One of the least exciting parts of buying a home is also one of the most essential: homeowner’s insurance. If you’re borrowing money to buy a home — and most buyers are — your lender is certain to remind you that you need an insurance policy to get a mortgage.
“Every homeowner is different and will have slightly different needs for their insurance policy,” said Michelle Tennant, vice president of product management for Erie Insurance, headquartered in Erie, Pa. “It can be confusing, especially for a first-time home buyer, to know how much coverage they need and if they should get any optional coverage.”
The best source of individualized guidance is an independent insurance agent who will check out the offerings of several insurance companies for you, said Michael Giusti, senior writer and analyst for InsuranceQuotes.com in New Orleans.
“Not every independent insurance agent can shop with every insurance company, so it’s smart to ask which companies and how many companies they work with,” Giusti said. “They get paid by the insurance company, not you, so it won’t cost you extra money to use an agent.”
Insurance companies also have their own agents who can provide advice.
“Shopping among several companies is especially important now because the more severe storms in some places and inflation have caused homeowner’s insurance rates to increase,” Giusti said.
Cover the cost to replace your home
A lender may require at least enough insurance to make sure that the mortgage is paid off if the home is declared a total loss, but that’s usually not enough to replace the home.
“We recommend ‘guaranteed replacement cost’ insurance that would rebuild your house to the way it was if the entire structure is destroyed by a fire or flood or other disaster,” Tennant said. “If you just buy a policy for $300,000 of coverage without this guarantee and your home will cost $350,000 to replace, you would have to come up with that extra $50,000.”
You don’t need to insure the ground under your home, so the amount of coverage won’t necessarily be the same as your home’s market value, Giusti said.
“An agent can work with you to figure out your replacement cost based on the size of your home, the location and the materials used,” said Craig Eagleson, president and chief revenue officer of Incenter Insurance Solutions, a provider of property and casualty insurance headquartered in Fort Washington, Pa. “Many lenders want to see documentation of the research that goes into your estimated replacement cost.”
Home values and labor and materials costs have escalated in recent years, increasing the overall cost to replace a house. Giusti recommends that homeowners review their coverage annually to see if it’s adequate and that they inform their insurance company of improvements, such as an addition or new flooring, that could increase the replacement cost.
“It’s smart to add 10 percent to 20 percent of coverage to your estimated replacement cost as a buffer for inflation,” Eagleson said.
Additional coverage to consider
To understand your coverage, Giusti suggests starting with the declarations page — the list of what’s covered and for how much — that insurance companies provide.
“Damage from a flood is never covered,” Giusti said. “A lot of people don’t realize that a ‘flood’ to an insurance company refers to any water that touches the ground, even if it’s rain that pools in your yard and seeps into your house rather than an overflowing river.”
Flood insurance is required by law for homes in flood zones designated by the federal government, and Eagleson recommends that most people purchase flood insurance even if they’re not located in a flood zone.
“Flood insurance is inexpensive if you’re not in a flood zone, and we’ve seen some surprising damage on homes that are not in one,” he said.
Eagleson also recommends a water-backup policy as an add-on to provide protection if a sewage line or some other pipe backs up and damages your home.
“We offer a supplemental extended water policy that covers sewer and drain backups, damage from plumbing issues as well as from floods and natural disasters,” Tennant said.
Depending on your location, you may want to buy protection from earthquake damage, which typically isn’t covered by a basic homeowner’s insurance policy.
“In some places that are prone to intense storms, you may need a separate wind and hail policy,” Eagleson said. “Things like termite damage and damage from bats in the attic isn’t always covered under a basic policy, either.”
In addition, Tennant recommends supplemental coverage if you have underground utility lines on your property.
“Most homeowners don’t realize that they’re responsible for damage to those utility lines, which can be costly,” Tennant said.
If you have solar panels, you may need special insurance to cover damage to them because some companies exclude them from basic policies, Giusti said.
Protecting your personal possessions
An inventory of your possessions is useful when estimating how much coverage you need, and it provides a record if you make a claim, Tennant said.
“Typically, your personal possessions will be covered up to 60 percent to 80 percent of the coverage for your home,” Eagleson said. “So, for example, if your home is insured for $500,000, your personal property could be insured up to $375,000 if you have 75 percent coverage. It’s inexpensive coverage, too, so it makes sense to keep it at a high level. If you dropped your coverage down to $250,000 it would only save about $5.”
If you have collectibles such as art or expensive jewelry, you should ask your insurance agent about supplemental coverage, Tennant said.
“Your jewelry will be covered at a certain amount per piece, such as $500 or $1,000, so if you have something more valuable than that, you may want to get special coverage,” Giusti said.
Keep in mind that with any claim you’ll pay a deductible, and if your deductible is $500 or $1,000 it may not be worthwhile to put in a claim for some items.
Surprising things homeowner’s insurance covers
You may be surprised to learn that personal belongings are covered by your homeowner’s insurance even when away from home, Giusti said.
“If you have a designer jacket that gets stolen when you’re at a restaurant, you can put in a claim to be reimbursed,” he said.
Liability insurance, which is included in homeowner’s policies, can provide extremely valuable protection for homeowners if they are sued, Eagleson said. “If your friend slips and breaks a hip or someone is hurt in your swimming pool, your liability insurance can cover you up to $500,000 or $1 million if you’re sued,” he said.
Most policies also include reimbursement of medical expenses for someone injured on your property, Giusti said. And liability coverage can even be of help in personal conflicts such as a neighbor suing you for slander because you called him a scoundrel, he said.
“Your homeowner’s insurance policy also usually includes a ‘loss of use’ feature that pays for a hotel or rental home if you can’t live in your home until it’s repaired,” Giusti said.
Other structures on your property, such as a detached garage or a storage shed, are covered by your regular homeowner’s policy, usually up to a percentage of the coverage for the house, Giusti said.
For example, he said, if the limit was 10 percent and the house was covered for $250,000, “the other structures would be covered for $25,000.” But, he added, “if you have something special, such as a high-end pool house or a guest cottage, you may want to buy additional coverage.”
Some policies include unusual features such as reimbursement for costs associated with identity theft, Tennant said.
“People often don’t realize that they have coverage for things like gift card reimbursements that can replace the value of a gift card if the company goes out of business before you use it,” he said.
Saving money on premiums
It may be tempting to save money by skimping on homeowner’s coverage levels, but that could be disastrous in the event of a major claim. The three main ways to lower insurance premiums are to shop around among several companies, increase your deductible and look for discounts.
“Your deductible can be a set amount such as $500 or $1,000 or more,” Giusti said. “Insurance companies want you to have some skin in the game so you won’t make frivolous claims. But in some cases, your deductible will be based on a percentage of your home value. For instance, in Florida your deductible in the case of a hurricane or a named storm can be 10 percent of your home value.”
You can usually choose a deductible above a certain minimum set by your insurance company.
“Finding the sweet spot for your deductible is a personal preference,” Eagleson said. “You need to make sure you can afford the deductible and know whether you would bother to make a claim for $2,000 or only make a claim if the damage costs $5,000 or more. Then you can compare the savings at different deductible levels.”
A wide range of discounts are available for bundling different types of policies with one company and for installing home-protection measures such as an alarm system or leak-detection monitors, Giusti said.
Still, shopping among companies and getting independent policy advice can be the best way to get the lowest possible insurance rates for your home.