Securing Your Future: A Guide to Homeowners Insurance
Buying your first home is a significant achievement, but it comes with substantial financial obligations. One of the most critical is securing adequate homeowners insurance. While many first-time buyers focus on the mortgage and upfront expenses, understanding the importance of homeowners insurance is equally crucial.
The Insurance Information Institute (III) provides valuable insights into the common reasons homeowners file claims, highlighting the critical need for protection. For instance, in 2022, property damage accounted for 97.8% of all claims.
As a new homeowner, safeguarding your investment should be at the forefront. Homeowners insurance provides financial protection for both your home and your belongings against unexpected events. This guide will walk new homeowners through what they should know when purchasing home insurance, how to identify coverage needs, and how to select the right policy.
Why is Homeowners Insurance Essential?
New homeowners quickly realize the costs of homeownership can be considerable. In an attempt to cut expenses, some may consider reducing their homeowners insurance coverage, but this is a risky move. Ilya Shnol, Vice President of Underwriting at Hippo Home Insurance, emphasizes the importance of this coverage: “Homeowners insurance may not be legally required, but it’s crucial for financial protection. Without it, you’d be responsible for covering repairs or rebuilding costs if your home is damaged by fire, storms, or vandalism. It also protects your personal belongings and provides liability coverage in case someone is injured on your property.”
Shnol also points out that most mortgage lenders will require borrowers to maintain a homeowner’s policy. “Even if you own your home without a mortgage, insurance provides a financial safety net against unexpected damage,” Shnol says.
Robert Washington, Founder and Broker of Savvy Buyers Realty, encourages his clients to obtain coverage, even if not mandated. He also mentions that first-time buyers may be unaware that some lenders include homeowners insurance costs in their mortgage payments. “Most first-time homebuyers are unaware that if they are using financing, their lender will collect a portion of their insurance premiums monthly and hold it in escrow in order for it to be paid to the insurance provider annually,” Washington explains.
When a lender includes insurance in your mortgage, you can typically choose your own insurance company. Alternatively, the lender may select a provider. Lender-Placed Insurance (LPI) tends to be more expensive. Therefore, shopping around and selecting your own provider can lead to significant savings.
Understanding Coverage Limits and Costs
Misconceptions about homeowners insurance coverage can be costly. For example, many buyers assume that the coverage amount should match the purchase price of the home. Diane Delaney, the Executive Director at the Private Risk Management Association, clarifies the reason why coverage amounts may exceed the mortgage loan. “Your dwelling coverage is based on the cost to rebuild—not the price you paid. Insurance companies consider the cost of construction, materials, and skilled labor, which can fluctuate. Because of this, your coverage amount is often higher than your home’s purchase price.”
Homeowners can influence this by choosing between different types of policies:
- Actual Cash Value (ACV): This policy covers the cost to replace the home and belongings, but it considers depreciation, which means you will receive less than the cost of a brand-new item. ACV policies are typically less expensive but offer less financial protection.
- Replacement Cost Value (RCV): RCV policies pay to replace, rebuild, or repair your home at current market prices without deducting for depreciation, providing superior financial protection but at a higher cost.
“Insurance should cover the cost to rebuild your home, which is different from its market value. With rising labor and material costs, the price to rebuild may be significantly higher than what you originally paid for the home. If you own an older home, rebuilding must comply with current building codes, which can further increase expenses,” Delaney explains.
Decoding Your Home Insurance Policy
Homeowners insurance policies can seem complex, but understanding their components is important. A standard policy includes four main areas of coverage:
- Dwelling Coverage: This covers expenses required to repair or rebuild your home if damaged or destroyed by fire, wind, hail, or lightning. Also inquire whether the policy covers damage from vandalism. Dwelling coverage typically includes garages and decks.
- Personal Property Coverage: This portion of the policy covers personal belongings such as clothing, jewelry, furniture, and electronics against damage or theft. High-value items may require additional coverage riders. Always review your policy limits to ensure your valuable items are adequately protected.
- Liability Protection: This protects homeowners from lawsuits if someone is injured on their property or if their property damages someone else’s. It also covers damage caused by pets and the cost of defending you at trial, up to the policy limits.
- Additional Living Expenses: If you cannot live in your home because of a covered event (fire, windstorm, etc.), this covers the costs of hotel stays and meals while your home is being repaired or rebuilt.
These components only highlight the standard coverage. Insurance policies often exclude specific incidents and items. Thoroughly review the details of your policy to fully understand the coverage provided.
Common Homeowners Insurance Misconceptions
Delaney notes that a common misconception is that a basic homeowners policy covers everything. “Not all disasters are covered; so confirm with your agent on what disasters are excluded. While standard policies cover many risks, they do not cover floods, earthquakes, or routine maintenance issues,” Delaney says.
Homeowners should also consider their home’s location when reviewing coverage options. “It’s important to evaluate your home’s location and check with your insurance agent or provider about its potential risks to ensure you have the right protection,” Shnol advises. Additionally, homeowners should ask insurers if their policies extend to pools or detached structures, as these often require additional coverage elements. Make sure you have carefully reviewed your policy to make sure you have all protections needed.
New homeowners should also be certain they are aware that insurance providers will not cover most maintenance issues; these costs are the homeowners’ responsibility. “By staying proactive with seasonal home maintenance, homeowners can help avoid costly, unexpected damage in the first place,” Shnol says.
Choosing the Right Home Insurance Policy
Shopping for a homeowners insurance policy doesn’t have to be intimidating. Understanding your coverage needs and how much coverage you need in case something unexpected happens can make the process less stressful. Start by assessing your coverage needs. “Home buyers should consider their financial situation to determine how much they can afford to pay out of pocket for rebuilding their home or replacing personal belongings. While carrying enough coverage for full replacement is generally recommended, some homeowners choose to cover more costs themselves, such as opting for a higher deductible to lower insurance premiums,” Delaney says.
Delaney also recommends creating a home inventory which details contents in case you end up needing to file a claim. “An inventory should include item names, descriptions, receipts, and photos of valuables, such as electronics, jewelry, and furniture,” she says.
When selecting liability coverage, consider how you will use your home now and in the future. If you have a pool, expect to host a lot of guests, or have pets, you ought to consider increasing coverage to protect against those additional risks.
Next, don’t just look at the price. The cheapest quote isn’t always the best choice. “It’s important to look beyond just the price. Start by evaluating coverage options. Some insurers offer broader protection or additional endorsements that may be valuable, based on your home’s location and risks. Pay attention to deductible and policy limits to ensure you’re adequately covered without overpaying,” Shnol advises.
“When comparing insurance providers, it is important for first-time homebuyers to feel comfortable with their policy and coverages. Make sure to ask your insurance agent, if there is anything you don’t understand regarding your policy,” Washington says.
Numerous factors influence the cost of homeowners insurance, including credit score, property location, home age (especially the age of the roof, plumbing, and electrical systems), and any additional risks such as a pool or natural environmental features.
Finally, thoroughly investigate potential insurers. Delaney suggests looking into customer service reviews and ratings, and checking the insurer’s credit rating. “Research claims satisfaction. Look for reviews and ratings on how insurers handle claims … understand what’s not covered to avoid surprises later. And, check the insurer’s credit rating with agencies like AM Best to ensure their financial creditworthiness,” Delaney recommends.
Saving Money on Homeowners Insurance
Several steps can maximize your coverage and lower out-of-pocket costs. Consider bundling your homeowners policy with other existing coverage (like auto or life insurance). As Delaney says, “[New homeowners] absolutely should bundle home and auto policies. By not doing this, you can leave yourself open for gaps in coverage. Different companies may have varying terms and exclusions, which can create coverage gaps, if policies don’t align. Most carriers offer a discount for protecting your home and auto.”
Another option is to upgrade your home with certain new features. Safety features like leak detection systems, that monitor household electrical systems and alarm systems can make your home safer, provide timely alerts on potential issues, and save money on your insurance policy. Other money-saving measures include storm shutters, impact-resistant windows, and gates (with locks) around any pools.
Ultimately, you should compare rates and coverage options from at least three different companies. When reviewing policies, carefully compare the coverage, exclusions, and any additional benefits.
The Bottom Line
Safeguarding your home and financial investment is essential. The correct homeowners insurance will protect your property, belongings, and finances from unexpected disasters, costly repairs, and liability concerns. Carefully review your policy, compare options, and make certain you have the needed protection. A small investment in insurance today can shield you from costly financial setbacks later on.
