Congratulations on taking the plunge into homeownership! This new level of adulting can bring about many other new purchases and decisions. And we’re not talking about curtains and flooring here: We mean homeowners insurance.
You’ve probably had to secure insurance for your car, and we hope you’ve had renters insurance in the past, but homeowners insurance is a slightly different animal. As with most things, it is a good idea to shop around and get two to three quotes from different companies so you can compare the monthly premium cost. If you don’t maintain your insurance policy and you still have a mortgage, your mortgage lender will likely have your home insured, but at a much higher cost that will be passed on to you!
Here are a few things to consider when comparing coverage and cost. Remember you want to be comparing apples to apples, so be sure you ask lots of questions:
- A standard homeowners policy (HO-3) covers your home if fire or fallen trees strike, but in most cases does not cover floods or earthquakes. Each state has different regulations about what is minimally covered with this policy, so be sure to ask. It also covers your personal belongings inside the home and has a liability coverage component to protect you if someone gets injured on your property. As you can imagine, the price, or premium, depends on the maximum amount your insurance company will pay out if a claim is filed.
- There are several types of optional coverage you should consider adding onto your basic policy. If you live in a flood or earthquake zone, you may actually be required by your mortgage lender to purchase one of these policies. There are also other endorsements you can purchase to cover mold damage, sewer and drain backups, and sump pump overflows. The climate and age of your home will help you decide if those are worth the investment.
- You also need to determine the level of coverage you feel comfortable with. Most homeowners opt for extended replacement cost coverage, which normally covers up to your home’s replacement cost plus removal (normally 125%) and a maximum amount to replace your belongings. Just think what a mess it would be to clean up after a fire if your home had to be completely removed and replaced with a new one—that’s why the coverage is 125% of the value. There are also “Cadillac” policies called guaranteed replacement cost that can go beyond the level mentioned above, but these can be hard to find and quite costly.
- Optional coverages to protect your personal belongings are also available. Consider upgrading to personal property replacement cost to avoid your belongings being undervalued. If you have expensive jewelry, furs, guns, or antiques, you should consider a personal article floater be added to your standard policy. Most standard policies protect your possessions from disasters and theft, but they aren’t a blank check! They have limits and may not provide full replacement cost unless you have the floater.
- While the level of coverage for your actual home is somewhat fixed, the personal liability coverage can be more flexible. Each state has its own minimum requirements, but beyond that, you can choose the level that is appropriate for your financial situation. If you have significant assets, you should ask about an umbrella policy for extra protection.
- High deductible, lower insurance premiums—and vice versa! Some people consider the lower premium to be a cost savings, but if you can’t cover the higher deductible (amount of loss you are responsible to pay out of pocket before your insurance pays a cent) with money you have saved in the bank, you could be in trouble when tragedy strikes. This decision is a personal one and something you must consider in your personal financial plan.
The sooner you get your insurance shopping trip done, the faster you can move on to the fun parts of homeownership, like paint colors and new couches. Welcome home!
Guest blog author and military spouse Gailo Bodenhamer, Accredited Financial Counselor®
Resource: National Association of Insurance Commissioners https://www.naic.org/documents/prod_serv_consumer_guide_home.pdf