What You Need to Know About Home Insurance
Whether you’re buying a house or even thinking about it, you’re probably hearing a lot about home insurance. But there are so many options and you may be unsure what you actually need.
Car insurance is a breeze, but with home-related insurance, there are various specialties, and other things that aren’t quite insurance, but act like insurance.
If you take out a mortgage to finance your home purchase, the lender won't even give you the option to borrow without a homeowners policy, said Keir Jones, owner of the Keir Jones Agency with State Farm in Long Beach.
"Home insurance isn’t optional if you have a loan on the property. Your lender requires it, and for good reason. It’s a major asset that you want to protect, so even if you pay cash, a homeowners policy is a small price to pay to get your home rebuilt and protect one of your largest assets," Jones said.
How will you know which you really need to protect your home and which are just a waste of your hard-earned cash? Let us walk you through it.
Insurance for Your House and Your Stuff: Homeowner’s Policies 101
If you rented a house before you bought, you may have had a watered-down version of this policy, often called a renter’s policy. These are meant to cover your things, should the house burn down or a tornado carry it off into the sunset. Renter’s policies are relatively inexpensive, running about $15 a month in most areas, so more landlords are making them mandatory parts of rental agreements. You’ll see a few similarities between your renter’s policies of the past and a homeowner’s policy.
A homeowner’s policy is designed to protect you, your family, your dwelling and your personal property from damage, both physical and financial, to some extent. Most policies are essentially the same, containing these components:
Dwelling coverage. Your lender will require that if your property is severely damaged, it’s able to recover the amount of the loan you’ve borrowed. This is what dwelling coverage is for, when it comes down to it. In the case that your house was a total loss, you’d have the option to either rebuild with those insurance funds or give them to the bank and own the lot free and clear (then you could rebuild with cash or sell the lot off).
Oh, but it gets better! Dwelling coverage will also cover major damage to your home, like when a bad wind or hail storm comes through and causes your roof to spring a leak. You will likely have a deductible around $1,000 or higher to deter you from making too many claims, but it is handy to have when big issues crop up.
It’s extremely important to note that while many acts of nature (tornadoes, fires, wind storms, etc.) are covered by your dwelling coverage, most policies specifically exclude floods, earthquakes and sinkholes. Check your policy carefully and ask your agent about additional coverage if you’re in a flood-, quake- or sinkhole-prone area. Make sure you understand what your deductible will be if you have a claim, and that you're comfortable with that deductible option.
Other structure coverage. Other structure coverage does exactly what it says it does: covers other structures. There’s usually a dollar cap, which is a percentage of the value of your home, but it can be applied to major damage to sheds, detached garages, fences, greenhouses and any other permanent structure you have on your property.
Personal property coverage. This is the part of the insurance policy that’s just exactly like renter’s insurance. If your property is damaged during a storm, stolen during a robbery or severely damaged by something out of your control, you can file a claim and possibly have some kind of reimbursement. Replacement cost coverage provides the amount necessary to replace your items, so if this is an option, choose it. Again, though, there is probably not coverage for flooding, earthquakes or sinkholes, so be ready to ask about it.
Personal liability coverage. If the neighbor pops by to bring you a pie and accidentally slips and is injured, you don’t have to worry about how much her hospital bills are going to be. Your insurance will cover it (to a specified amount). The same applies if your tree drops a limb on the neighbor’s roof and they sue you for the costs. Accidents happen, that’s what insurance is for.
Other things that are covered by this part of the policy may include dog bites that occur on your property, if you were honest with the agent and your dog wasn’t on a prohibited dog list (some insurance companies won’t insure homes with “pitbull” type dogs, German shepherds, Rottweilers, and others). It’s essentially a general liability policy tied to your home, so if you can imagine an accident stemming from your family, it’ll probably cover it.
Loss of use coverage. Many homeowner policies will also pay for you to live elsewhere while your home is being repaired after major damage. This is the loss of use coverage portion of the policy. It, of course, comes with a cap, so don’t get too cozy at the Ritz. Your dollars — and days — are limited.
Additional Coverage. You can choose from a number of additional coverages, from extra coverage for valuable collectables to coverage for identity fraud, at an additional cost. Most of these extra coverages won’t apply to most buyers, but there’s one that you may want to consider if you’re buying a house with a basement or in an area with a high water table.
That’s the “Water Backup and Sump Pump Discharge or Overflow” coverage. Now, this still won’t cover flooding, but it will cover any water that’s forced back into your house through the sewer system due to excessive ground- or wastewater causing backflow in the sewage system. So, it’s not for flood waters that enter your house the normal way, but if they come in through the sump pump, you’re gold.
Flood Insurance: What’s That All About?
Flood insurance primarily comes up when you’re looking to buy a house sitting on a piece of land that has even a tiny corner poking into a floodplain. The fact that most homeowners don’t know they can buy flood insurance no matter where they live is a serious disservice to all of them, especially considering how many homes have been flooded in recent years without being located in flood plains. The issue usually comes up when your bank requires a flood insurance certification to process your home loan for a house in a flood hazard zone.
The cost of flood insurance varies depending on the risk and the value of your home. This is the coverage that fills in the gap that your homeowner’s leaves totally open. It only pays on flood damage, and there are plenty of exclusions, including anything located in a basement or other room that’s below ground level, but it’s a lot better than the nothing you’ll have otherwise. Ask your agent about optional flood insurance while you’re discussing homeowner’s.
The Seller Provided a Home Warranty, How Does This Figure In?
Getting a home warranty at closing is a good move. Although the companies behind them can sometimes be slow to get the wheels moving, they can protect you from major repair expenses in your early homeownership years. But, they can also be a little confusing because they sort of work like insurance, even though they aren’t technically insurance.
Home warranties help you cover the cost of repairs for common small household issues, like leaky plumbing, air conditioning or electrical malfunctions, or the failure of your water heater. You pay a fixed cost for the service call, and the warranty company pays the rest.
In this way, it behaves a bit like health insurance. Everyone pays into one big pot and the money is used where it’s needed. Not everyone will need to use their home warranty, but those people who do need it may require a considerably larger chunk than they contribute. Everybody understands that’s the deal when they sign up, though. They know they may not actually use the coverage, so it’s all on the up-and-up.
Wrap Your Home in a Warm Layer of Insurance Bubble Wrap
A lot of home buyers and homeowners think that insurance is a waste of money. After all, it’s designed so that you never use it. While that may be true, the fact remains that if you do need it, you’re really going to need it and there’s no take-backs. You can’t change your mind and load up on coverage after that giant tree has fallen through your bathroom ceiling.
For the relatively small cost (when compared to your house payment) of the right insurance coverages, it’s nice to be able to sleep at night without having to worry about what you’ll do if water comes in under the front door from the storm that’s brewing. Getting good insurance is a snap, too.
Wondering where to start? You can ask your Realtor to recommend an experienced insurance agent who can help you sort out which options will best match your needs. A short call later, you’ll walk a little taller and feel a little bit better about the next windy day.