Navigating Homeowners Insurance for First Time Homeowners
So you’re finally in the market to buy your first home? Congratulations–you’ve now made what will probably be the largest investment in your life and are fortunate to be in such a position. Nothing is more fulfilling than being handed keys to your new house and knowing that it’s yours. Or at least, it will be–in about 30 years.
1. Realize that shopping for home insurance is as important as shopping for your home.
First things first–choose your insurer carefully, don’t buy the first policy you’re quoted—this includes the insurance offered to you by a mortgage company. Take some time to look at home insurance options with an agent or a company that can provide you with detailed information about what’s covered, what’s not covered, and what options you can add or take away to customize your policy to best meet your needs. Otherwise you can easily end up in a situation where you don’t have enough coverage and have a denied claim.
You don’t want to put in all that money and investment only to have something happen and lose your home to some type of damage you thought would be covered under insurance, only to find it wasn’t. Prime example? Hurricane Katrina victims who thought flood was covered on their policies only to find it wasn’t at all.
2. Familiarize yourself with homeowners insurance for basic knowledge.
Many of the options you’ll be presented with will sound foreign to you, such as the different ‘forms’ that will be offered. You have basic coverage that is typically included on all standard hazard or fire insurance policies:
ü A: Dwelling (the actual house structure itself)
ü B: Other Structures (detached garage, shed, workshop)
ü C: Personal Property (all the stuff you have in and around your house)
ü D: Loss of Use (reimbursement of additional living expenses due to a loss)
ü E: Personal Liability (if you are sued due to negligence on your property)
ü F: Medical Payments (If you have a guest that is injured)
Much of what you hear will be new to you, and unfortunately homeowners insurance isn’t as easy as the standard coverage types listed above—there are different forms homeowners insurance can be written on. You should understand the difference between the different types of forms homeowners insurance is written on, which are:
• Broad Form (sometimes called Named Perils) coverage is the most common form of insurance, and it is pretty standard.
• Special Form (sometimes called All-Risk) coverage extends coverage for your home for more reasons of loss. In addition it provides you more detailed coverage on your personal property. It also provides little benefits that vary from company to company. Special Form costs more, but you still want to customize your policy and then ask the difference in cost between broad form and special form. If you have great credit and no prior loss, it may only mean the difference of a few dollars a month.
If you’re comparing different quotes and one seems very cheap in comparison, find out which form it is before you spring for it. If they’re writing your insurance on a basic form, you’re being cheated out of 100% replacement cost and probably getting an Actual Cash Value (ACV) policy which only gives you cash value for your house minus depreciation/wear and tear.
Next, familiarize yourself with the three main categories based upon the kinds of perils, or risks they cover. The categories are technically referred to as HO-1, HO-2 and HO-3. There are also other kinds of homeowner’s insurance policies which cover renters, condominiums and other specific structures.
HO-1 is a basic insurance which covers a few common perils to your home. This type of policy is being increasingly replaced by HO-2 policies which are more detailed in their listing of specific perils.
HO-2 covers sixteen specific perils as listed below and the damages they cause:
• Lightning or fire
• Hail or wind
• Damage from falling airplanes
• Damage from cars
• Falling objects
• Electric current overload
• Damage from ice and snow
• Water damage from plumbing
• Water heater malfunctions
• Frozen pipes
HO-3 is probably the most popular home insurance category because it’s very comprehensive and covers the widest possible variety of perils.
While HO-2 covers sixteen specific perils, HO-3 covers all perils unless specifically excluded or not covered within the policy itself. For example, your HO-3 policy may specifically exclude earthquakes, aftershocks, sinkholes, landslides, mud flows, flood damage, sewer back-ups, or damages resulting from power failure or the homeowner’s neglect of proper maintenance of the structure. HO-3 doesn’t cover acts of war and/or nuclear radiation. However, unless a peril is specifically excluded, your HO-3 policy will most likely cover the losses from such an event.
Damages to your home and outbuildings don’t necessarily limit themselves to those structures. The loss of a home carries many consequences you may not have thought about. These things may or may not be listed specifically in your policy but require your attention.
For example, you’ll want to be sure that should a catastrophic loss of your home occur that your insurance policy will provide you with money to obtain housing for you and your family while you can’t use your own home. In some cases, special situations will demand that your temporary housing have certain amenities like handicapped ramps and bathrooms.
For the most part, you can adjust a lot of the coverage to provide more protection or broader protection, so even if the coverage names are the same, you still want to go over each coverage option.
3. Homeowner’s coverage can differ greatly in how it is written.
Within standard coverage there’s a lot of room for options. For example, on the dwelling, if you’re only covered on a basic form, you may only be covered for eleven different types of loss.
In addition, you might have just actual cash value (ACV) on the dwelling rather than full replacement cost (RC) which would severely limit the amount you could collect from the insurance company to make repairs or to replace your house. With ACV, if you have an older home that’s not in the best shape, your insurance company is going to depreciate the cost and value of your home and give you far less than what it actually costs to replace it.
With RC, you should have full replacement cost up to 120% or 125% depending on your state’s guidelines. This actually gives you a buffer for inflation and rising building costs so your home has plenty of coverage and can be completely rebuilt from scratch if need be.
4. Consider liability options carefully: Lawsuit protection is very important.
In a sue-happy world, it makes sense to prepare for the worst when it comes to lawsuits. Consider the implications of your choice—if you buy the lowest liability available, you could end up setting yourself up for an easy lawsuit. Even some ‘friends’ can spot a way to sue someone. This is especially true if you’re buying a home of high value or if someone believes they could profit from your wealth.
Sadly, odds are if your lender picked your coverage, you probably only have $100,000 worth of liability protection. This can end up being a disaster—if you someone were injured on your property, sued you, and a judgment was brought against you, you’d have two options—file bankruptcy and hope the bankruptcy would get you out of your sudden debt, or you could be forced to give up your assets, liquid or not, to pay for the judgment. Then if your assets aren’t enough to cover the judgment, you could end up having your pay or taxes garnished the rest of your life to pay off that debt. Better to be safe than sorry– you can choose up to $500,000 without much difference in cost, often a couple dollars a month.
In addition, if you have your auto and home insurance with the same company (which only makes sense for the multiple discounts) you can also purchase excess liability or an umbrella liability, which extends your auto and home liability to an additional $1 or $2 million. For low-risk customers, this extra coverage worth a million plus will cost you as little as $20 month.
5. Other options to pick and choose from.
There are extra coverage options, endorsements, or riders you can add to your policy to customize it for your needs and peace of mind. Usually you have even more options with these to choose how much you’d be covered for under any extra endorsements or riders you add. Some of the extra options you can choose from include:
• Debris removal
• Damage to landscaping
• Credit card/identity theft
• Fire department surcharges
• Scheduled personal property
• Mine Subsidence
If you’ve made the time to seek out the perfect home for yourself or your family then you should take at least 30 minutes to go over your home’s coverage with a knowledgeable agent, ask questions, and as always, however boring it sounds, read your policy. Buyer’s remorse is bad enough, don’t add ‘homeowners insurance’ remorse onto it.
If it seems a bit intimidating when you begin to read it, a handy copy of Insurance For Dummies is probably available at Barnes and Noble, but the first, most important thing you should know about buying homeowners insurance as a first-time homeowner is to be your own advocate and most importantly, never allow others to make your homeowner’s insurance decisions for you.