Because homeowners insurance is so important for protecting your home, it is wise to learn how to keep the cost of this insurance as low as possible. Three basic factors determine how much a policy costs: location of structure, type of structure, and level of coverage. There are ten major areas you should consider when looking to reduce your homeowner’s insurance costs.

1. Know your needs: Know what you want out of your homeowner’s insurance. Remember to insure against the high risk, high severity items and self-insure against the low severity low risk events.

It may be wise to buy guaranteed full-replacement cost coverage for your home in case the home is damaged beyond repair. If you have this type of coverage, your home will be replaced without cost to you, regardless of what you paid for the home. Also, determine whether other structures or landscaping on your property has adequate coverage. Purchase additional insurance if part of your home is used as an office. You can also purchase extra coverage for unique situations if you have specific concerns that are not included in a policy; for example, if you live on a flood plain, you may want to add flood insurance to your policy. Finally, consider extra coverage, or floater policies, for valuables such as paintings, jewelry, or collections.

2. Don’t underinsure: The 80 percent rule states that a dwelling must be insured within 80 percent of its replacement cost. If you do not carry adequate insurance on your home, co-insurance requires you to pay for a portion of your home’s loss. If your home is not insured for at least 80 percent of its replacement cost, your settlement will be the greater of two amounts: either the settlement will be the cash value of the damaged or lost portion of the home or the settlement will be the amount of your insurance coverage divided by 80 percent of the replacement cost multiplied by the value of the loss. For example, if your home was insured for $300,000 but its replacement cost was $400,000, you are underinsured. You should have had a minimum insurance amount of $320,000 or 80 percent of $400,000. If you had a loss of $250,000, the company would pay $300,000 (your insured amount) divided by $320,000 (80 percent of the replacement value), times $250,000 or $234,375 (not including deductibles). You would be personally responsible for $15,625.

3. Select a financially sound insurance company with comparatively low costs and stick with them: Shop around for homeowners insurance—knowledge is your most important asset. Remember, the more types of insurance you have with a single insurance company, the lower your costs on specific types of insurance will be (multiple-policy discounts can be substantial). Once you have decided on an insurer, check with www.Ambest.com to review your insurer’s ratings and financial health. Pick a good insurer that is not likely to go out of business. Get as many discounts as you can: Different companies have different discounts for different areas. Talk with your agent and get as many discounts as you possibly can.

4. Get a CLUE (Comprehensive Loss Underwriting Exchange) report for both your home and your automobiles: A CLUE report is similar to a credit report. It gives a list of all payments made by the insurance company on your behalf. Review this report—this is what potential insurance companies will see when they are considering you as a client. You can get one copy a year from www.Choicetrust.com. Be careful that inquiries are not listed as actual payments.

5. Reduce the insurance company’s risk: There are a number of ways to do this. First, you may want to consider paying your premiums annually instead of monthly; paying your premiums annually lowers administrative costs for your insurer and usually lowers your costs as well. In addition, some companies will give you a 5 to 10 percent reduction in costs if you allow them to deduct your insurance costs monthly through electronic funds transfers (EFTs). Second, increase your deductible. Deductibles are the amount of money you must pay toward a loss before your insurance company starts to pay for the loss. The higher your deductible, the lower your premium costs; by raising your deductible you are self-insuring a greater part of your risk.

Third, make your home more disaster resistant and safer. Companies may give discounts if you make your home more disaster resistant, for example, by adding storm shutters or buying strong roofing materials. Contact your insurance company to find out about possible discounts. Insurance companies may also give a 5 to10 percent discount if you add fire extinguishers and burglar alarms to your home that are connected to police monitoring. Because of the high cost of home security systems, contact your insurance agent to see what the agent recommends and how much savings would be before you purchase these systems.

6. Know your coverage restrictions: You should read and understand your policy completely. Remember, the amount paid by the insurance company will never exceed the limit listed on your policy. An important restriction you should be aware of stipulates that in order to receive full insurance benefits, you must rebuild in the same location. If you don’t rebuild in the same location, your insurance company will give you only the cash value of the home and not the replacement value.

7. Make your coverage work: Create an inventory of everything you insure, preferably on videotape, to establish proof of ownership. Keep the inventory in a safe place away from the house and update it yearly. Videotape the exterior of your home to document the value of landscaping and the condition of the house and update this record yearly as well. Make a list of the value of your assets. These records will be invaluable if your home or assets are damaged.  

8. Keep your credit score high: Having a solid credit history can reduce your insurance costs. Monitor your credit report annually, check your credit score every two years, and keep your credit score high.