Imagine losing everything you own – every single possession in your home and maybe even the house too. Ask anyone who has lived through a devastating fire what it feels like to suddenly have nothing but the clothes you’re wearing and you’ll understand the importance of buying homeowners insurance.
If you’re using a mortgage to purchase the home you’ll have no choice in the matter; the lender will insist that you insure the home.
In my daily dealings with first-time homebuyers, I’ve noticed that few of them understand insurance and how to intelligently shop for coverage. Hey, that’s understandable. It’s not every day you purchase a home. So, let’s bring you up to speed on purchasing enough insurance while trying to save money in the process.
Where to start
Your homeowners insurance covers the cost to rebuild the house, not the loss of market value. How much will it cost to rebuild the house? Your insurance agent will supply you with an estimate.
What insurance agent, you ask? Since you already have an established relationship with your auto insurer, he or she is a good person to contact first. Most insurers will offer a discount for those with more than one policy with their company.
But it’s always a good idea to shop around so ask friends, colleagues and neighbors who they recommend. An independent agent should be among those you interview. He or she is able to shop for coverage from among different companies to find you the best deal.
A good insurance agent will ask the important questions and gather lots of information from you. If you happen to interview an agent that magically pulls a figure out of thin air, without understanding your circumstances, move on to another.
To get a general idea of the replacement cost of your home before speaking with an insurance agent, follow the instructions at Forbes.com, Bankrate.com or Valuepenguin.com.
What does homeowners insurance cover?
The typical homeowner insurance policy covers damage to the home caused by fire, some natural disasters – wind and hail for instance – vandalism and theft. In some areas homeowners need to purchase additional earthquake or flood policies.
Your belongings, up to a set limit, are covered under your policy as well. “Homeowners insurance automatically provides coverage for your possessions based on a certain percentage of your home’s insurance value – 75 percent is typical,” Kiplinger’s Kimberly Lankford says.
“So, if your home is insured for $200,000, you’ll also have up to $150,000 of coverage for your possessions,” she continues. Lankford also cautions that the insurance company may set a coverage limit on some items, such as jewelry, so ask for additional coverage for any expensive pieces you own.
Your homeowners insurance policy covers more than just the home and its contents, though. It also may protect you:
- For damage to other structures on your property such as the garage, a shed, fencing and an in-law unit.
- From liability if someone is injured on your property.
- From out-of-pocket expenses, such as housing and living expenses while your house is being repaired.
- From liability for damage that you or a family member cause to other people or their property.
What’s not covered?
While it’s important to understand what your insurance policy covers, you also need to know what isn’t covered. These items are known as “exclusions” in your policy.
The following is a list of typical exclusions:
- Water damage caused by flood or by sewer or drain backups.
- Loss of pets.
- Automobile damage or loss.
- Damage as a result of war.
- Power failure.
- Earth settlement or other movement.
Choose a deductible
An insurance deductible is how much money you will pay out-of-pocket before the insurance company begins paying a claim.
The standard homeowners insurance policy deductibles are $500, $1000, $2500, and sometimes $5000, according to Coastal Insurance in Rocky Point, N.Y. The lower the deductible, the higher your insurance premium will be.
Choose the deductible carefully by considering what kind of a financial position you’ll be in should disaster strike. Do you have enough savings to pay the deductible? If you are retired, this is a crucial consideration.
Additional considerations
Ask your insurance agent about ways to get discounts on homeowner insurance. Adding a burglar alarm, sprinkler system and even smoke detectors may bring down the premium.
While the concept of homeowners insurance is simple, the policies may be confusing and complex. Choose an experienced insurance agent to help you navigate the process of buying home insurance.
Ensure that you get answers to every question that comes up.
You’ll need your homeowners insurance to begin coverage on the date you take possession of the house, so getting an early start on shopping for it is important.
