Homeowners insurance, which is also called “home insurance,” is not a luxury; it’s a must. And not just because it keeps your home and things safe from being broken or stolen. Almost all mortgage companies require borrowers to have insurance for the full or fair value of a property (usually the purchase price) and won’t make a loan or finance a residential real estate transaction without proof.
You don’t even have to own your home to need insurance. Many landlords require their tenants to have renter’s insurance. But having this kind of protection is smart whether it’s required or not. We’ll explain the basics of homeowner’s insurance to you.
Homeowners’ insurance policies usually cover damage to the inside and outside of a home, the loss or theft of belongings, and your personal liability if you hurt someone else.
There are three basic types of coverage: actual cash value, replacement cost, and extended replacement cost/value.
Policy rates are mostly based on how likely the insurer thinks it is that you’ll file a claim. They figure out this risk by looking at the home’s claim history, the neighborhood, and the condition of the home.
Get quotes from at least five companies when looking for a policy, and make sure to check with any insurers you already work with. Often, current clients get better deals.
What a homeowner’s insurance policy gives you
A homeowner’s insurance policy can be changed in any way you want, but it has some standard parts that tell you what costs the insurer will cover.
Problems with the inside or outside of your house
If your house is damaged by a fire, a hurricane, lightning, vandalism, or something else that is covered by your insurance, you will get money from your insurance company so that you can fix it or even build a new one. Most insurance policies don’t cover damage or injuries caused by floods, earthquakes, or poor home maintenance. If you want this kind of protection, you may need to buy separate riders. Freestanding garages, sheds, or other structures on the property may also need to be covered separately using the same rules as for the main house.
Most of the things in your home, like clothes, furniture, and appliances, are covered if they are destroyed in a covered disaster. You can even get “off-premises” coverage, so you could file a claim for lost jewelry no matter where in the world you lost it. There may be a cap on how much your insurance company will pay you back, though. The Insurance Information Institute says that most insurance companies will cover between 50 and 70% of the amount of insurance you have on your home’s structure.
For example, if your house is insured for $200,000, your belongings would be covered for up to about $140,000.
If you have a lot of expensive things, like fine art or antiques, fine jewelry, or designer clothes, you might want to pay extra to put them on an itemized schedule, buy a rider to cover them, or even buy a separate policy.
Damages or injuries caused by an individual
Liability coverage protects you from lawsuits that others might file against you. Even your pets are covered by this clause. So, if your dog bites your neighbor Doris, your insurance company will pay for her medical bills, whether the bite happens at your house or hers. Or, if your child breaks her Ming vase, you can file a claim to pay her back. And if Doris trips on the broken vase pieces and wins a lawsuit for pain and suffering or lost wages, you’ll be covered, just as if someone had been hurt on your property.
Most renter’s insurance policies don’t cover liability outside of the home.
The Insurance Information Institute says that policies can cover as little as $100,000, but experts say that you should have at least $300,000 worth of coverage. With an umbrella policy, you can pay a few hundred dollars more in premiums and get an extra $1 million or more in coverage.
Hotel or Renting a House While your house is being fixed or rebuilt
It’s not likely, but if you do have to leave your home for a while, this will be the best insurance you’ve ever bought. This part of your insurance, called “additional living expenses,” would pay for your rent, hotel room, restaurant meals, and other small costs while you wait for your home to be fixed. Before you book a suite at the Ritz-Carlton and order caviar from room service, though, you should know that the hotel has strict limits on how much you can spend each day and in total. Those daily limits can, of course, be raised if you are willing to pay more for coverage.
There are different kinds of homeowner’s insurance.
Not every kind of insurance is the same. Most likely, the least expensive homeowners insurance will give you the least coverage, and vice versa.
In the U.S., there are several standard types of homeowners insurance. They are called HO-1 through HO-8 and offer different levels of protection based on the needs of the homeowner and the type of home being insured.
Basically, there are three types of coverage.
Actual cash value
After depreciation is taken into account, the actual cash value is the cost of the house plus the value of your belongings (i.e., how much the items are currently worth, not how much you paid for them).
Replacement value policies cover the actual cash value of your home and belongings without taking into account depreciation. This means that you would be able to repair or rebuild your home up to its original value.
Guaranteed (or extended) cost or value of the replacement
This inflation-buffer policy is the most complete. It pays for all of the costs to fix or rebuild your home, even if they are more than your policy limit. Some insurance companies offer an extended replacement, which gives you more coverage than you bought, but there is a limit. Usually, it is 20% to 25% more than the limit.
Some experts say that all homeowners should buy “guaranteed replacement value” policies because you don’t just need enough insurance to cover the value of your home; you also need enough insurance to rebuild your home, preferably at current prices (which probably will have risen since you purchased or built). “People often make the mistake of only getting enough insurance to cover the mortgage,” says Adam Johnson, who works as a home insurance product manager for QuoteWizard.com. However, that only covers about 90% of your home’s value. “Because the market is always changing, it’s always a good idea to ensure your home for more than it’s worth.” If construction prices go up, a guaranteed replacement value policy will cover the higher cost of replacing the home and give the homeowner a cushion.
What Does Homeowners Insurance Not Cover?
Most situations where a loss could happen are covered by homeowner’s insurance. However, natural disasters, other “acts of God,” and acts of war are usually not covered.
What if you live in a place that floods or gets hurricanes? Or a place where earthquakes have happened before? If you want earthquake or flood insurance, you’ll need to add on a rider or buy a separate policy. You can also add coverage for sewer and drain backup, and you can even get identity recovery coverage, which pays for costs related to identity theft.
How are rates for homeowner’s insurance set?
So what makes rates go up and down? Noah J. Bank, a vice president and insurance advisor at HUB International, says it’s the likelihood that a homeowner will file a claim or the “risk” that the insurance company thinks the homeowner poses. And when figuring out risk, home insurance companies look at the homeowner’s past claims as well as claims related to that property and the homeowner’s credit score. “The number of claims and how bad they are playing a big role in setting rates,” says Bank. This is especially true if there are multiple claims about the same thing, like water damage, wind storms, etc.
Insurance companies have to pay out claims, but they are also in business to make money. When you insure a home that has had multiple claims in the last three to seven years, even if the claims were made by the previous owner, your premium may go up. Bank says that if you’ve filed too many claims in the past few years, you might not even be able to get home insurance.
Rates will also be affected by the neighborhood, the rate of crime, and the availability of building materials. The size of an annual premium is also affected by coverage options like deductibles or added riders for art, wine, jewelry, etc., as well as the amount of coverage that is wanted.
“Pricing and eligibility for home insurance can also change based on an insurer’s taste for certain building construction, roof type, condition or age of the home, heating type (if an oil tank is on-site or underground), proximity to the coast, swimming pool, trampoline, security systems, and more,” says Bank.
How else do your rates change? Bill Van Jura, an insurance planning consultant in Poughkeepsie, New York, says, “The condition of your home could also make an insurance company less likely to cover it.” “An insurer is more likely to pay for damage to a home that hasn’t been well taken care of.” Even having a puppy at home can cause your home insurance rates to go up. Depending on the breed, some dogs can do a lot of damage.
How to Save Money on Insurance
Even though it’s never a good idea to skimp on insurance, there are ways to lower your premiums.
Things that affect the rates and premiums of homeowner’s insurance
Keep a security system in place.
The homeowner’s annual premiums may go down by 5 percent or more if the alarm is monitored by a central station or connected directly to the local police station. In most cases, the homeowner must show the insurance company proof of central monitoring in the form of a bill or a contract in order to get the discount.
Another important thing is a smoke alarm. Even though they are standard in most new homes, putting them in an older home can save the owner 10% or more on their annual insurance premiums. CO detectors, dead-bolt locks, sprinkler systems, and even weatherproofing can help in some situations.
Raise your deductible
As with health insurance or car insurance, the homeowner’s annual premiums go down as the deductible goes up. But if you choose a high deductible, you’ll probably have to pay for claims or problems that usually cost less than a few hundred dollars to fix, like broken windows or sheetrock damage from a leaky pipe. And all of these add up.
Look for discounts on more than one policy.
Customers who have more than one insurance policy with the same company often get a discount of 10 percent or more (such as auto or health insurance). Think about getting quotes for other kinds of insurance from the same company that covers your home. You might save money on two insurance premiums.
Plan ahead for changes.
If you want to add on to your house or build something next to it, you should think about the materials that will be used. Most of the time, wood-framed buildings cost more to insure because they are more likely to catch fire. On the other hand, structures made of cement or steel will cost less because they are less likely to be destroyed by fire or bad weather.
Another thing that most homeowners should think about, but often don’t, is the cost of insurance when they build a pool. In fact, things like pools and/or other potentially dangerous devices (like trampolines) can raise the annual insurance costs by 10 percent or more.
Pay off your home loan.
This is easier to say than to do, but people who own their homes outright will probably see their insurance rates go down. Why? The insurance company thinks that if you own a place completely, you’ll take better care of it.
Compare and review policies on a regular basis.
No matter what price you are given at first, you should compare prices and look into group coverage options through credit or trade unions, employers, or memberships in associations. Even after buying a policy, investors should compare theirs to the costs of other policies at least once a year. Also, they should look over their current policy and make a note of any changes that could make their premiums cheaper.
For instance, you may have taken apart the trampoline, paid off the mortgage, or put in a fancy sprinkler system. If this is the case, telling the insurance company about the change(s) and showing proof in the form of pictures and/or receipts could significantly lower insurance rates. Van Jura says that some companies offer credits for making full improvements to plumbing, electric, heat, and roof.
Loyalty usually pays off. Some insurance companies will lower your premium or deductible the longer you stay with them.
Make regular assessments of your most valuable items to find out if you have enough coverage to replace your things. John Bodrozic, the co-founder of the home maintenance app HomeZada, says, “Many people are under-insured on the contents part of their policy because they haven’t taken an inventory of their belongings and added up the total value to compare with what their policy covers.”
Look for changes in the area that could also lower rates. For example, putting in a fire hydrant within 100 feet of the house or building a fire substation close to the property may lower insurance rates.
How to Find the Best Home Insurance
Here is a list of things to keep in mind when looking for and shopping for an insurance company.
1. Compare prices and insurance companies by state
When it comes to insurance, you want to make sure you go with a legitimate company that you can trust. The first thing you should do is go to the website of your state’s Department of Insurance to find out how each home insurance company licensed to do business in your state is rated and if any customers have filed complaints against the company. The website should also show how much home insurance costs on average in different counties and cities.
2. Check the company’s health.
Check out the home insurance companies you’re thinking about by looking at their ratings on the websites of the top credit agencies (like A.M. Best, Moody’s, J.D. Power, and Standard & Poor’s) as well as the National Association of Insurance Commissioners and Weiss Research. These sites keep track of what customers say about the companies, how claims are handled, and other information. In some cases, these websites also rate the financial health of a home insurance company to find out if it can pay out claims.
3. Look at the response from claims
After a big loss, if you have to pay out of pocket to fix your home and then wait for your insurance company to pay you back, it could be hard for your family to make ends meet. Several insurance companies are giving their most important jobs, like handling claims, to other companies.
Before you buy a policy, find out if your claims calls will be handled by licensed adjusters or by a third-party call center. Mark Galante, president of field operations for the PURE Group of Insurance Companies, says, “Your agent should be able to tell you about his or her experience with a carrier and how well-known it is in the market.” “Look for a company that has a history of settling claims fairly and on time, and make sure you know how your insurance company feels about holdback provisions.” Holdback provisions are when an insurance company holds back a portion of the payment until a homeowner can prove that repairs have begun.
4. Satisfaction of current policyholders
Everyone will say that their claims service is good. But you can sort through the noise if you ask your agent or a company rep about the insurer’s retention rate, which is the percentage of policyholders who renew their coverage each year. A lot of companies say that between 80% and 90% of their employees stay with them. You can also find out about customer satisfaction through annual reports, online reviews, and testimonials from people you know and trust.
5. Get Multiple Quotes
Eric Stauffer, the former president of ExpertInsuranceReviews.com, says, “Getting multiple quotes is important when looking for any kind of insurance, but it’s especially important for homeowner’s insurance because coverage needs can vary so much.” “The best results will be found by comparing several companies.”
How many price quotes do you need? About five will give you a good idea of what people are willing to give you and give you more power in negotiations. But before you get quotes from other companies, ask the insurance companies you already work with for a price. As we’ve already said, a carrier you already work with (for your car, boat, etc.) may be able to give you better rates because you’re already a customer.
Some companies give discounts to people who are over 60 or who work from home. The reason for this is that both of these groups tend to be at home more often, making the house less likely to be broken into.
6. Don’t just look at price
Most people decide whether or not to buy home insurance based on the annual premium, but you shouldn’t just look at price. Bank says, “No two insurers use the same policy forms and endorsements, and the wording of policies can be very different.” “Even if you think you’re comparing apples to apples, there’s usually more to it, so you need to compare coverages and limits.”
7. Have a real conversation
Stauffer thinks that the best way to get quotes is to go directly to the insurance companies or talk to an independent agent who works with multiple companies. This is better than going to a traditional “captive” insurance agent or financial planner who only works for one home insurance company. Keep in mind, though, that “a broker who is licensed to sell for more than one company often adds their own fees to policies and renewals.” “This could cost a few hundred dollars more every year,” he says.
Bank urges people to ask questions that give them a clear picture of their options. “You want to think about different deductible scenarios to figure out if it makes sense to choose a higher deductible and self-insure,” he says.
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