Before closing on your new home, you must buy home insurance to protect the lender’s investment. Buying the right amount of insurance that covers the various kinds of potential losses is critical. Here’s what you need to know about types of coverage and how to buy a policy.
Having insurance to cover your most expensive asset includes more than protecting it from fire, theft, and other types of damage. There’s also title insurance, home warranties, and making sure you have enough coverage to rebuild if it comes to that.
Here are some coverage basics to remember when shopping for a policy.
Base the amount of dwelling coverage on the cost to rebuild the home and not the market value,. The cost of the land is irrelevant, and you can easily over-insure yourself if you’re not careful.
An insurance agent will use a “replacement cost calculator” to determine the cost per square foot to rebuild the home. It should use “actual cash value” at today’s market value to determine the rebuilding costs and not depreciate the home’s value.
You may get an insurance premium discount with a new home because things are less likely to fall apart.
Floods and other exclusions
Floods and earthquakes are excluded from lists of “all perils,” natural disasters that can damage or destroy a home. War and water backups are also excluded.
Get an “all risk” policy that includes unlimited backup of sewers, drains, and sump pumps. For example, an all-risk policy would cover the loss if a power failure causes pumps to fail and a basement floods.
Flood and earthquake insurance cost extra, and your mortgage company may require you to have flood insurance from the federal government if you live in a flood zone.
Homeowner’s insurance should cover personal belongings found in and outside the home. Just as with dwelling coverage, the replacement costs should be for actual cash value and based on today’s prices.
If your computer burns in a fire, you don’t want to get the depreciated value for it, but enough money to buy a similar, new computer.
Taking a video camera or smartphone and walking around recording everything while opening doors, closets, and drawers is a good idea. That shows insurers what you own and serves as proof if something happens to them later.
If you own guns, fine art, antiques, or other valuable items, you may need a separate insurance rider to cover them. Some things, such as expensive jewelry, should be appraised and covered under a separate floater policy.
If your dog bites someone or a neighbor injures themselves on your property, liability insurance will protect you from a lawsuit. Consider at least $300,000 in liability coverage to match or exceed the home’s value.
If you have a lot of assets and want to go beyond the maximum payouts on your home and auto policies, an umbrella policy may be appropriate. It’s a part of personal liability insurance to protect you from a lawsuit and is important for high-net-worth individuals.
Coverage for mold
Most standard homeowners’ policies have limitations for mold. Where there’s a water claim, mold will likely happen quickly, and you’ll need adequate protection.
Lenders require title insurance to protect them in case someone makes a claim on the home’s title and says they’re the owner. It also ensures there are no liens on the property, ensures the seller owns the house, and ensures a fence isn’t going through your property, for example.
It’s a one-time premium when buying a house, and by law, buyers don’t have to go with the company recommended by their bank or the same company doing the title search on their home,
A home warranty covers appliances and other home systems that break during the warranty period. It’s common for sellers to buy home warranties for buyers, putting them at ease in case something breaks within a year.
An air conditioner, water heater or clothes washer can be expensive to buy new, and a warranty can be worth the cost if you’re unsure how long an appliance will last.
Update coverage as needed
Be sure to update coverage if you renovate or add personal items that need to be covered. Many new homeowners need to be educated on the insurance they need, and an annual talk with their agent can help.
Shopping for the Best Deal
Mortgage lenders require homeowners insurance set up before a loan is finalized to protect their collateral.
Most homeowners are unlikely ever to use their insurance, may buy a policy once, and renew it without shopping for a better deal. That’s one of several mistakes when shopping for and buying a policy.
When buying a house, start shopping before the closing date to find the best rates and ensure proper coverage.
A good place to start is by getting recommendations for a high-quality insurance agent from people you know based on customer service, responsiveness, and willingness to maintain competitive rates.
Residents of California, Florida, and other states whose insurance departments publish rate comparisons for standardized coverage can find the lowest-priced insurers on the state insurance department’s website and contact insurers for custom quotes.
Without such state assistance, contact an independent agent who sells insurance from multiple carriers. You can compare policies yourself, ask your broker to do it for you or take a quote to a competing agent for a side-by-side comparison.
However you do it, make sure you’re comparing the same types of coverage and deductibles.
Basic coverage should include the replacement cost for the dwelling and the costs of replacing personal property inside the home. Make sure you’re offered a deductible that you’re comfortable with.
Deductibles are usually $1,000 to $1,500 but can be as high as $5,000 to $10,000.
Ensure the covered perils are the same in the policies you compare. If a peril isn’t listed, then it’s probably not covered.
“All perils” coverage excludes certain things, such as earthquakes, hurricanes, and floods. “Named perils” coverage will list only what is covered, such as fire, smoke, lightning, and theft.
Shopping for homeowners insurance every year before renewal time is a good idea. But in general, home insurance pricing is consistent between new businesses and those with an insurer for many years.
Experts advise to only switch carriers if you can get a large discount. Insurance carriers look at previous policy longevity when offering discounts on new policies, so if you’re moving your policy every year, you are less likely to qualify for those better discounts.
You don’t want to skimp on insurance and be underinsured, but you don’t want to spend more than you have to either.
Here are some of the ways to ensure you’re getting the right amount and type of insurance coverage you need at the best price.
Work with an independent agent. An independent insurance agent represents multiple insurance companies and can compare their offerings to get the best deal for your needs. However, you should also know that some insurers, particularly larger insurers, don’t market their products through independent agents. For those, you’ll need to contact them directly.
Ask about discounts. You can often get a reduced rate if you bundle two or more types of insurance (i.e., auto, homeowners, life) from the same company. Some organizations, such as credit unions or the AARP, also offer members group discounts on homeowners insurance.
You may also be able to get a group discount through your employer, labor union or professional organization.
Compare apples to apples. Make sure you’re comparing similar products between providers. That includes the same levels of coverage, situations, and deductibles as other policies to ensure you’re not getting a lowball offer that gives you less coverage.
Adjust your deductibles and coverages. Insurance policies are often designed to cover what the company thinks a typical homeowner will need, with certain adjustments. However, a base policy that does not account for your particular circumstances could leave you over- or under-insured in some ways.
For example, a standard policy may come with a $500 deductible, but you may decide you can afford to pay $1,000 out of your pocket in case of a claim. Taking the higher deductible will reduce your premium.
You might also review your coverage limits. Many policies cover home possessions at a value equal to 50-75% of the coverage of the home itself. Consider whether you need that much coverage, particularly if it’s the higher figure and you live simply.
Another consider add-ons. Add-ons are separate riders included in the policy to cover specific things such as jewelry and other luxury items, firearms collections, artwork, musical instruments and specialized hobby equipment.
Special features installed in your home. A burglar alarm or sprinkler system will usually get you a discount, though they can be costly to install. Smoke detectors, deadbolt locks, and fire-resistant building materials can also get a discount.
In older homes, upgrading the electrical wiring can lower insurance costs. Closing off a damaged or unused fireplace can also lower your premium.
Consider your home’s location. If you’re still shopping for a home, where you live can have a big effect on insurance rates. Two adjacent zip codes or communities can have significantly different insurance rates. Costs for individual neighborhoods can also vary, particularly if one has a higher crime rate.
Proximity to a fire station and whether your neighborhood is on municipal water and is serviced by fire plugs are also variables that can lower rates. Susceptibility to flooding is another factor.
Homes in a flood plain cost considerably more to insure, though flood insurance is typically not included in a standard policy and must be purchased as an additional rider.
Insure for rebuild cost. When buying homeowner’s insurance, you generally want to be insured for the actual cost of rebuilding the home rather than the property’s market value. There are two reasons for this.
First, the property value includes the cost of the land itself, which won’t have to be replaced. Second, real estate prices fluctuate, so the cost of the property could either be significantly higher or lower than the cost of rebuilding.