Your mortgage lender will more than likely require some level of insurance. The most basic coverage will not protect you from financial disaster. Those buying a first home often have experience with renters insurance.
Some similarities exist that are like personal property coverage. Home insurance entails a lot more. There is more to lose when owning a home. Basic home insurance typically covers:
- Other property
- Personal property
- Additional living expense
A dwelling is the home and attached structures like a garage. Covered ‘perils’ are:
- Damage caused by ice, sleet and snow
- Damage from a vehicle
- Fire and smoke damage
- Lightning strikes
- Vandalism and malicious destruction
Dwelling insurance also covers cooling and heating systems, plumbing and wiring. Other property coverage is for structures that are unattached such as a fence, shed or detached garage.
Personal property coverage is content coverage for property within the home that includes:
There are two choices for personal property coverage: actual cash value and replacement value.
Liability insurance covers injuries to visitors on your property. It includes a legal settlement and legal fees up to the liability limit.
Additional living expenses are also referred to as ALE or loss of use coverage. If a home is damaged and residents are required to live elsewhere while it is repaired, ALE coverage pays for meals and hotel rooms while residents are displaced.
Things to Know
Home insurance takes the worry out of unfortunate, unexpected events such as break-ins, slippery sidewalks, and fallen trees. Things to know when comparing coverage and prices are:
- Buy enough insurance to cover rebuilding your home
- Take an inventory of your possessions
- Replacement cost coverage is worth the extra expense
- A home insurance policy does not cover everything
Cover the Cost of Rebuilding
A mistake many new homeowners make when buying insurance is to purchase coverage equal to the market value of the home. Home insurance is meant to pay for rebuilding a home that is destroyed.
The amount can be higher or lower than the purchase price. Homeowners, who lose a home in a disaster, may be caught short if underinsured. A reliable insurance agent can help with the estimate.
A local contractor is another source to ask about building costs in the area. AccuCoverage and HMFacts are online calculators that estimate replacement costs.
An inventory lets you know how much coverage is needed. Some insurance companies offer an inventory app. There is also free online software from the Insurance Information Institute found at KnowYourStuff.org.
Standard home insurance policies have dollar limits placed on coverage for special collections and valuables. Additional coverage for these items may be required. The inventory also helps make the claims process easier if something unfortunate happens.
Replacement Cost Coverage
Replacement cost coverage is more expensive than cash value coverage. Replacement cost coverage reimburses enough money to buy new, comparable items to replace those that were damaged.
Cash value coverage pays the current value of damaged or destroyed items. With replacement coverage, the five-year-old furniture damaged by a broken pipe would prompt funding for a new piece of furniture. Cash value coverage reimburses the cost of new furniture minus depreciation.
Things Not Covered
Standard home insurance policies do not cover floods or earthquakes. A separate policy is needed for coverage in case those disasters strike. This link will give you an idea of the average home insurance rates where you live. You enter your zip code, the approximate cost of the dwelling, the deductible you want, and an estimated amount of liability.
Homeowner insurance companies offer discounts that you may qualify for such as:
- Automatic payment
- Security System
Check an insurance company’s website for a list of discounts it offers. Bundling is an easy means of saving money on insurance. Bundling means getting multiple policies from one insurer. Motorcycle, auto, and home insurance can be bundled. Some companies also offer life insurance.
Other Things to Know
Insurers use credit scores as a determining factor for insurance rates. Insurance companies see a person’s credit history as a glimpse into the risk of insuring that person.
You should request a CLUE report. The acronym stands for Comprehensive Loss Underwriting Exchange. The report tells of claims filed by the homeowner and the home’s claim history. Insurance companies want to prevent risks. A house with multiple claims over a few years will mean paying higher rates or being declined to insure.
The deductible is the homeowner’s share of repair costs if an insurance company approves a claim. The higher the deductible is, the lower the premiums will be. A higher deductible saves money and reduces insurance claims.
It is essential to know the tradeoff being made when deciding on a deductible that makes sense for your financial situation. There are three kinds of home insurance deductibles.
- Dollar amount
A dollar amount deductible is a specific amount the homeowner pays before an insurer pays its portion. A percentage-based deductible is a percentage of the amount covered by the policy. For example, if the deductible is 2% and the home is insured for $200,000, the homeowner pays the first $4000 of a claim.
Split deductibles are hybrids of the other two. Most claims have a dollar amount deductible. Specific events such as an earthquake or hurricane trigger a percentage. Homeowner deductibles are different than health plan deductible.
Health insurance deductibles typically have a yearly deductible. When the threshold is met, the insurer pays for everything else for the remainder of the year. Those payments are still subject to coinsurance and copayments.
Home insurance deductibles apply to every claim. From the insurer’s stance, deductibles cut down on the minor claims that have to be processed and lower payments for major claims. Taking less risk, allows the insurer to reduce premiums when higher deductibles are chosen.
A high deductible can reduce premiums by as much as 20% to 40%. A minimum deductible is imposed by most insurers, but increases are allowed in exchange for premiums that are lower. The lower premium is an attractive deal when claims are unlikely, and the homeowner has sufficient savings that will cover the deductible if a severe loss occurs.