It’s easy to get caught up in the home buying process and forget insurance shopping for your home. You may think of homeowner’s insurance as an additional expense. But it can protect you from financial losses if something happens to your property.
Your home is one of your most expensive investments, if not your biggest investment. Like any valuable asset, your home needs protection. That’s where homeowner’s insurance comes in.
What Is Homeowner’s Insurance?
Homeowner’s insurance (or home insurance) is a kind of property insurance that pays for replacement or repair costs. This insurance kicks in when your home gets damaged due to unforeseen events like fire and other disasters specified in your policy. Some types of insurance extend the coverage to the assets inside your home.
What’s The Difference Between Homeowner’s Insurance, Mortgage Insurance, And Home Warranty?
Expect to see different types of insurance and warranty products during the home buying process.
Mortgage lenders require buyers who can’t afford to make the required 20% down payment to pay mortgage insurance or private mortgage insurance. This insurance protects the lender in case the buyers fail to keep up with their mortgage payments. Homeowner’s insurance, on the other hand, protects the home itself. If the property sustains damage, the homeowner will benefit not just the lender.
Another product you may encounter in the process is the home warranty. Unlike the homeowner’s insurance, a home warranty is NOT insurance. The warranty covers damages due to normal wear and tear which is not covered by homeowner’s insurance.
A home warranty is a contract between the homeowner and a home warranty company. This contract provides for discounted repairs for the home’s major components. It usually expires within 12 months. A home warranty covers furnace, plumbing, air conditioning, and electrical system repairs. It may also cover appliances and swimming pools.
How Much Does A Homeowners Insurance Cost?
On average, home insurance costs $952 per year. However, in some states, homeowner’s insurance may cost up to $2,000 per year. It’s important to note that these averages may include discounts not applicable to first-time home buyers.
Expect to pay higher premiums if you live in hurricane or tornado-prone states like Florida or Texas. Insurance premiums in these states are about 80 to 90% higher.
Use this homeowner’s insurance cost calculator to know the rates applicable to your state.
Why Should You Get A Homeowner’s Insurance?
Your main reason for getting homeowner’s insurance may be your lender but it’s in your best interest to have one too! Here are some reasons why you need home insurance.
1. The obvious — you get protection from accidents.
For many, buying a house is their biggest investment. This means that there may not be enough cash left for emergency repairs after the home purchase.
Insuring your house means you’ll have the money you need to take care of the house in case something unfortunate happens. In worst-case scenarios (e.g. devastating fire or storm), your insurance policy makes sure you’ll have something extra for home maintenance or relocating to a new home.
2. It helps you deal with potential lawsuits.
Most types of homeowner’s insurance include personal liability coverage. Personal liability coverage helps you pay for damager and deal with lawsuits when someone gets hurt in your property. Take note that this insurance only covers bodily injuries to others, not to yourself.
Personal liability insurance helps with:
- Hiring a lawyer to defend you during a lawsuit
- Settling damage caused by your pets to other people and their property
- Paying for damages caused by a member of your household
- Medical payments to others
- Property damage payments
Usually, the personal liability coverage for homeowner’s insurance is $100,000. Since insurance coverages are customizable, you can increase the coverage limit as you wish. Depending on your policy, personal liability may apply only to damage from unintentional acts.
3. Insurance protects your belongings.
When disaster strikes, home insurance protects your home and, sometimes, extend to cover losses from personal property inside your home. Depending on your policy, you may file a claim for damage, theft, or loss of your valuables.
Types Of Homeowner’s Insurance
You can choose your homeowner’s insurance based on where you live and the coverage you want. Here are some of the most common types of home insurance:
- HO-1 or the Basic Homeowners Policy. This protects the owners from 10 basic perils including smoke or fire, aircraft damage, lightning, volcanic eruptions, and explosions.
- HO-2 or the Broad Form Policy. This policy covers 10 basic perils from HO-1, plus a few others. It covers personal liability, personal belongings, and your home structure.
- HO-3 or Special Form Policy. HO-3 covers everything in HO-2, plus a few more. This policy covers the damage you cause to another property or an injury you inflict on another person.
- HO-4 or Tenant’s Form. Also known as renter’s insurance, this policy doesn’t protect the structure at all. This insurance only covers damage to personal liability and personal belongings of a tenant.
- HO-5 or Comprehensive Form. As its name implies, this policy is ‘comprehensive’ because of its expanded coverage. It basically covers all perils except those in the list of exclusions in your policy.
- HO-6 or Condominium Unit Form. This policy is specifically for condo owners or occupants.
- HO-7 or Mobile Home Form. The coverage of this insurance is similar to Special Form Policy (HO-3) but for mobile homes.
- HO-8 or Older Home Form. This policy applies to older homes and covers the same perils as the Basic Homeowners Policy (HO-1). Older homes cost more to rebuild, hence the separate policy.
- Dwelling Fire Form. This insurance is a popular option for vacation homes. It protects your home from specific perils but excludes personal liability and personal property.
Coverage: What Will Home Insurance Cover?
Home insurance coverage depends on the policy you get. However, basic homeowners insurance typically covers:
- Home exterior damage
- Interior home damage
- Damage to personal belongings (or loss of personal belongings)
- Injury while on the property
Aside from these four perils, homeowners insurance usually cover the following:
- Fire damage
- Water damage (but not flood damage)
- Wind or hail damage
- Damage from falling objects outside your home, damage from outside electrical issues
How Does Home Insurance Work?
When your property sustains damage from covered disasters, you can file a claim with your insurance company. Your insurance will cover the amount in excess of your deductible up to the liability limit.
A deductible is an out-of-pocket amount that you need to pay before the insurance kicks in.
For example, you made a claim for roof replacement due to a recent windstorm. The total cost of the repairs and restoration determined by the claims adjuster (or the claims investigator) is $8,000.
Let’s say your deductible is $3,000. This means that you will cover the first $3,000 and your insurance company will pay the remaining $5,000.
Take note: insurance policies with lower deductibles have higher monthly or annual premiums.
What is a ‘liability limit’?
The liability limit determines the full coverage of your home insurance. When you make a claim, this is the maximum amount you’ll receive for repairs or replacements. Every insurance policy has a liability limit and the standard amount is $100,000.
You may increase the liability limit of your policy as needed.
What’s NOT Covered In The Basic Homeowner’s Insurance?
While your home insurance policy helps you recoup losses due to property damage, it doesn’t cover all types of damages. Nonetheless, you may purchase additional coverage at an extra cost.
Perils NOT automatically covered include the following:
- Acts of war
- Acts of God (earthquakes, floods)
- General wear and tear
- Water backup damage
- Termite and other pest damage
- Mold damage
Homeowners residing in natural disaster-prone areas must obtain add-on protection for earthquakes or floods. Fortunately, the coverage for basic insurance policies usually cover tornado and hurricane damage.
Is Homeowners Insurance Required By Law?
NO. Unlike car insurance, the law does not require you to get home insurance when you buy a house. However, your mortgage lender may require you to get homeowners insurance.
As your ‘business partner’, it’s in your lender’s best interest to protect the asset’s property value. Having insurance for your home does just that. If something bad happens, you still have a way to recover the loss without spending your personal funds.
When Do You Need To Get A Homeowner’s Insurance?
Owners usually need to get insurance for a property when they apply for a mortgage. Most lenders ask for proof that you have home insurance before approving the mortgage.
Lenders Won’t Let You Close On The House Without Home Insurance
Most lenders require buyers to have home insurance before closing on the house. So without the policy, the loan won’t be funded and finalized.
Typically, the borrower brings the insurance policy on the closing day. However, buyers may send a copy of the policy to the lender in advance.
Lending Banks Usually Issue The Homeowners Insurance
Lenders or lending banks may procure the insurance on your behalf. In this case, you need to pay a separate fee to cover the insurance premium. However, buyers may apply for homeowner’s insurance with a company of their choice.
You Still Need Insurance Even If You Purchase A House In Cash
Even if you buy a property in cash, it’s still useful to get home insurance. If you purchase a house in cash, get home insurance before closing on the home.
How To Pay For Your Homeowner’s Insurance
Monthly mortgage payments often include home insurance payments. Most buyers include homeowner’s insurance as part of their mortgage. So, you need to allocate part of your mortgage payment to an escrow account. When the bill for the policy comes, the bank settles the payment using the escrow account.
How Do Insurance Companies Determine Their Rates?
Buyers can choose which insurance companies to use for their home insurance. While homeowners may select their lending bank as their insurance provider, they can choose another company for their insurance policy. Buyers aren’t required to use the same bank for their mortgage and the homeowner’s insurance.
Homebuyers who shop around for the most suitable policy usually save on insurance premiums.
So, how do insurers determine their rates? Companies usually calculate your premium based on the following:
- Size and age of your home
- Potential cost of rebuilding your home
- Protective measures on the house
- Possible safety hazards (for personal liability)
Things To Consider When Choosing A Homeowners Insurance Policy
Your home insurance coverage should be enough to help you rebuild the home from scratch in case of damage or losses.
Let’s say it will take $200,000 to rebuild your house and you need $50,000 to replace personal items. In this case, aim for a $250,000 insurance policy. The general idea is to choose sufficient coverage to cover the cost of your property.
Knowing The Actual Costs And Replacement Costs Will Help You Decide The Coverage You Need
When buying home insurance, you’ll choose between actual cash value or replacement cost value for coverage. Understanding the difference between these two helps you determine the best coverage for your home.
- RCV or replacement cost value. This guarantees that the policyholder will receive the full amount needed to replace damaged items. The replacement should be similar to the damaged item. For instance, you’re allowed to replace a $4,000 roof with another roof of the same value. You can’t ask your insurance company for funds to upgrade to a more expensive roof. RCV claims are the highest-paying claims. However, RCV premiums also cost more than actual cash value coverage.
- ACV or actual cash value. ACV factors in depreciation in the damaged items. Insurance companies factor in age and the amount of wear and tear your property has sustained while in your possession. Let’s take the $4,000 roof example. With ACV, you’ll receive less than $4,000 since the value of the roof has depreciated at the time of the incident. ACV premiums are cheaper than RCV.
Mind Your Deductible
Be mindful of your deductible. Insurance policies offer lower monthly premiums for higher deductibles. With a higher deductible, you have to pay more before your insurance kicks in. This means higher out-of-pocket costs on your part.
Whether you want a high or low deductible is up to you. But it’s always better to choose the deductible you can afford.
Shop Around For Insurance Providers
To save on homeowner’s insurance, you may browse insurance companies online. Some noteworthy insurance providers based on their J.D. Power & Associates Homeowners Insurance rating include:
- Amica Mutual Insurance (holds the best rating for 11 years)
- Auto Club Of Southern California Insurance Group
- Cincinnati Insurance
- Erie Insurance
- State Farm
When asking for a quote, you will need to provide basic details about the home. Prepare the following details when shopping for insurance providers:
- home location
- square footage
- date the home was built
- type of construction
- number of bedrooms, bathrooms, and stories
- security systems, if any
- garage, if any
- foundation type
Avoid Buying Homeowner’s Insurance At The Last-Minute
Never save insurance shopping for last! When you don’t have time, you feel pressured to make a decision. Moreover, your choices will be limited.
Start researching insurance companies in your area during the early stages of the home buying process. Don’t forget to list the insurance products they offer. This way, you will have plenty of time to review your options and pick the best coverage for your property.
Your goal as a homeowner is to find the best coverage for your future home. While having a mediocre insurance policy is better than no insurance at all, it’s always better to find one that serves your needs. After all, you want the homeowner’s insurance that can save you thousands of dollars in the long run.