How to Choose Home Insurance: Coverage Types, Costs, and Mistakes to Avoid

Homeowners insurance is one of those expenses people pay for years without ever reading the policy — until something goes wrong. Then they discover their “full coverage” doesn’t cover the thing that just happened. I’ve seen homeowners gutted by this realization, sometimes to the tune of $30,000 or more out of pocket. So let’s talk about what home insurance actually does, what it doesn’t, and how to buy it without getting burned.

What Homeowners Insurance Actually Covers

A standard homeowners policy (HO-3, the most common type in the US) covers four main areas:

• Dwelling coverage — repairs or rebuilding your home’s structure after covered damage (fire, windstorm, hail, lightning, vandalism)
• Personal property — your stuff inside the home, typically covered at 50–70% of your dwelling coverage amount
• Liability protection — if someone gets injured on your property and sues you, usually $100,000–$300,000
• Additional living expenses (ALE) — hotel and food costs if your home becomes uninhabitable after a covered event

What it doesn’t cover is where people get tripped up. Floods, earthquakes, sewer backups, termite damage, normal wear and tear, and mold that developed over time — none of that is included in a standard HO-3. If you live in a flood zone or earthquake-prone area, you need separate policies, period. FEMA flood insurance averages around $700–$800/year, while earthquake coverage runs $800–$5,000+ depending on your location and home value.

Before you close on a home, make sure you understand exactly what your policy excludes. Our insurance guide breaks down the fine print most buyers skip over.

HO-3 vs. HO-5: Which Policy Type Do You Need?

Most homeowners have an HO-3, which covers your dwelling on an “open perils” basis (everything is covered unless specifically excluded) but covers personal property on a “named perils” basis (only listed events are covered). That distinction matters more than you’d think.

Say your kid spills a gallon of paint on your $4,000 hardwood floor. Under an HO-3, that’s probably not covered for personal property claims because “accidental spills” isn’t a named peril. Under an HO-5, which covers everything on an open perils basis, it likely is.

An HO-5 typically costs 5–15% more than an HO-3. For a policy with a $1,800 annual premium, that’s an extra $90–$270 per year. If you own high-value belongings — art, electronics, musical instruments — the upgrade often pays for itself after a single claim.

How Premiums Are Calculated

Insurance companies look at a surprisingly long list of factors:

• Location — proximity to fire stations, crime rates, weather risk, and state regulations
• Home age and condition — older homes with outdated electrical or plumbing cost more to insure
• Construction type — wood-frame homes cost more than brick or concrete
• Coverage amount and deductible — higher deductible = lower premium
• Claims history — yours personally and the property’s (yes, the house has its own claims record)
• Credit score — used in most states as a rating factor
• Roof age — a roof older than 15 years can spike your premium by 20% or more

This is one reason a home inspection matters so much before buying. If the inspector flags an aging roof or outdated electrical panel, you’re not just looking at repair costs — you’re looking at higher insurance premiums for as long as you own the place.

Average Costs by State

The national average for homeowners insurance sits around $2,300/year for $300,000 in dwelling coverage, but the spread across states is enormous:

• Oklahoma — ~$4,800/year (tornado and hail risk)
• Nebraska — ~$4,500/year
• Texas — ~$4,300/year (hurricanes, hail, and everything else)
• Florida — ~$4,200/year (hurricane risk, insurer pullouts driving prices up)
• Vermont — ~$1,100/year
• Hawaii — ~$1,000/year

If you’re buying in a high-premium state, insurance costs should be part of your budget math from day one — right alongside mortgage payments and closing costs.

Deductible Strategies That Actually Save Money

Most policies default to a $1,000 deductible. Bumping that to $2,500 can cut your premium by 10–15%. Going to $5,000 might save you 20–25%.

Here’s my take: if you have a solid emergency fund ($10,000+), a higher deductible almost always makes financial sense. You’re essentially self-insuring small claims, which keeps your premium low and — critically — keeps small claims off your record. Two claims in five years can get you non-renewed by your insurer, so filing a $1,500 claim on a $1,000 deductible (netting you $500) is often a bad trade.

One exception: if you’re in a hurricane or hail state, watch out for percentage-based deductibles on wind damage. A 2% hurricane deductible on a $400,000 home means you’re paying the first $8,000 out of pocket. That surprises a lot of people after a storm.

Replacement Cost vs. Actual Cash Value

This is the single biggest policy detail most people ignore. Replacement cost pays to replace or repair damaged property at current prices. Actual cash value (ACV) pays replacement cost minus depreciation.

Example: your 8-year-old roof gets destroyed by hail. Replacement cost: $15,000. ACV payout after depreciation: maybe $6,000. That $9,000 gap comes out of your pocket.

Always, always get replacement cost coverage on both your dwelling and personal property. The premium difference is modest — usually 10–20% more — but the payout difference during a claim is massive.

Bundling and Discount Stacking

Most insurers offer 5–25% discounts for bundling home and auto. Other discounts that stack up:

• Security systems — 5–15% discount
• New roof — 5–35% discount (varies wildly by insurer and state)
• Claims-free history — 10–20% after 3–5 years
• Loyalty — 5–10% for staying with one insurer (though shopping around often beats loyalty discounts)
• Smart home devices — water leak sensors, smoke detectors, some insurers give 5–10%

A first-time buyer working through our home buying guide should be getting insurance quotes early in the process — not scrambling for coverage three days before closing.

When to Shop Around

You should re-quote your insurance every 2–3 years, minimum. And definitely shop around when:

• Your renewal premium jumps more than 10% with no claims filed
• You’ve completed major renovations (your coverage needs may have changed)
• Your credit score has improved significantly
• You’ve been with the same insurer 5+ years without comparing

Get at least three quotes. Use one independent agent (they represent multiple carriers) and check one or two direct writers like USAA, State Farm, or Amica. Comparing apples to apples means matching coverage limits, deductibles, and endorsements — not just premium price.

Common Mistakes That Cost Homeowners Thousands

1. Underinsuring Your Home

Your policy should cover the rebuilding cost of your home, not its market value or purchase price. These are different numbers. A home that sells for $350,000 might cost $420,000 to rebuild from scratch due to labor and material costs. If you’re insured at the purchase price, you’re short $70,000 in a total loss.

2. Not Updating After Renovations

Finished a $60,000 kitchen remodel? If you didn’t update your policy, that new kitchen is underinsured. Every major renovation — our renovation guide covers the most common ones — should trigger a call to your insurance agent. Rebuilding costs went up, and your coverage needs to match.

3. Skipping Flood Insurance

About 25% of flood claims come from properties outside designated flood zones. If you’re within a few miles of any body of water, a creek, or in a low-lying area, get a flood quote. Policies through the NFIP start around $400–$500/year for moderate-risk areas.

4. Ignoring the Claims Process

Before you sign up, ask: what’s the claims process? Is there 24/7 reporting? Do they use in-house adjusters or third-party? What’s the average time to settlement? J.D. Power surveys show customer satisfaction varies wildly between carriers — Amica and USAA consistently rank at the top, while some budget insurers score near the bottom.

5. Choosing Based on Price Alone

The cheapest policy is cheap for a reason: lower coverage limits, ACV instead of replacement cost, higher deductibles buried in the fine print, or an insurer with a reputation for fighting claims. Read the policy declarations page. All of it.

Red Flags in a Policy

Watch for these warning signs when reviewing quotes:

• ACV coverage on the dwelling (should be replacement cost)
• Cosmetic damage exclusions on roofing (common in hail-prone states)
• Water damage sublimits under $10,000
• No ordinance or law coverage (pays for code upgrades during rebuilding)
• Unusually low personal property limits

If you’re working with professionals from our service directory, ask your real estate agent or financial advisor to review your policy before you commit. A second pair of eyes catches what you miss.

Final Thoughts

Home insurance isn’t exciting, but getting it wrong is expensive. Spend two hours reading your policy, comparing quotes, and understanding your deductibles. That small time investment protects what is probably your single largest asset. And if you’re just starting the buying process, loop insurance into your planning early — it affects your monthly costs just as much as your mortgage rate and property taxes.