Homeowners insurance basics

Did you know that you can legally own a home without homeowners insurance? However, if you’re like most people and plan to purchase your home with the aid of a mortgage, your mortgage lender will likely require you to obtain homeowner’s insurance coverage before they approve the loan. Plus, it makes sound financial sense to protect any large investment. Homeowners insurance provides financial protection for your home and the items you keep in it against disaster, theft, or loss.

What homeowners insurance covers

The most commonly purchased homeowners insurance policies include coverage for:

• The structure of your home. This pays for the repair or rebuilding of your home—including detached structures on your property like a garage or tool shed—should it be damaged or destroyed by a disaster covered by your policy. Insured disasters generally include: tornadoes; hurricanes; fire or lightning; windstorms; hail; explosions; riots or civil commotion; smoke; vandalism; theft; volcanic eruption; falling objects; weight of ice, snow, or sleet; and damage caused by aircraft or vehicles. Some policies may cover more or less than those listed here—it’s important to review each policy for what it specifically covers.
• Your personal belongings. Personal items in your home such as furniture, clothing, and electronics are covered if they are stolen or destroyed by an insured disaster. Typically, the policy will cover 50%-70% of the amount of insurance you have on the structure of your home. For example, if you have $200,000 worth of insurance on the structure of your home, you would have between $100,000 and $140,000 worth of coverage for your personal belongings. Is that enough to cover your most prized possessions? The easiest way to find out is to create a home inventory.
• Liability protection. This coverage goes beyond your home to protect you from the cost of damage to other people’s property. For example, if you drive your car into your neighbor’s garage, the policy will cover the cost of the damage, as well as court costs and awards, should your neighbor file a lawsuit against you. This part of the policy also provides no-fault medical coverage, so in the event that a friend or neighbor is injured on your property, he or she can submit medical bills directly to your insurance company.
• Additional living expenses. If you’re forced to live elsewhere due to damage from an insured disaster to your home or property, this would cover that additional cost, beyond what your structural insurance covers. 

What it doesn’t cover

Some occurrences aren’t covered by standard policies, but you can generally purchase additional coverage through your insurance provider or a separate policy. Floods, earthquakes, sewer backups, and damage due to lack of maintenance are a few items typically not covered. If you buy a house in a designated flood zone, you’ll be required to purchase flood insurance. Earthquake coverage isn’t mandatory, though it may make sense for you depending on where you live. Even if your home is tied to the city’s sewage system, the sewer lateral—the pipeline between the city sanitary sewer main and your building—is your responsibility, and damage due to sewer backup is not covered under flood insurance. Finally, make sure you stay on top of routine maintenance both in your home and around your property.

Insurance considerations

As you’re looking to buy a home, factor in the homeowners insurance implications of your potential purchase, in addition to property taxes, school district, etc. A home’s size, location, construction, and overall condition can affect the cost, choice, and availability of homeowners insurance. Some specific criteria to keep in mind:

• Quality and location of the fire department. If your potential home is located near a highly-rated, permanently-staffed fire department and/or a fire hydrant, it may cost less to insure.
• Coastline proximity. If your house is located on or near the coast, it may cost more to insure and may also carry a higher deductible for hurricanes or windstorms.
• Flood risk. According to the National Flood Insurance Program, flooding is the most common natural disaster in the United States, affecting every region and state. If your potential home is in an area prone to flooding, you’ll likely have to purchase additional insurance.
• Earthquake history. Though not included in standard policies, you may want to purchase this insurance, depending on where you live. Regions are graded on a scale of one to five for likelihood of earthquakes, which is reflected in insurance rates.
• Age and condition of the home. Older homes, though generally well-built, can have outdated plumbing and electrical systems, and features that are more costly to replace, such as wooden floors and crown molding. Because of these things, an older home may drive up the cost of insurance. Similarly, the quality and age of the roof can have a significant impact on the cost of homeowners insurance. 

Before you bid on a home or sign a mortgage, get a home inspection. A home inspection should uncover any potential issues or problems and better help you decide what insurance coverage you may need. You should also request a loss history report, which contains a record of insurance claims on the house. That way, you can see if there were any past issues or damage, and if the damage was properly repaired.

Purchasing insurance

The cost of insuring your home will depend on what it would cost to rebuild the home, what coverage you add to the policy, and how likely it would be for the home to be damaged or destroyed. Be sure you purchase enough insurance to rebuild the house in the event of a total loss, as opposed to basing it on the retail value of the home, which is market-driven.

To help save money, inquire about discounts for covering multiple items—such as your car, home, and life insurance—with the same company. You should also look into installing items that make your house less of a risk: smoke detectors; fire extinguishers; sprinkler systems; burglar and fire alarms; deadbolt locks; and upgraded plumbing, heating, and electrical systems. Finally, consider taking the highest deductible you can afford. By increasing your deductible from $500 to $1,000, you could save up to 25% on your premium payments.

Having a place to call home is a dream for many people. The right homeowners insurance can protect that dream, so you can rest easy knowing you and your home are covered.

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