Even if you’re the type of person who likes to live dangerously, your mortgage lender is not. They will require you to purchase homeowners insurance to protect their interest in your home. And thank goodness they do. Because even if you don’t have a mortgage, you should have homeowner’s insurance. Your home is a huge investment that contains all your worldly possessions. The premiums for coverage are a small price to pay for the protections they provide.
When you say “small price…”
The cost of homeowner’s insurance varies depending upon your location, type of coverage, any discounts you might qualify for and your provider. But as an extremely rough estimate, you can expect to pay in the neighborhood of $35 per month for each $100,000 of coverage.
When do I have to pay?
Assuming you will have a mortgage, you will be required to bring proof of at least 12 month’s worth of insurance premiums to your closing. You will need to bring along your policy’s declarations page which shows the effective date and the cost for a year’s coverage to closing, along with a receipt or a letter showing you’ve paid the bill.
After that, your lender will set up an escrow account and pay your monthly premiums out of that. Your homeowner’s insurance will just be rolled into your house payment, along with taxes. Since you’ve already paid for a year upfront, some home buyers assume their first year’s payments will be reduced. But from the first payment forward, your lender will be collecting insurance premiums to pay next year’s bill.
Picking an insurance company
You can probably rattle off at least three big insurance companies with no prompting, so finding one isn’t a problem. But finding the right one for you is important. Ask trusted friends and relatives if they have recommendations based on their experience. Then get quotes and compare prices. Check in with your state insurance office to see if there are any issues with the insurers you are looking into. If you already have auto insurance, you may be able to get a discount by using the same company. (Or you may find you want to move your auto insurance to a new company.) Ask if there are discounts for alarm systems or a sprinkler system.
How much?
To satisfy your mortgage lender, you need to cover the home for current market value. All they care about is that they get their loan repayment even if the house and its contents burn to the ground. Except in some very rare circumstances, that’s not enough.
Most experts advise you to buy “replacement cost” coverage rather than market value. Here’s the difference. Say you buy a $200,000 home with market value coverage. If a fire destroys your home, it could cost $225,000 to rebuild. You’re left to foot the bill for the extra $25,000. Would it really cost more to rebuild than the market value of the home? First you’ve got to pay to remove the debris from the destroyed home.
Even without those demolition costs, rebuilding is just more expensive. You won’t get the economy of scale that that a professional home builder enjoys. You may also want to consider adding “extended value” coverage. This will pay you up to 20-30 percent over your policy coverage limit. Why would you need that? Let’s say a storm damages homes throughout your area. A lot of people are going to need repairs and quick. The laws of supply and demand dictate that prices to make those repairs will spike. Extended value coverage protects you against that.
How do you determine replacement value?
Your insurance agent should be able to help you come up with a ballpark. There are also online calculators you can use to compare. You can also hire a contractor to give you an estimate or see if the appraisal that was done on the home included a replacement cost estimate.
Your policy may include an automatic inflation adjustment, but even if it does, it’s a good idea to take a look at your coverage limits once a year or so to make sure nothing has changed that would make you want to adjust your policy.
What’s protected besides the house?
You: As a homeowner, you also need to protect yourself against lawsuits if someone is injured on your property. Let’s say you have the neighbors over for a barbeque and one of them trips on a tree root and breaks a wrist. Or maybe a door-to-door salesperson trips on an uneven concrete walkway and falls. You could be liable for their medical treatment and even loss of work. This is also why your insurance company may ask what seem like strange questions. Do you have a dog? Do you own a trampoline? They could raise your premiums to account for past claims experiences with that sort of thing.
The amount of liability coverage you need depends on your personal worth. The more you’re worth, the more you have to lose and the more coverage you need, possibly including an enhanced personal liability plan.
Your stuff: Ask about the personal property protection included – how much of your stuff is covered. Is it covered at replacement value or depreciated cash value? What isn’t covered? If you have an antique doll collection or high-end computers, you’ll probably need a “rider” to add coverage. Ask your insurance agent what specific exclusions are in your policy.
You should take an inventory of what you own to help in case you ever need to make a claim. Where to start? The Insurance Information Institute’s website can be an enormous help.
What isn’t covered
Standard homeowner’s policies do not insure against floods, earthquakes, hurricanes or wildfires, among other things. If you live in a flood zone, your lender will probably require you to purchase additional flood insurance. Even if you aren’t required to purchase specific hazard coverage, you may as well ask what it would cost for those events most likely to occur in your area. Only you can decide what the peace of mind is worth to you.
