Excited home buyers have plenty to think about as they carefully search for the perfect home. One of the last things on their minds is the purchase of home owner’s insurance. Unless you’re paying for the entire home with cash, insurance is likely mandatory, so it’s best to get the scoop in advance on what policies cover and how much they cost.
1. Do I need home owner’s insurance?
If you’re purchasing a home through a lender, the answer is most likely a big yes. You’re borrowing their funds, so they want the asset protected. But even cash buyers should carry insurance…it’s common sense to protect one of the most valuable assets you own.
2. What does a standard policy cover?
Structure: If your home is damaged or destroyed by a covered peril (described later) and needs to be extensively repaired or even rebuilt, a standard policy helps pay for these expenses. Coverage is not the same as the price you paid for the home, rather, it’s what it would cost to rebuild it from the ground up.
Contents: The contents are obviously all of your personal belongings. Coverage for loss of these items is normally set between 50 and 70% the cost of structural coverage. Note there are caps (between $1000-2000) on high-value items like jewelry, so additional coverage should be purchased for these if warranted.
Liability: This portion covers medical, legal, and other costs related to bodily injury a person suffers within your property in the event the injured person sues you. Usually $100,000 is the standard coverage, though some owners go as high as $300,000 to $500,000 if they own higher risk items for injury, such as a pool or trampoline.
Additional Living Expenses: In the event you can’t live in your home due to damage or destruction, this covers temporary housing and living expenses.
3. What is a covered peril?
Your insurer will define the type of event or disaster that destroys your property or personal belongings for which they will cover expenses. Each type of destructive event or disaster is called a covered peril. Most standard policies list the following as a covered peril, but make sure you know what is on the list before you sign a policy:
Fire, smoke, water (usually not flash flooding), lightning strikes, windstorms, hailstorms, explosion, theft, rioting, vandalism, falling objects, and weight of snow or ice.
Note that earthquake coverage and flash flooding are not normally part of a standard policy.
4. How do insurance companies calculate rates?
The primary factors that affect your rates include your home’s location, age, size, and condition. Your claims history and credit score also affect your rates. Ways to keep insurance costs down include choosing a higher deductible, bundling insurance with auto protection, and getting discounts for having a security system and fire safeguards such as smoke detectors or a sprinkler system.
5. How do I choose a provider?
Get more than one or two quotes. Insurance carriers vary widely in their terms of coverage and cost. Also, check reviews from policy holders to see how well the carrier responds to claims. Compare what each company has to offer so that you’ll be prepared to make an informed choice when it’s time for closing on the home.
Real Estate Term of the Week
Covered Peril: In home insurance, a covered peril is an event or disaster that causes damage to your home or loss of your belongings, for which your insurer will compensate you.