Congratulations! You’ve found your dream home and signed a purchase agreement. It’s at this point that many first-time homebuyers begin to think, “Uh-oh, now the not-so-fun-stuff begins,” as your attention shifts toward home finance. Of course, you’ll want to get the best mortgage rates, but there are other recurring costs to consider too, such as purchasing homeowner’s insurance.
Your mortgage lender will require you to carry homeowners insurance. They want to protect their financial interests by ensuring that your home’s value isn’t diminished by damage due to weather, vandalism, and other hazards. Insurance also protects the bank against liability for accidents that occur at your home. But homeowner’s insurance also safeguards you in important ways.
What Does Homeowner’s Insurance Protect
Homeowner’s insurance generally protects you against two risks: property damage and liability. Property damage insurance covers things like fire, wind and lightning damage, and will reimburse you for the stolen or vandalized property. Liability insurance protects you when someone is hurt on your property; it also covers the cost of legal representation in those instances, which can be quite high. Both types of insurance are critical. High-worth individuals should definitely carry more than the minimum coverage.
The most important thing to understand about property insurance is how the amount the insurer must pay in the event of a claim is calculated. Actual cash value coverage will reimburse you at the “going rate” for your home in the current real estate market. It won’t cover the cost of restoring a walnut fireplace mantle or replacing a high-end refrigerator. The elements that make up your home will be valued at used goods rates—think thrift store prices.
Other Things To Consider When Purchasing Homeowner’s Insurance
To make sure you’re completely covered in the event of a catastrophe, consider replacement cost insurance, which as you might expect, is a higher premium. Note, too, that these policies only kick in when you replace the insured item. If you don’t replace it, you will receive the only actual cash value.
Many policies limit coverage for natural disasters. If you live in an area prone to flooding, wildfires, or earthquakes, consider adding specific coverages to protect you against those dangers. There are also optional coverages that pay the medical bills of people injured on your property, reimburse you for living expenses while you wait for your home to be repaired, and cover other risks that homeowners face. Those additional coverages, of course, increase your premiums.
Before you buy a homeowner’s policy, inventory your belongings and photograph unique and antique items. Keep that information somewhere safe—not in your home. Standard coverage for jewelry is typically very modest. If you own a lot of jewelry, consider adding a jewelry rider to your policy.
Homeowner’s insurance is expensive, but there are ways to reduce its cost. Updating old wiring, installing a security system, and taking other safety measures can bring your rates down. Bundling your home and auto insurance with a single provider typically brings down the cost of both. It’s smart to review your coverage periodically with your insurance agent. Due to rising construction costs and inflation, underinsurance is a common problem.