If you're in the market for your first home and don't already know, you'll find out soon enough that getting home insurance is a prerequisite to securing a mortgage loan.
When loan applicants are checking off the boxes, they're often so focused on the goal of finding the home of their dreams that they neglect to research. Instead of finding the kind of home insurance that will provide adequate protection for that home, they go with the first or cheapest home insurance.
We'll share what homeowners insurance covers and what the rates are based on. We'll wrap it up with tips so you can get the protection you need for a fair price.
What does homeowners insurance cover?
There are three distinct types of coverage appropriate for all homeowners, and they usually come together in one package. There are also a few different policies that you might have to or want to carry depending on where you live.
Dwelling Coverage
This coverage is the type everyone thinks of when they think of home insurance. It protects your home's structure. If a pipe bursts and damages the flooring, walls, and cabinetry, the dwelling coverage portion of your insurance policy will cover the cost to fix your home up to the limits of your policy.
Contents Coverage
Did you realize that your personal property is covered by home insurance even when you're away from your home? So, if you're on vacation and someone steals your entire family's luggage, you can file a claim with your home insurance policy.
Making a claim for this reason isn't always a wise route to take because deductibles can be high, and filing claims make your rates increase, but it's an option to consider.
For the most part, you'll use contents coverage to protect your belongings in your home. If that same flood mentioned above ruins your couch and piano, your contents coverage will kick in to reimburse you for the damages.
Liability Coverage
If someone injures themselves on your property, your homeowners liability coverage will cover the cost to treat those injuries. So, if your kids have a friend over and the friend falls off the couch and breaks their arm, the friend's insurance provider will likely deny claims, and you'll have to file a claim with your home insurance to cover the costs.
Earthquake and Flood Coverage
If you live in the high desert, chances are you don't have to purchase a flood insurance policy, but if you live in a flood plain, your mortgage lender will probably require that you buy an additional flood insurance policy.
Similarly, if you live in an area that may experience damaging earthquakes, you'll have to carry a separate earthquake policy.
A standard home insurance policy won't cover damage from floods and earthquakes.
Optional Home Insurance Coverages
You can insure other specific items in your house if their value exceeds what your standard policy protects. For example, if you have a valuable jewelry collection, you should purchase a rider or separate policy for your jewelry.
Other optional supplemental policies include coverage for art and gun collections. You can also add coverage for additional structures on your property, like sheds or barns.
What are home insurance rates based on?
Insurance premiums are based on risk, and insurance companies calculate risk using a variety of factors.
Square Footage
One of those factors is the square footage of your home. If a fire destroys your home, a 2,000-square-foot house will cost a lot more to rebuild than a 1,000-square-foot home, so you can understand why premiums are higher for bigger houses.
Claims History
Another significant factor that goes into your rates is your claim history. For example, if you haven't filed a claim in three or more years, your insurer will consider you a lower risk than someone who has filed a claim or two.
As a new homeowner, you won't have much history with homeowners insurance, but insurance providers can look at your account of claims with rental insurance and use that to set your rates.
Location
Where you live will also make a difference in how much you pay for home insurance. For example, suppose you live in a region prone to natural disasters like wildfires in California, hurricanes in Florida, or tornados in Kansas. In that case, you can expect to pay higher rates than if you live in a similar home in a region without those risks.
Similarly, if you live in a high-crime neighborhood, you'll face a higher risk of having your home broken into, so you'll pay higher insurance premiums.
When you review your policy options, you should make sure you look for 100% replacement coverage. Some less expensive policies cover the value of your losses but not what it would cost to replace them. You also might need to consider looking for specific insurance policies for older homes.
If you suffer losses, you need your insurance policy to help you rebuild your life. But you'll have a challenging time doing that if they only reimburse you for the depreciated value of your belongings.
What are the best tips to keep home insurance premiums low?
If you're hoping to save money on your home insurance, discounts are where you need to look. You can usually get a bundling discount when you purchase home and auto insurance from the same provider. It's such a significant discount, in some cases, that you should always at least consider purchasing both lines of coverage from the same company.
If your new house has specific safety features, or you add them when you move in, make sure to let your insurer know because they may offer a discount. Security systems usually earn you a discount, as do sprinkler systems, smoke detectors, and some smart gadgets.
Besides discounts, you'll probably find savings when you compare home insurance quotes. Some circumstances are a better fit with different companies, so you won't know what's best for you until you compare quotes.
There are so many tasks involved with moving that you might not want to take the time to compare home insurance quotes, but it's worth spending a couple of hours to potentially save hundreds of dollars a year.
Increasing your deductible is another way to save on your monthly premium. For example, with a $2,000 deductible, you might pay about $20 less per month than you would with a $1,000 deductible.
Hopefully, you'll never have to file a claim for your home insurance, but if you do, you'll be thankful you took the time to get the coverage you need. Home insurance makes it possible to provide for yourself and your family if a disaster strikes your home.
(Photo : Melanie Musson)
Melanie Musson writes and researches for the insurance comparison site, USInsuranceAgents.com. She's passionate about helping others understand their insurance needs and how the right policy can protect their current and future financial stability.
