How Do You Buy Homeowners Insurance?

If you’re purchasing a home or looking for better (or cheaper) coverage, it pays to learn how home insurance works. We’ll talk about what’s covered or can be, how your policy limits are calculated, how “actual cash value” can reduce reimbursements, how deductibles fit in, when you need extra coverage, and how to compare quotes and insurers.

1. Understand what homeowners insurance covers

Home insurance covers a wide range of losses, from destroyed roofs to burst pipes to stolen jewelry or tech. The table below breaks down standard coverage types (included in most policies), along with optional add-ons (also known as endorsements), and specialty coverages that may require a separate policy and insurer.

2. Determine how much homeowners insurance coverage you need

Lenders typically require that you maintain at least enough coverage to rebuild your home in case of a total loss. If your current coverage level is based on what the lender required 10 or even five years ago, it could be too low. It might also be too low if you’ve recently renovated, have acquired valuable art, electronics, or other assets, or if you’ve introduced a new liability risk (like a pool or dog).

Talk to an insurance agent (or several) to get a better sense of your coverage needs — which they can calculate based on current local building costs and any changes to your home or situation. Though coverage for your main dwelling may be the most important number, other coverages often hinge on that top-dollar amount. 

Dwelling coverage

Ideally, you should insure your dwelling for 100% of the total cost to rebuild your home using today’s labor and materials prices, and mortgage lenders typically require it. As of 2026, Fannie Mae guidelines no longer include exceptions based on a formula that calculated replacement cost vs. unpaid mortgage principal — which may be just as well, since anything less than 100% coverage puts you at risk of being underinsured for a total loss claim.

Other structures coverage

Most standard homeowners insurance policies set this at 10% of your dwelling coverage. If you own a lot of land with multiple structures, you may want to increase this coverage limit.

Personal property coverage

Insurers typically set coverage limits at a percentage of your dwelling coverage, such as 50% to 70%. Take a full inventory of all your possessions and estimate the overall cost to replace them, in the event of a total loss — ensure you have at least that much coverage.

Loss of use

Insurers generally set coverage limits at 10% to 30% of your dwelling coverage. If you live in an area with a high cost of living, it may be worth considering a higher coverage limit.

Personal liability insurance

A traditional home insurance policy usually starts at $100,000 of personal liability insurance, but if your home presents unique risks (e.g., swimming pool, trampoline, multiple dogs) or you have a high net worth, consider increasing this amount and/or extending liability coverage with an umbrella insurance policy.  

3. Choose replacement cost or actual cost value coverage

Homeowners insurance payouts for property damage are either calculated based on replacement cost value (RCV) or actual cash value (ACV). RCV is typically standard and required for your main dwelling’s coverage (except for the roof, which we’ll get into below).

• Replacement cost value: Your insurer pays what it would actually cost to repair or replace your damaged property with the same-quality materials, brand-new.
• Actual cash value: Your insurer pays out the depreciated value of your damaged property.

RCV vs. ACV for dwelling and other structures

Standard home insurance policies usually protect your dwelling and other structures with RCV coverage. That means, if your home is damaged, insurance will typically cover the cost to repair or rebuild it using the same or similar-quality materials, in today’s dollars.

ACV roof coverage

One key exception now is roof coverage; some policies with RCV for dwelling coverage specify that damage to roofs is paid out on an ACV basis instead. And some policies that begin with RCV roof coverage convert to ACV coverage once the roof is 15 years old (or earlier in some hazard-prone areas). Importantly, you may not be notified of this change to your policy, making it essential to stay on top of coverages and re-evaluate annually.

“The practical difference can be enormous,” says Anthony Lopez, CEO and founder of Your Insurance Attorney. “Imagine that a 15-year-old roof is destroyed by a covered windstorm. A new roof may cost $30,000, but an ACV policy may assign substantial depreciation because of the roof’s age and condition. After depreciation and the deductible, the insurance payment may cover only a fraction of the replacement cost.”

He adds, “That creates the principal risk of ACV coverage: The homeowner may have a covered claim but still lack enough money to complete the repairs. This can leave the homeowner financing the difference, delaying repairs, or living with an incompletely restored property.”

RCV vs. ACV for personal property

While RCV is the norm for the physical structures of your property, home insurance might cover your personal possessions on an actual cash value basis. That means you would only be paid out the depreciated value of damaged items.

Your old bike, your baseball card collection, an aging couch, a flat-screen TV from your college days, you name it — all those older items are worth a lot less used than they are new, and that depreciated value will be reflected in your insurance payout.

If you want the ability to replace belongings without paying out of pocket, make sure your policy includes replacement cost value coverage for personal property.

4. Choose your homeowners insurance deductible

A deductible is what you pay for a covered claim before insurance kicks in, and a policy with a lower deductible generally has a higher premium. The deductible may be limited to a maximum of 5% of your dwelling coverage, or less, depending on your lender. And some coverages can have a separate deductible for certain types of damage, such as wind and hail damage, hurricane damage, or damage from named storms, or for certain endorsements.

Depending on the type of peril, homeowners insurance policies can feature either flat dollar-amount deductibles or percentage-based deductibles. Standard claims like fire damage or burst pipes typically carry a flat deductible — such as $500, $1,000, or $2,500 — that you pay out of pocket per event. However, specific severe weather risks — like wind, hail, or hurricanes — often have percentage deductibles. These are calculated as a percentage (typically 1% to 5%) of your dwelling coverage limit. 

Review any policy you’re considering purchasing carefully. Make sure you understand how much your deductible is and how it works. Consider ensuring you have enough in a savings account to pay for a deductible should the worst happen. 

5. Decide whether you need additional coverage

A standard homeowners insurance policy provides a wide range of coverages, but for many homeowners, there are notable exclusions. You can cover these exclusions by adding endorsements to your policy or by purchasing a separate policy.

Some additional endorsements to consider:

• Sewer or water backup: Most water damage isn’t covered by a standard homeowners insurance, including flood damage and water damage resulting from a sewer or drain backup.
• Scheduled valuables: If you own high-value items, you might need additional coverage to ensure they’re fully insured.
• Liability: If you’re a high-net-worth individual, you may want to increase your liability insurance limits or purchase umbrella insurance, which provides additional liability coverage for high-value claims.
• Ordinance or law: Ideal for older homes, this endorsement helps cover required upgrades to make your home compliant with local zoning or building codes during repairs or rebuilding after a covered loss. It's typically limited to a percentage of your dwelling coverage, such as 10% or 25%. “Most homes built before the 1980s could use this one,” advises William Lemmon, principal broker at Broadway Insurance Services.
• Extended or guaranteed replacement cost: Sometimes, rebuilding costs can go higher than expected. With extended replacement cost, your policy can pay out beyond the coverage limit by a certain percentage. With guaranteed replacement cost, the policy will pay out the full rebuild cost, with no cap.

Separate policies include:

• Flood insurance: if you live in a Special Flood Hazard Area as defined by FEMA, your mortgage lender will require you to obtain a separate flood insurance policy. Flood insurance is mandatory for homes with government-backed mortgages located in high-risk areas. You may be able to buy government-backed coverage through the National Flood Insurance Program (NFIP), but only if you live in an eligible area. Private flood insurance may be an option if you don't live in a community that participates in NFIP.
• Earthquake insurance: Similarly, if you live in an area known for seismic activity, you may need to purchase a separate policy or endorsement for earthquakes.

6. Get and compare homeowners insurance quotes

Once you understand how homeowners insurance works, the coverage limits you need, and additional coverages to consider, get quotes from multiple insurers.

Use an online insurance marketplace or an independent insurance agent — either can gather quotes from multiple insurers on your behalf. Make sure you’re doing a true apples-to-apples comparison. That means:

• Same coverage limits
• Same deductibles
• Same endorsements
• RCV and/or ACV on the same features (like the roof and personal belongings)
• Same exclusions

Also consider customer reviews and ratings from the Better Business Bureau, along with complaints filed with the National Association of Insurance Commissioners (NAIC) and the insurer’s financial strength with a ratings agency like AM Best or Fitch Ratings.

8. Purchase and finalize your policy

Once you’ve decided on the best home insurance company for your needs, it’s time to purchase. Here’s everything you need to do:

• Choose an effective date: If you’re closing on a home, make sure your coverage is effective as soon as you get the keys. If you already own a home and you’re switching insurers, don’t cancel your current coverage until your new coverage is in place.
• Review the policy documents: Always read the policy in full, especially the declarations page, to make sure it’s what you expected. Discuss any concerns with your agent before you sign.
• Send proof of insurance: If you have a mortgage or are getting a mortgage, your lender likely requires proof of coverage. Your insurer may be able send this directly to your lender, but you may need to arrange this on your own.
• Set up payment: In many cases, you’ll pay your home insurance premium via your mortgage servicer; the money goes into an escrow account, and the insurer is paid on your behalf when the bill comes due. If you pay for the policy outside of escrow, set funds aside to make the payment when the policy renews, or set up automatic payments. You might even qualify for a discount if you pay in full.

What factors affect homeowners insurance rates?

Several factors influence homeowners insurance rates. Some are within your control, but many are due to macroeconomic factors and weather events far outside of your control. Here are some of those core factors:

• Coverages and deductibles: The coverage types, coverage limits, and deductibles you choose have a direct impact on how much you pay. The more comprehensive the coverage, the higher the premium.
• Discounts: You can qualify for various home insurance discounts to save money on coverage. Discounts include bundling, switching to paperless communications and having a history of on-time premium payments. 
• Increased weather and crime risks: Where you live has a huge impact on how much your home insurance costs. If you live in an area with a higher crime rate or greater risk of storm damage from weather events such as hurricanes, tornadoes, wildfires, or hail, you’ll typically pay more.
• Material costs and labor shortages: As construction materials skyrocket and construction labor shortages continue, the cost to rebuild a home will continue to increase. And that, in turn, results in higher home insurance premiums.

How to lower the cost of homeowners insurance

Homeowners insurance costs are on the rise. According to the National Association of Insurance Commissioners (NAIC), premiums across the country increased 2.4% to 5.3% per year between 2018 and 2024. The rate of growth has likely risen since then due to factors such as inflation and tariffs driving up the cost of building materials and more frequent severe weather events.

Here are some ways to keep homeowners insurance costs down:

• Lower your coverage limits: The more coverage you have, the higher your premium will be. To save money, you can reduce your coverage limits — but make sure you still meet your lender’s requirements. In the event of an expensive claim, you may not have enough coverage from insurance to pay for the full repair or replacement costs.
• Raise your deductible: Raising your deductible will lower your home insurance premium. However, when you file a claim, you’ll have to pay more out of pocket before your insurer pays.
• Ask about discounts: You might be eligible for several homeowners insurance discounts that keep costs down, including discounts for paying in full and setting up autopay, bundling with your car insurance, or installing certain home safety features.
• Review your coverage annually: At least once a year, typically before your policy renews, take the opportunity to review your coverage. If your needs have changed, you may be able to remove certain coverages or otherwise update your policy to lower the premium. You can also use this opportunity to shop around for a similar policy with a different insurer, if you can qualify for a lower rate. 
• Opt for actual cash value coverage on personal property: Keeping ACV coverage on non-essential belongings can save money on your policy. Just remember that if you file a claim, an ACV payout will only reflect what your used items were worth, leaving you to cover any difference to replace them.