5 Reasons to Avoid the Cheapest Homeowners Insurance

Anybody who purchases a house or condo is required to show proof of homeowners insurance before the closing can take place. It’s natural to want to save money when you’re making the biggest purchase of your life and for some buyers, it may be tempting to cut corners and buy the cheapest homeowners insurance they can find.

We always want our Addition Financial members to be wise about expenditures and to create budgets, but we don’t believe it’s a good idea to buy the cheapest homeowners insurance policy. In fact, doing so can leave you in a precarious position in the event you should need to file a claim. 

What is the Average Cost of Homeowners Insurance?

If we want to talk about why you should avoid the cheapest homeowners insurance rate, then we’ll need to begin with an understanding of what the average premium for homeowners insurance is. According to Market Watch, the average homeowners insurance premium in the United States as of November 2021 is $1,249 per year or $104.08 per month.

You should keep in mind that costs may be higher or lower where you live. Florida has an average annual premium of $1,960, making it one of the most expensive states for home insurance, while the average cost for Oregon homeowners is just $706 per year.

In addition to location, your cost will be impacted by the size of your home, the cost to rebuild it and decisions you make about your deductible and policy limits.

5 Reasons Not to Buy Cheap Homeowners Insurance

Now that you know the average cost of homeowners insurance, here are five reasons to avoid the bargain rack when it comes to buying homeowners insurance.

#1: Cheap Insurance May Not Be Real

When insurance fraud makes the news, it is almost always a situation where there is bad faith on the part of the person who is insured. However, there can also be bad faith on the part of the insurance company and you should be wary of any insurance provider who offers coverage at a price that’s too good to be true.

Some examples of things that a bad faith insurer might do include the following:

  • Denying a valid claim
  • Denying coverage for events that should be covered
  • Failing to properly investigate a claim
  • Underpaying a claim

According to the National Association of Insurance Commissioners (NAIC), consumers should be wary of any insurer whose premiums are 15% to 20% lower than their competitors, since it is rare for such a big difference to exist for the same coverage. Likewise, you should be wary if a company’s contact information is not easy to find online. Legitimate insurers don’t hide their contact information. Your best bet is to contact your state’s Department of Insurance to verify that the home insurance company is legitimate before you buy a policy.

#2: You May Not Have the Coverage You Need

Low homeowners insurance cost policies are inexpensive for a reason. While you might save money up front, the truth is that buying a cheap policy could cost you a lot more down the line if you file a claim that isn’t paid or you don’t have the coverage you need.

For example, your dwelling coverage in a homeowners policy should be sufficient to rebuild your home from the ground up. While such catastrophic losses are rare, you don’t want to be caught in a situation where your home needs to be rebuilt only to find that you don’t have the coverage limits you need to do it.

Another example of not having enough coverage would be if you bought a home with older appliances and systems and signed up for a policy that offers reimbursement for the actual cash value of these things instead of for the replacement value. An old dishwasher might only be worth $300 but could cost more than $1,000 to replace.

#3: Your Deductible Could Be Too High

The purpose of homeowners insurance is to cover you in the event that the structure of your home or your belongings are damaged, as well as to provide coverage for personal injuries and property damage incurred by visitors to your home. Anytime you file a claim, you will be responsible for paying the policy deductible.

One of the hallmarks of cheap homeowners insurance is a high deductible. While it is legitimate to save money by opting for a higher deductible, it’s also risky. If you choose a deductible that you can’t afford to pay out of pocket, then you could put yourself in a financial hole if your home incurs major damage – particularly if you find it necessary to file more than one claim in a short period of time.

You should choose a deductible that is affordable for you even if it means paying a higher premium for your insurance. For most people, spreading out the cost of homeowners insurance over a year is easier to do than to come up with the funds to pay a high deductible.

#4: You Could Get Sued

There’s no denying that we live in a litigious society and opting for the cheapest home insurance policy could leave you vulnerable to a lawsuit in the event that a guest in your home is injured (or their property is damaged) while they are visiting.

The liability portion of homeowners insurance is there to protect you from any liability as the owner of a home. If someone falls down the stairs or has their belongings ruined, you can file a claim to reimburse their medical expenses or the cost of replacing their personal property. With cheap homeowners insurance, you might not have enough coverage and in the event of a catastrophic event, you might find yourself embroiled in legal proceedings.

You should have enough liability coverage to protect you from litigation. While buying quality homeowners insurance doesn’t guarantee that you won’t be sued, it does minimize the chances because you can be sure you have the coverage you need.

#5: It Can Be Stressful

The final reason to avoid buying the cheapest homeowners insurance is that it can be stressful knowing that you have a high deductible or lower limits than what you need to protect yourself and your family.

You might save a few dollars a month, but cheap coverage doesn’t provide you with the same peace of mind as a quality policy with the necessary limits and an affordable deductible. Owning a home is a big responsibility and buying the right homeowners insurance will provide you with the comfort of knowing you’ll be covered if something catastrophic (or even just expensive) should happen to your home.

New Homeowner Monthly Expense Worksheet

Tips for Evaluating Homeowners Insurance Coverage

We’ve covered the five reasons to steer clear of the cheapest homeowners insurance. Now, let’s talk about some tips to help you evaluate quotes and policies for homeowners insurance.

  1. Compare apples to apples. We suggest getting a home insurance quote from at least three home insurance companies at the same levels of coverage options to compare costs and policies. You want to get as close to the same coverage as possible, so match up the policy limits, deductible and coverage provided when you compare.
  2. Read the fine print. This advice is probably something you expected and there’s a good reason for that. We recognize that the language of insurance policies can be dry and confusing but that’s exactly why you need to read it. Any reputable carrier will provide you with a specimen contract. Read it, highlight anything you don’t understand and go back with questions as needed. You may also want to ask a lawyer to read the contract.
  3. Don’t accept the carrier’s recommendations for coverage without research. Insurance companies will recommend policy limits based on your home and its value, but remember that the replacement value may be higher than the appraised value of your home. It’s always a good idea to compare policies and be realistic about the cost of rebuilding your home.
  4. Pay attention to the deductible. As we mentioned earlier, choosing a high deductible can save you money in the short term but may be risky in the long term. Make sure that you can afford to pay the deductible out of pocket, and keep in mind that it’s possible you might need to pay more than one deductible in a year if you file more than one claim.
  5. Check on the insurance company. We already talked about the importance of checking with your state’s Department of Insurance to make sure a carrier is legitimate. We suggest checking the carrier’s rating with companies such as A.M. Best, J.D. Power and Moody’s. You can also check the NAIC website.
  6. Check your personal property coverage. Most insurers default to providing coverage at the actual cash value (or replacement cost) of your personal property. For an additional 10% or so, you can upgrade that coverage to the reimbursement value of your belongings, which in most cases is a worthwhile investment.

Buying cheap home insurance might seem like a smart way to save money but it can cost you far more than you save in the long term. The five reasons to avoid cheap insurance that we’ve covered here illustrate that point. Your best bet is to get quotes from multiple companies and compare them to get quality insurance at a price you can afford.

Are you ready to become a homeowner? Addition Financial is here to help you achieve that dream. Click here to read about our competitive mortgage options!

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