeowners Insurance Premium?

Homeowners insurance premiums are determined by a variety of things, including what it would cost to rebuild your home, where you live, what your home is made of and your history of making insurance claims. Your credit and even your pets can also have an effect on how much you pay.

How Can You Lower Your Homeowners Insurance Premium?

It’s well worth investing the time to lower your home insurance costs. With a little effort, you can cut your premium by as much as 50%, not just this year, but for years to come. Of course, homeowners insurance rates simply costs more in certain parts of the country. If you live along a coastline, for example, your costs are going to be high no matter what you do. As such, it’s all the more important for you to follow these steps to help you save.

Make sure you look your best on paper. Insurers often use credit-based insurance scores to determine how likely you are to file a claim. (The more likely you are to file a claim, the higher your premium will be.) So check your free annual credit reports for accuracy and get errors fixed. (You can learn how to dispute credit report errors.) You can also keep tabs on your credit and get tips for how to improve it by reviewing your free credit report summary on Credit.com, which includes two free credit scores. Improving your credit could help you save on insurance.
Don’t be clueless. Before agreeing to give you a policy, insurance companies check to see if you have a history of filing claims – even small ones, like for theft or fire.

Tip: Consider covering some claims on your own – or even withdrawing a claim you’ve made – to avoid falling into the bad risk zone. Ask your insurance agent for some guidance on this.

Shop around. Policies are not identical. Costs, coverage, and conditions can vary, as can the financial stability of the insurer. Compare coverage and prices for your home and belongings. Start with a couple of sites that will get you multiple quotes, for example, Insure and Insweb. But don’t stop there. Make sure you get quotes from a range of insurers, including:

Independent agents: They sell the policies of several different insurance companies. While they can help you get the best deal among the insurers they handle, their commission structure is the highest. Still, there are often benefits to working locally with someone who you know and can contact quickly in an emergency. But even if all you want to do is look at the pros and cons — say, of registering your kid’s car at school or at home — a good independent agent should help you figure out what makes sense. Your best bet is going to be to ask friends and relatives for recommendations of local independents they’ve worked with and liked.
Captive sellers: They work for a single insurance company such as Allstate and State Farm — companies that have their own sales forces. Their commissions are typically lower than those of the independent agents, so you may pay a bit less for your policy.
Direct writers: They can give you a quote on the phone or online and generally offer the lowest-priced policies, because they sidestep commission fees. Direct writers tend to be the choosiest. If you have anything that hints at a real risk (a wood stove, for example), it’s quite possible they’ll say, “No thanks.”

Consider going for the highest deductible you can afford. Compare quotes for the replacement value of your home and its contents with different deductibles, say, $500 and $1,000. They’ll shave 10% to 25% off your premium annually. If you can go for a still higher amount of $2,500 or $5,000, your annual savings will be 30% or higher.
Put smoke and carbon monoxide detectors on every floor, and make sure the agent knows about them. A smoke detector may not only save a life, it can pay for itself in a year or two with the 2% to 5% that it can save you on premiums.
Get fire extinguishers, deadbolt locks for all the doors, and consider other safety devices. Ask if there are other low-cost safety features that might save even more money on the policy. And depending on the location and condition of your home, you may want to invest in costlier fire and theft protection. Fire sprinklers, anyone? They can save you money, though a home security system that’s connected to the local police and fire departments can save you more.
Ask the agent or company that writes your car insurance for a “multiple policy” discount. Find out if you’re eligible for a price reduction if you let them write both your home and car insurance. Also ask other insurers what their multiple-policy discounts are.
Be loyal (if it’ll save you money). Many insurers reward good customers to keep them. Does yours offer discounts to long-time customers? Ask.
Get money off for “good behavior.” Have you been claim-free for a few years? Some companies offer discounts for that.
Are you retired? Some companies offer retirees discounts of 10% to 20%.
Be sure to ask about all possible other discounts. Here’s a handy checklist:

Was your home built with fire-resistant materials?
Is yours a non-smoking household?
Got a newish house, built with state-of-the-art construction materials? If so, it should cost less to insure.
Recently renovated? You might be eligible for a price break – but if you made a significant improvement, you may need additional coverage.
If you normally keep some of your gems in a safe deposit box, and if they’re worth more than the standard policy limits, ask if you would be eligible for a discount.
Does your membership in an organization – whether it’s AARP, AAA, a labor union or an alumni group – make you eligible for a discount?
Insuring a second home? See if you can get a multiple policy discount. You might need to accept less coverage for the contents of your second home or install an alarm system.

Get the Most Out of Your Coverage by Planning Ahead

You’ll have the least grief with a claim if you keep receipts, obtain written appraisals for anything of substantial value and create a detailed inventory of your possessions. Now. Before the storm hits.

A detailed list of your belongings can also help you figure out how much coverage you really need. Then, down the road, if you file a homeowners claim, you’ll have the documentation in hand.

Major categories mentioned often by insurers include jewelry, cash, art, furniture, appliances, electrical equipment, heirlooms, rugs and clothing. Keep an up-to-date copy of your list in a safe place, such as a safe deposit box, at your office or with your attorney.

You want a formal, detailed inventory with careful descriptions of your pricey belongings, brand names, receipts, dates of purchase, professional appraisals and photo or video records. Don’t forget to update your inventory periodically to cover new purchases.

This article has been updated. It was originally published August 1, 2010.