New Homebuyers’ Guide to Home Insurance

Shopping for a new home comes with many considerations. From selecting the best neighborhood to property taxes to the number of bedrooms you need, there are a lot of factors to think about when buying a house.

While you may be preoccupied with the aesthetics and location of your new house, don't overlook the chore of locating an appropriate homeowner insurance policy.

Here are a few homeowners insurance concerns for new homebuyers to assist you understand what to expect.

Mortgage Lenders Usually Require Home Insurance

If a homebuyer obtains a mortgage, the bank or financial institution will almost always require homeowners insurance in order to preserve their investment. For example, if your house was damaged by fire, homeowners insurance would assist you in rebuilding it (up to your policy limits).

Homeowners insurance is frequently put into an escrow account, along with your property taxes, for payment. An escrow account is a separate account where your mortgage lender will collect and pay for homeowners insurance on your behalf. Escrow can be useful because it reduces the number of bills you must worry about.

For homeowners insurance and property taxes, some lenders need a mortgage escrow account. For example, if you put less than 20% down on a property, your lender may require an escrow account. If you put down more than 20%, you may be able to roll your home insurance into your mortgage payments.

If you discover a lender that permits you to avoid an escrow account, they may charge a higher interest rate for the arrangement. You will still be responsible for paying your own home insurance and property taxes. Some homeowners choose this choice because it provides greater financial freedom, such as putting money in an interest-bearing account until it is due.

If your lender does not need escrow, you may be required to pay the annual homeowners insurance amount in advance. If your lender permits you to pay quarterly or monthly, your insurance company may levy a small installment fee.

Navigating The Home Insurance Shopping Process

Homeowners insurance protects the structure of your home (the "dwelling") and your valuables (the "contents") from disasters such as fires, lightning, tornadoes, explosions, vandalism, and theft. If you're a first-time purchaser, you may be unsure of how to purchase homeowners insurance and how to decide the appropriate amount of coverage. Here are some things to take to help you streamline your home insurance purchasing process.

Understand What Homeowners Insurance Covers

You'll want to know what homeowners insurance covers as a new homeowner. A common homeowners insurance policy includes:

Dwelling: Pays to reconstruct your home's structure if it is damaged by any reason, with the exception of conditions that are specifically excluded, like floods.
Personal belongings: Pays to replace or restore your personal belongings following a covered problem, such as theft or fire. Typically, you can update an insurance to cover contents for any condition except those specifically listed as exclusions. This provides you with more protection for your belongings.
Liability insurance: Covers medical expenses and property damage caused by your household members to others. Liability, for example, can pay up if your dog bites someone or your child throws a baseball through a neighbor's window. Liability insurance also covers the cost of a legal defense if you are sued for an injury or damage. Homeowners insurance policies normally have liability limits of $100,000, but consider increasing it to $300,000 or $500,000. Liability insurance should cover the amount of money you could lose in a lawsuit.
Medical payments to others: Assists in the payment of minor injuries if a guest is injured on your property. This is typically done in minor amounts of coverage ranging from $1,000 to $5,000.
Additional living expenses coverage: This covers additional "loss of use" charges such as hotel bills, meals, and other fees (such as laundry services or pet boarding) if you are unable to reside in your home due to a covered problem, such as a tornado or fire.

Compare Home Insurance Companies

"You should purchase homeowners insurance as soon as you know the house you're buying," says Bob Buckel, vice president of product management at Erie Insurance. "This allows your insurer adequate time to complete all of the paperwork before the closing."

When comparing homes insurance companies, keep the following points in mind:

Customer service rating. It's critical to understand how an insurance company processes claims. Customer happiness can be an excellent predictor. According to the J.D. Power 2020 U.S. Property Claims Satisfaction Study, homeowners insurance firms do well in terms of claims satisfaction.

According to the report, the top factors that will cause customers to hunt for a new insurer are premium rises and claims processes that demand a lot of policyholder work.

Financial stability. Examine the financial strength ratings of a corporation from Standard & Poor's or A.M. Best. These provide an assessment of the insurance company's future ability to pay claims. Many insurance companies publish their financial strength ratings on their websites.

Before purchasing a policy, you should investigate the financial condition of the company. If your insurance company fails, your policy may be transferred to another carrier or administered by the state guaranty association (which could cap the amount of claims they will pay).

Identify the Right Amount of Coverage

When you purchase a policy, your insurance provider will assess the features of your home (such as the structure and building materials) to estimate the cost of reconstructing it. They will advise you on the proper quantity of coverage for your home.

Consider the following:

Can you get extended coverage in case the home is destroyed? Buckel at Erie Insurance says you should also consider “guaranteed replacement cost coverage,” which pays the full cost to rebuild a house, no matter what amount is listed on your policy.

"For example, if your policy is for $200,000 and the builder estimates that it will cost $250,000 to rebuild your home, the insurance company will pay the full amount as long as you have the benefit in your policy," Buckel says.

"Extended replacement cost" is similar, except it specifies a maximum amount, such as 25% more. These choices are not available from all house insurance companies.

Do you have enough contents coverage to cover all of your possessions? Think about your furniture, rugs, clothes, jewelry, musical instruments, gadgets, artwork, kitchenware, and other possessions. Creating a home inventory is a smart approach to accomplish this.

Most plans cover items in an amount ranging from 50% to 70% of the dwelling coverage. For example, if your residence is insured for $200,000 and your personal property coverage is set at 50%, your personal property coverage would be $100,000.

You have the option of changing the level of coverage. The level of coverage you select will be determined by the sort of personal things you have and the cost of replacing the items.

Insurance Options Beyond Default Limits

You may choose to restructure your coverage to fill gaps or boost your coverage limits.

Natural disaster insurance. If you live in a flood-prone location, you may want to consider flood insurance. In fact, if you reside in a high-risk flood zone, your mortgage lender may require it.

There's also sinkhole insurance (which is useful for Floridians) and earthquake insurance (a consideration for Californians).

To be properly insured, you may require a combination of insurance options. Tidal waves, for example, frequently accompany earthquakes, but earthquake insurance does not cover flood damage.

Sewer backup. Water backup and sump pump overflow coverage pay for the expense of water damage if a sewer backs up or your sump pump fails. Water damage caused by tree roots developing in a sewer line may also be covered by this insurance type.

Umbrella insurance. While the liability coverage provided by a homeowners policy is a solid start, it may not be sufficient. If your insurance provider restricts the amount of liability coverage you can acquire and your assets exceed that level, you may want to consider purchasing umbrella insurance to supplement your liability coverage.

According to Trusted Choice, an insurance network for independent brokers, you can often get $1 to $2 million in umbrella insurance for around $380.

How To Evaluate a Home Insurance Policy

Understand coverage levels. To avoid unpleasant surprises later, know the maximum sums that will be paid for your home, belongings, loss of use, and liability lawsuits filed against you.
Select your deductibles. The amount deducted from an insurance claim check is known as the deductible. If you're willing to pay more if you have a claim, you can save money by raising the deductible. Be aware that some policies contain deductibles that are related to specific damage, such as a high deductible for wind damage in some states.
Compare rates. Request quotations from a few different businesses. If you already have auto insurance, start there—you're likely to get a multi-line discount for insuring both your vehicles and your home with the same firm.