Traditional house

For the majority of homeowners, buying a home is the most expensive purchase they’ll ever make. So, it makes sense to protect your investment with homeowners insurance.

When you’re shopping for homeowners insurance, what do you need to know? Let’s cover some of the basics when searching for the right policy.

Homeowners Insurance Basics

Before we get into shopping for homeowners insurance, let’s talk about what it covers, if you need it (you almost certainly do) and when to buy it.

What Does Homeowners Insurance Cover?

What’s covered and how much value is covered will vary from policy to policy, but typically, a homeowners insurance policy covers the following categories.

Damage to the home: This is the most basic protection you can get from a homeowners insurance policy and typically covers things like fire or smoke damage, wind, lightning strike or hail. Not every natural disaster is covered. However, you can buy flood and earthquake protection. Depending on where you live, you may be required to buy this additional coverage in order to get a mortgage. We’ll talk about why in a minute.

Damage to other structures on the property: Homeowners insurance commonly covers the cost to repair or replace structures on your property, like a shed or garage.

Personal property: If purchase personal property coverage and have anything that’s stolen or damaged during a covered disaster, this coverage helps you replace it. These policies have certain limits, but you can buy extended coverage (sometimes referred to as riders) for valuable items like jewelry.

Liability coverage: Did you accidentally put a split log through a neighbor’s window when chopping wood? Maybe someone slipped on a patch of ice on your driveway and you’re now being sued to pay their medical bills. Liability coverage helps pay for these expenses.

Do You Need Homeowners Insurance to Get a Mortgage?

If you’re buying a house with cash, homeowners insurance is a no-brainer for all the reasons mentioned above, but you’re not required to have it.

If you’re getting a mortgage to pay for your new home, it’s a different story. All of the major mortgage investors like Fannie Mae, Freddie Mac, the FHA, USDA and VA will require that you have homeowners insurance. This will also likely be the case if you go with a lender that holds the loan themselves.

What’s the reasoning for this?

When a lender originates your loan or when an investor buys it, they do so on the assumption that you’ll make the payments every month until the loan is paid off. If you don’t make the payments, the lender or investor can eventually take the house back and sell it to recoup its investment.

If you have incurred property damage, your lender wants to know that the house is repaired to a condition similar to when you bought the property. This helps the lender know that its investment is protected.

Typical homeowners insurance policies don’t cover floods, wildfires or earthquakes. If you live in one of these zones and are getting a mortgage, you’ll likely need to purchase this extra coverage. Sometimes, this is referred to as hazard insurance.

When Do You Need to Buy Homeowners Insurance?

As mentioned above, you’ll likely need to buy homeowners insurance if you’re getting a mortgage. It’s important to understand the timing of your purchase.

Your lender will require that you have insurance coverage at the time you close. How much coverage they require depends on the lender, but it must be at least enough to entirely rebuild the house in the event of a disaster.

Often, you’ll be required to purchase one year’s coverage in advance. From then on, if you have an escrow account, your homeowners insurance premiums will be paid from it. If you don’t have an escrow account, you’ll need to set up your own payments.

If you ever switch your insurance carrier, you’ll likely receive a refund check for any months in which you haven’t already been covered under your former policy. If you use an escrow account to make your insurance payments, in order to avoid an escrow shortage, immediately send the refund check to your lender. Because your lender pays for the coverage upfront, they’ll also do so with your new insurance policy and will be able to repurpose those funds.

Now let’s go over tips for shopping around.

Shopping for Homeowners Insurance

If you’re shopping for homeowners insurance, you might have a number of questions – from what coverage you need to how to get the best rate to how to save money. We’ve got some tips.

Determining How Much Coverage You Need

Before you start comparing rates and premiums, it helps to determine an estimate of the amount of coverage you’ll need to properly insure your home.

Your lender will require you to carry at least enough coverage to completely rebuild the physical structure of the house if required, so let’s start there.

The Insurance Information Institute has a good article that goes over the types of factors that affect how much homeowners insurance coverage you should buy. As noted in the article, when it comes to the cost to rebuild your home, there are several major factors:

  • Local construction cost
  • Square footage
  • Number and types of room (e.g., bathrooms cost more to construct)
  • Materials used exterior and interior
  • Special features (fireplace, arched windows, etc.) as well as whether anything was custom-built or renovated

In addition to rebuilding costs, you’ll also want to account for personal property. Now is a great time to take a look at all the stuff you have and determine how much it would cost you to replace it. You’ll want to take pictures and keep an inventory of anything valuable you have. Not only will this help you down the line if you need to make a claim, but you’ll also be able to get an idea of the amount of coverage you need.

If you have particularly expensive items, it could be worth getting extended coverage for things such as jewelry or computers.

Additionally, consider liability coverage. You might want an umbrella policy that has the advantage of being able to cover a variety of events on or off your property and serve as a backup in case you get sued for more than the limits on your home insurance.

It’s reasonable to be unsure of how much coverage you need. Talk to your real estate agent, local builders association or an independent insurance agent to get an idea of how much coverage you should have based on your home value, exposure to risk and financial goals.

How Much Does Homeowners Insurance Cost?

When you’re shopping for a policy, one of the considerations to take into account is the price. It’s rational to not want to pay more than you need to, but at the same time, you should be trying to get the most bang for your buck.

Shop around to get a good price; however, before you pick the one that will make the least impact on your wallet, there are a few things to keep in mind.

Make sure you’re getting at least the coverage you need based on the evaluation you did with the information above. If it’s not going to cover your needs, the policy isn’t a good deal at any price.

Compare apples to apples as much as possible. Look at policies with the same or similar amounts of coverage – ideally with similar deductibles. Any riders should also be similar.

The deductible is an important consideration. You can often save some money on annual premiums by agreeing to a higher deductible. However, you’re going to want to balance this against the fact that while you could be saving money up front, it means you’ll have to pay more in the future if you make a claim.

Important Questions to Ask About Your Policy

When comparing insurance policies, in addition to the above, here are a few more important questions to ask when shopping for appropriate coverage.

Can you explain the differences of coverage between your HO-1 through HO-8 policies?

In the U.S., there are eight levels of homeowners insurance. They range from basic condo insurance to comprehensive, full-coverage single-family home insurance. It’s important that you understand coverage for each level so you can choose the right one for you.

Do you cover replacement cost or actual cash value?

Typically, policies that cover replacement costs are better because, after paying for a deductible, you’ll receive funds to replace what was lost. With an actual cash value policy, the insurance company will take into account depreciation of the items you’re filing claims for. Since each company calculates depreciation differently, you may end up with much less money to help you replace items lost during an event.

What is the replacement value of my (future) home?

You’ll be surprised to see that the replacement value of a home may be less than the purchase/appraised value of a home. This important to know since, in the case of a tragedy, you may have to pay for repairs out of your own pocket on top of the deductible.

Does the insurance cover the home and land?

Make sure the policy only includes the home and not the land. If something were to happen to your home, the land will always be there and there’s no need to cover it. Also, removing land coverage may help you save some money.

What is excluded from the policy?

Again, maybe there are certain coverage limits or there may be things that will need an additional or separate policy, like an expensive painting, for example.

Does this policy cover water damage?

Some policies may cover sewer damage but may not cover flood damage. Make sure you ask if you’ll need flood insurance as well.

Lowering Your Home Insurance Cost

There are obvious ways to lower your home insurance cost, such as lowering your coverage amount or raising your deductible, but there are others you may not be aware of.

Insurance actuaries decide what rates should be based mostly on the risk associated with issuing the insurance. Anything you can do to reduce the risk of a future homeowners insurance payout can help lower your rate.

For instance, installing a home security system could help lower your rate by deterring burglars. A fence around the pool can help prevent someone from slipping and falling in a wet area.

Sometimes it’s as simple as living in the house. If the home being insured is your primary property, you’re a lower risk than if it were your second home. If you live in the house and a pipe starts to leak, you’re around to take actions to mitigate the damage and limit the scope of the fix for the insurance company.

Finally, companies like getting as much of your business as possible. Cable companies like to give you a deal if you bundle cable, internet and phone. A lot of insurance companies will give you a deal if you bundle your home, auto and motorcycle insurance with them, for example. If you have other insurance with another carrier, you should ask if you can get any discounts by taking your home insurance their way.

Hopefully this has given you some actionable advice for shopping for your home insurance. Want to know more? Check out this post on the other unexpected things impacting your insurance rates.

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