Basically all mortgage providers require insurance coverage to protect the home throughout the lifetime of the loan. After all, they have a stake in your home – if it’s destroyed and you don’t have the proper coverage, it would most likely be the bank holding the bag, facing big monetary loss when you stop paying the mortgage on a house you don’t have anymore.
You might not even have to buy a home to be required to have insurance. Often, landlords require renters to have coverage for their possessions. Even if your landlord doesn’t require it, though, it's smart to have this kind of protection should you be robbed or if a disaster happens.
What a Homeowners' Policy Insures
There are multiple types of homeowners insurance policies but the most basic ones will cover:
Damage to the interior or exterior of your house due to fire, storms, lightning, vandalism and other covered catastrophes. Damage from floods, earthquakes and inadequate maintenance is generally not covered, though separate riders for this protection can often be purchased. Depending on the policy, the insurance may also cover other structures on the property, such as detached garage, pole barn, fences, etc.
Loss or damage to your personal belongings, such as clothing, furniture, appliances and other household contents, if they're destroyed in a covered disaster. There may be a limit on the items and amount for which your insurer will reimburse you. If you have high-end luxury items, antiques or other costly valuables, you may need an additional policy or an umbrella policy to increase your coverage.
Personal liability for damage or injuries that occur on the property. So if someone slips and falls on your icy sidewalk or your dog bites someone, your homeowners insurance policy will likely pay for the medical bills, lost wages and potential lawsuits. Though policies start around $100,000 coverage, experts recommend having at least $300,000 worth of coverage. For extra protection, a higher premium may buy you an umbrella coverage policy that could cover you up to $1 million or more.
Loss of use due to your home being uninhabitable during repair or rebuilding. Your policy may pay for hotel or house rental while your home is being fixed or rebuilt. It may also help to pay for food and other costs of living. Though it’s unlikely you'll ever need this protection, if you do find yourself in this situation, it could be a lifesaver for your wallet. Don’t check into a fancy hotel and start eating lobster, though, as the policies usually have strict daily and overall limitations.
Different Types of Coverage
Not all homeowners insurance are created equal. The cheapest homeowners insurance will likely provide the least amount of coverage, while the more costly the policy, the better your coverage.
There are basically three types of coverage:
Actual Cash Value – This value covers the house plus the value of your belongings after deducting depreciation. Because this covers how much the items are worth at the time of the disaster, and not how much you paid for them, you may have to foot the bill for the difference.
Replacement Cost – This is the value of your home and possessions without the deduction for depreciation. It’s basically a 100% replacement value, so if your $200,000 house burned to the ground, but it would cost $300,000 to rebuild it, that’s how much you’d receive.
Guaranteed (or Extended) Replacement Cost – This type of policy pays for whatever it costs to repair or build your home, even if it's more than your policy limit! Some insurers offer extended replacement, which offers more coverage than you purchased, but with a ceiling that is typically 20-25% higher than the limit.
How Much Does It Cost?
Premiums for insurance can vary widely. The ultimate cost could depending on the value of your property, how much coverage you’re purchasing, what type of policy you buy, where you live, and the rules of your state. High value homes or high crime areas may increase your insurance costs, for example. The details of your credit score may also impact the premium cost. The average yearly premium cost for U.S. homeowners insurance in 2008 was $791, according the National Association of Insurance Commissioners.
Whatever price you are quoted, you should shop around. Policy coverage and costs vary from one insurance provider to the next. Additionally, there may be some steps you can take to reduce your premium price, such as adding a burglar alarm.
Selecting an Insurance Company
Price and coverage are important, but they are not the only important factors. The insurance company you work with could have an impact on your experience, should you ever need to file a claim. You’ll want to ensure that your insurance provider is legitimate and reputable. Your state's insurance department can let you know if the company is properly licensed. Additionally, ask your relatives, friends and coworkers for referrals on a good insurance company, as they may have first hand experience with one company or another.
As with all insurance policies, they are under-appreciated until they are needed, and then they quickly become a godsend. Getting yourself set up with a comprehensive homeowners policy can go a long way toward making your home truly a place of comfort and security.
So that wasn’t a fun topic to talk about, but it’s important to know if you’re buying a home, especially if you are a first time home buyer. Buying a home is one of the biggest purchases most people make in their entire lifetime. With that much at stake, you want to make sure that it’s covered should the unthinkable happen.
A good real estate agent can help to direct you to reputable homeowners’ insurance providers. Let HomeVisor do the research to help you find a good real estate agent that can help you in your local area.