Purchasing a home is one of the biggest financial decisions you’ll ever make.
Now imagine: What would happen if a storm, fire, or other disaster were to destroy that house? What if a visitor became injured on your property and sued you? How could you possibly afford to rebuild your home or recoup your losses?
For these and other reasons, it’s crucial to have homeowners insurance.
It’s so crucial, in fact, that lenders require you to have a homeowners insurance policy in place before you can close on your home.
But there are a lot of insurance providers out there, and a lot of different coverage options. How do you choose?
Many homebuyers don’t realize that the lender needs homeowners insurance policy details immediately after they get an accepted offer to buy a home.
The homeowners policy, also known as hazard insurance, factors into your debt-to-income ratio, an important number when it comes to your loan approval.
Additionally, the lender needs to verify that you have enough coverage for that particular home. If the home costs an estimated $300,000 to rebuild, your policy shouldn’t have a $200,000 limit.
So have a plan on which company and/or agent you plan to use before you make an offer.
Your loan process can be delayed if you don’t supply the homeowners insurance agent and company contact information to the lender right away.
“Once you find the home you want to purchase, hunt for the best policy that suits your needs and confirm that it meets your lender’s requirements,” says Warner Quiroga, a real estate investor and owner of Prestige Home Buyers on Long Island, N.Y.
The insurance policy should take effect on the day you officially own the property. Make sure your insurance provider knows if the closing date changes. You don’t want to be uninsured for even a couple of days.
The lender will collect a full year’s homeowners insurance premium as part of your closing costs, so you don’t have to worry about making a separate payment to start your coverage.
If you’re like most Americans, your home is probably your largest and most valuable asset. Not only does it provide a place for you and your family to live, it also serves as a financial resource that can increase in value and help you grow your long-term wealth.
But this shelter and security can disappear overnight if your home is damaged or destroyed by a disaster, burglary, or vandalism, or you are sued by someone who sustains an injury on your property. Any of these circumstances can lead to financial ruin or displacement of your family.
“Homeowners insurance coverage provides you with financial protection against loss due to disasters, theft, and accidents. A standard policy not only insures the structure, but it also covers your belongings in case of a disaster and offers liability protection in the event of an injury or property damage lawsuit,” said Mark Friedlander, director of Corporate Communications for the Insurance Information Institute in St. Johns, Fla.
He notes that, if you have a mortgage loan, your lender will require you to have a homeowners insurance policy, which helps them protect their investment.
“With all the money and care you have invested in your home, it’s advisable to guard against financial risk and always keep a homeowners policy in force, even if you don’t have a mortgage loan and aren’t required to have property insurance coverage,” Friedlander said.
Quiroga explained that although there are no laws that mandate having a home insurance policy, “there are instances in which your house may be subject to foreclosure if you fail to maintain insurance.”
And again, lenders typically require you to have homeowners insurance, so chances are you won’t be able to purchase a property without it. But having homeowners insurance is to your benefit, since you don’t want to assume liability for serious damage to your home.
A fire, burst pipe, or storm damage can lead to tens of thousands of dollars in repairs and replacements, and you would have to pay those costs out of pocket if you don’t have insurance.
Most standard homeowners insurance policies cover four essential areas related to your home: structure, personal belongings, liability protection, and additional living expenses.
Your home insurance coverage will pay to repair or rebuild your home if it’s damaged or destroyed by fire, hurricane, hail, lightning, or other disasters listed in your policy. Friedlander noted that most policies also cover detached structures, such as a garage, gazebo, or toolshed, usually for around 10% of the amount of insurance you have on the house.
A standard policy protects your home’s foundation, walls, and roof. “But it will not pay for damage caused by a flood, earthquake, or routine wear and tear,” Friedlander said. A separate flood or earthquake policy may be available for purchase (more on those in a minute).
Your clothes, furniture, electronics, and other personal items are protected if they are stolen or ruined by fire, hurricane, or other insured disasters. This coverage typically equates to 50%-70% of the insurance you have on the structure of your house.
Costly possessions such as art, furs, jewelry, silverware, and collectibles are covered, but dollar limits may apply if these items are stolen (as opposed to destroyed in a fire or natural disaster). If you have an extensive art or jewelry collection, or other high-value items, you may want to talk with your home insurance company about increasing your coverage level on these.
Trees, shrubs, and plants are also covered (unless they have a disease or are poorly maintained), commonly for around $500 per item.
Liability protection safeguards you against lawsuits for bodily injury or property damage caused to other people by you, your family members, or your pets. This coverage pays for the cost of defending you in court as well as any court awards, up to the limit stated in your policy documents. Liability limits typically start at $100,000.
“Your policy also provides no-fault medical coverage, so if a friend or neighbor is injured in your home, he or she can simply submit medical bills to your insurance company, which will pay without a liability claim being filed against you,” Friedlander said. “However, it does not pay medical bills for your own family or your pet.”
ALE coverage pays the costs of having to live away from your home if you cannot stay there because of damage from an insured disaster, such as a fire or storm damage. Your hotel bills, restaurant meals, and other costs incurred while your home is being rebuilt – over and above your usual living expenses – are covered.
“If you rent out part of your house, additional living expenses also cover you for the rent that you would have collected from your tenant if your home had not been destroyed,” Friedlander said.
There are limits to your coverage, depending on your policy terms. Make sure you understand the limits on your policy so you can increase the coverage level (often for a higher premium) if you’re worried that the amount would not be adequate in an emergency.
Leonard Ang, CEO of iPropertyManagement, an online resource guide for tenants, landlords, and real estate investors, said climate-related disasters make it all the more critical to have a homeowners insurance policy in place.
“Climate change and the intense disasters it brings makes homeowners insurance a necessity. Without it, the unavoidable crises of hurricanes, fires, and other increasingly devastating catastrophes are your responsibility alone,” Ang cautioned.
Depending where you live, your lender may require you to have flood insurance or other protections if extreme weather is common in your area. Even if it’s not required, you might opt for flood insurance if you live near a beach or waterway or an area that’s prone to flooding.
Although your neighborhood might not have a flood insurance requirement, stronger storms could increase the risk of damage to your property, and you may have to cover some repairs out of pocket without more extensive coverage.
Other insurance products may be applicable where you live as well, such as earthquake insurance. You can also purchase water back-up of sewer coverage, which applies when sewers or drains back up into your home and flood the property, potentially causing water damage to floors, walls, and personal property.
It’s important to ensure that you have sufficient coverage to protect you financially if any of these aforementioned incidents occur.
“You want enough homeowners insurance protection to be able to cover the costs of rebuilding the structure of your home, replacing your belongings, defraying expenses if you are unable to live in your home, and protecting your financial assets in the event of liability to others,” suggested Friedlander.
Many experts advise opting for at least $300,000 to $500,000 in liability coverage.
“If you have significant assets and want more coverage than is available under your homeowners policy, consider purchasing an umbrella or excess liability policy, which provides broader coverage and higher liability limits,” Friedlander added.
Ang recommended “having replacement cost coverage versus actual cash value coverage so that you’ll have enough to cover the replacement of your home.”
Replacement cost coverage helps repair or pay for damaged property without making a depreciation deduction due to things like wear and tear. That can be especially advantageous if you live in an older home that hasn’t been renovated recently.
“The best way to determine if you have enough personal belongings coverage is to conduct a home inventory. Note that to ensure items like jewelry and furs to their full value, you may need to purchase a special personal property endorsement or floater and insure the item for its officially appraised value,” Friedlander said.
If you’re not sure how much coverage is appropriate for your home and belongings, an insurance agent can help you figure out the best policy. They’ll go over the different types of coverage included, such as dwelling coverage and personal liability, and the tiers offered by different insurance providers.
It’s a smart idea to request homeowners insurance quotes from several different carriers.
“Shop around, compare prices, and ask for second opinions of people you trust who are insured under that policy or insurer,” Ang suggested. “Don’t sign off on the first deal you see. And continue researching and comparison-shopping every year to try and find the best deal before your policy expires.”
Don’t shop solely on price. Make your decision based on customer service, reputation, and the financial health of the insurance company.
“Ask friends and relatives for recommendations for insurers, and do your due diligence. Contact your state’s insurance department to find out whether they make available consumer complaint ratios by company. If they do, check into the insurers you are considering doing business with,” advised Friedlander. “Check the financial health of prospective insurance companies by using ratings from independent rating agencies and consulting consumer websites.”
Homeowners insurance can be purchased online, over the phone, or in-person at an insurance agency office.
But you can also contact an insurance agency, which can compare prices and coverage tiers for you. They’ll source home insurance quotes from a number of providers and will recommend ones that fit your needs and budget.
Your top priority with homeowners insurance is to make sure you have adequate coverage. But you also want to make sure your monthly insurance premiums are affordable.
To decrease your premium costs, try these tips:
- Raise your deductible over the typical minimum of $500 to $1,000. A higher deductible can help you get lower premiums
- Purchase your homeowners and auto insurance policies from the same carrier. “Many companies that sell homeowners insurance also [offer] auto insurance and umbrella liability policies. If you buy two or more insurance policies from the same insurer, you may be able to reduce your premiums,” Friedlander said. Ask providers about bundling discounts before you buy a policy
- Make your home more disaster-resistant. For instance, install storm shutters and shatterproof glass, reinforce your roof against windstorms, and modernize your electrical, plumbing, and heating systems.
- Don’t include your home’s value when deciding how much homeowners insurance to purchase. Your policy should be based on the cost to rebuild your residence, not its total real estate value or the value of the land it sits on
- Inquire about discounts for home security devices. Installing a burglar alarm or security system, or a sprinkler system in case of fies, may qualify you for insurance discounts, according to Friedlander
- Review the value of your possessions in your policy limits every year. Be sure your policy protects any major additions or purchases to your home, and check to see that you are not spending money for coverage you don’t need – such as for pricey artwork or fancy jewelry you may have sold or given to a loved one
Homeowners insurance: FAQs
Homeowners insurance typically includes:
1. Dwelling coverage to repair or rebuild your home in the event of fire, vandalism, natural disaster, or other covered events
2. Personal belongings coverage, which applies to clothes, electronics, jewelry, furniture, and other possessions
3. Liability insurance to cover legal and medical expenses if someone gets injured on your property
4. Additional living expenses and loss of use coverage, which pays for hotel stays, meals, and other costs if you need to live outside the home while it is being rebuilt or repair
Your homeowners insurance premium can vary widely based on the type and size of home, and even your credit score. The average U.S. homeowners insurance premium is $109 per month according to a Bankrate study. But premiums can go up or down substantially depending on risk factors. The best way to know how much your insurance will be is to get a quote on a specific home.
Most homeowners will pay homeowners insurance along with their mortgage payment each month, all in the same bill. The lender collects a full year’s premium at closing, then you pay 1/12 of the annual premium each month so that the lender can prepay the next year. The lender takes care of paying the initial bill. If you don’t have a mortgage, you will need to make a payment directly to your insurance agent or company, and continue paying the bill monthly or yearly.
work with an insurance agent, who will take down information about your home and possessions and will gather quotes from a broad range of providers to compare their policies and find the best price.
A standard homeowners insurance policy may not include coverage for flooding, a sewer or drain back-up, damage from certain types of animals (such as birds or rodents), and general wear and tear on the property. Typically, a homeowners insurance policy applies to damage caused by storms, fires, or other events beyond your control. But a general breakdown of appliances, roofing, or problems associated with the aging of the house likely won’t be covered. For peace of mind when appliances and other systems break, you might want a home warranty.
Ensure a smooth closing. Start shopping for homeowners insurance now.
As a homebuyer, you don’t want any surprises when it comes to your closing.
Remove one potential hiccup early: secure homeowners insurance as soon as you get an accepted offer from the home seller, then submit that information to your lender.
Then you can focus on finalizing the purchase and enjoying your home.