Homeowners insurance covers the cost of damages to your home. If you want to preserve your financial security, it’s a must.
Am I Required to Have Homeowners Insurance?
Although you aren’t legally required to insure your home, lenders require it before they will finance your purchase. Lenders want their investment to be covered should something damage your property. Insurance does exactly that. The requirement protects you, too. Should a disaster occur, it’s reassuring to know that your losses will be covered.
What Kind of Homeowners Insurance Do I Need?
A typical homeowners policy covers a variety of destructive events. Depending on your location and threats common in your area, you may choose to add additional coverage. A basic homeowners policy will cover the following losses:
- The structural integrity of your home: This covers physical damages like a torn-off roof, an uprooted tree falling on your house or a fire caused by lightening. Your policy can cover repairing or restoring your house and your outbuildings, if any.
- Personal possessions: Your homeowners policy can repair or replace your furniture, housewares, electronics, clothing, accessories, decor and other similar items.
- Accommodations: Living expenses coverage can pay for the cost of lodgings while your home is being restored and repaired.
- Legal expenses: Homeowners insurance can cover legal costs if someone is injured on your property as a result of negligence. Besides legal bills, this coverage can pay medical bills and court awards up to their limits.
- Personal liability: If you are found guilty of accidentally damaging another person’s property or accidentally injuring someone, personal liability insurance can cover repair costs, medical bills and legal fees.
Those are the basic coverage components found in most homeowners policies. However, most policies also have exclusions. Earthquakes and floods are not usually covered. If you live in a flood-prone or an earthquake-prone area, your lender might require that you buy extra insurance to cover these events.
You might also own valuables that exceed the policy limits. These items can include wine cellars, fine jewelry, original art, precious metals and coin collections. Lenders don’t require it, but extra coverage in the form of a personal articles floater (PAF) can save you a fortune if any of these items are destroyed.
If you purchase a co-op or a condo, the co-op or condo board will require that you carry insurance to protect the entire complex from any damages caused by you.
What Are the Different Types of Homeowners Policies?
There are all sorts of homeowners policies, and some are better than others. Get the best coverage you can afford. Just as with your auto insurance, you’ll get what you pay for. There are three levels of coverage that are standard in the insurance industry. They are actual cash value, replacement cost, and extended replacement value. Each policy type offers different levels of protection:
- Actual cash value: This insurance covers the cost of your home and the depreciated value of your possessions.
- Replacement value: Replacement value insurance covers the actual cash value of your home and possessions with no deduction for depreciation. With replacement cost coverage, you can restore your home to its original value.
- Guaranteed extended replacement value: This insurance covers all costs required to restore your home to its original condition. This is true even if the costs exceed your policy limit. The extended replacement policy gives you more coverage than you buy. The additional coverage can cover up to 25 percent more than your limit.
If you can manage it, guaranteed replacement value insurance is the preferred option. As with the other policies, it covers your home’s value. It also covers your costs if you want to restore your home to its original condition at today’s higher construction prices. According to insurance industry advisors, your current mortgage represents only 90 percent of your home’s total value. With guaranteed replacement value insurance, the other 10 percent will be covered, too.
Can I Drop My Homeowners Insurance After I Pay Off My Mortgage?
When you make your last mortgage payment, you can do whatever you want with your homeowners policy. However, your home is probably your biggest financial investment, and you’ll want to keep it safe. To ensure that your investment isn’t lost, it’s best to keep your homeowners insurance in place.
After your house is paid off is an opportune time to examine your current homeowners coverage. Assess whether what you have now is still giving you what you need. If not, it’s time to rethink your options. You might be able to reduce your premiums and get more coverage for your money.
When Should I Purchase Homeowners Insurance?
Start looking for a homeowners policy immediately after you sign a contract to buy a house. The sooner you start researching, the more time you’ll have to find the best homeowners policy with good coverage and reasonable rates. By the time you close on the property, your insurance will already be in place.
How Long Will It Take for Coverage to Begin?
You can get quotes online in minutes, and if you have to move quickly, you can have a homeowners policy in place within a few hours. Timing will depend on the type of property you want to insure. If you’re not in a rush, you can usually get insured in one to three days.
What If My Home Is Damaged and I Have No Insurance?
Without a homeowners policy, you’ll have to cover any damages to your home out of your own pocket. Depending on the type of damages sustained, you could potentially lose your entire investment.
Do I Need Hazard Insurance?
Hazard insurance is a lending term that refers to the part of your policy that covers the structure of your home. If you live in an area that’s prone to natural disasters like floods, earthquakes or hurricanes, your lender may require you to carry hazard insurance as part of your policy.
What Is Not Covered by Homeowners Insurance?
Acts of war, natural disasters and acts of God may be excluded from your policy. If you live in an area prone to natural disasters, your lender will require you to have an additional policy or a rider to cover damages from that particular disaster. Sewer and drain backup are not covered either, but like natural disaster coverage, you can add it on. Some policies will even insure your identity and cover your costs if someone steals it.
How Can I Reduce My Premiums?
Although it doesn’t pay to skimp on coverage, you can reduce your premiums by doing three things:
- Install a security system. If your system is manned by the local police or by a central station, you could reduce your premiums by five percent or more.
- Install smoke alarms. Older homes typically don’t have smoke alarms. However, if you install them, you could reduce your premiums by 10 percent or more. You can also reduce premiums by installing a sprinkler system, adding weatherization and installing carbon monoxide detectors and deadbolt locks.
- Increase deductibles. The higher your deductibles, the lower your premiums. The only downside is that with lower deductibles, you may have to pay more out of your own pocket.
What Are Policy Limits and Deductibles?
Limits are the maximum your insurance company will pay toward a covered claim. Deductibles are the amount you’ll have to pay toward a covered claim before your insurance kicks in.
What Determines The Cost of My Premiums?
Insurance companies view you as a risk. The lower your likelihood of filing a claim, the less of a risk you become. To determine your risk factor and also your premiums, insurers look at your credit score. They also look at claims filed by the previous homeowner. If those claims are all related to one issue, it could increase your risk factor and your premiums.
Insurers also consider your history of filing homeowners claims and the severity of the claims you’ve filed. If you’ve filed more than one claim in the last seven years, you could be denied coverage.
Risk is also assessed according to your neighborhood and its crime rate. The building materials used in your home can affect your risk, and so can your deductibles, coverage limits and riders for art and jewelry.
Premiums are affected by the age of your home and its overall condition, the type of roof you have and your home’s HVAC system. Additional factors that can influence premiums include whether you have a swimming pool, a pet or even a trampoline.
Speak With a Homeowners Insurance Agent Now
Choosing a homeowners insurance policy is a tricky business. An experienced homeowners insurance agent can help you get exceptional value and thorough coverage at an affordable price.