If you plan on obtaining a mortgage to buy a house, you’re likely going to need homeowner’s insurance. When buying homeowner’s insurance for the first time, it’s important to shop around, check coverage limits, review exclusions, and select a suitable deductible.
Do You Need Homeowner’s Insurance?
Homeowner’s insurance isn’t required by law. However, most lenders require you to get a home insurance policy before approving your loan.
When you have a mortgage, your lender maintains a lien. If you default on the loan, they can recoup their losses by selling the property.
Without insurance, a damaged property may not get repaired, reducing its value and the amount that the lender can get back on its investment.
Even if you don’t intend to get a mortgage, getting a homeowner’s insurance policy is still a smart idea. It helps cover repairs or the replacement of your home should it become damaged due to a fire or other covered event.
How to Find the Right Homeowner’s Insurance Policy
Lenders often give homebuyers a referral to find an insurance company that offers homeowner’s insurance in their area. However, you have the freedom to shop around for a policy that fits your specific needs.
Here are some of the details to pay attention to as you compare options:
- Coverage limits
- Exclusions
- Deductibles
You may also want to consider getting additional coverage. For example, depending on where you live, flood insurance or earthquake insurance may give you greater peace of mind and protection against potential disasters.
Review the Coverage Limits
Start by reviewing the coverage limits on the policy. This is the maximum amount that the insurance company will pay on a qualifying claim.
Most policies also include different types of coverage. For example, you may have personal property coverage, dwelling coverage, and liability coverage.
The limit for personal property coverage should be enough to cover the replacement of your belongings. Take inventory of your possessions, including furniture and electronics. You may need a separate insurance rider for expensive items if you want to insure costly art, collectibles, or jewelry.
The limit for dwelling coverage should be able to cover the cost of replacing your home. If tearing down and rebuilding your home would cost around $300,000, you’ll want about that much in dwelling coverage.
The limit for liability coverage is often capped at $500,000. It should be enough to cover your assets, as it’s intended to cover costs if you’re held liable for an accident that causes injuries to someone else.
Pay Attention to Exclusions
Most homeowner’s insurance policies include exclusions. These are things excluded from coverage, such as floods and earthquakes.
While most policies protect against fire, you’re unlikely to get protection against floods and earthquakes without extra coverage. Other common exclusions include mudflows and landslides.
Consider the Deductible
Homeowner’s insurance policies include a deductible. This is the amount that you’re responsible for covering out of pocket when filing a claim. In most cases, the insurance company subtracts your deductible from the approved claim and sends you the difference.
For example, a fire causes $25,000 in damage to your property. If you have a $2,000 deductible, the insurance company will send you a check for $23,000.
Sometimes the deductible is set at a percentage of your home’s value, such as 2% to 3%. Other policies may allow you to choose a deductible.
If you have the option to choose a higher or lower deductible, be aware that a higher deductible lowers the cost of insurance but increases your out-of-pocket expenses for repairs.
Learn More About How Home Insurance Works
Before applying for a homeowner’s insurance policy, learn more about the company’s processes for managing policies and handling claims.
For example, you should find out how to contact customer service, pay your premiums, and view your policy details.
It’s also a good idea to know how to file a claim, as the process can vary from one insurance company to the next.
Along with these details, you can research more about the insurer. Look for insurance companies with strong financial health and positive customer service records. You can use ratings from independent agencies, such as Consumer Reports, AM Best, and JD Power to evaluate insurance companies.
Paying Homeowner’s Insurance From an Escrow Account
For those with mortgages, home insurance is often paid for through an escrow account, which is managed by the mortgage provider. A portion of your payments goes into the escrow account. It’s used to cover home insurance payments and property taxes.
Your escrow account is typically set up with a portion of the closing costs when buying a home. If your mortgage account doesn’t include an escrow account, you may need to pay for homeowner’s insurance up front. Some lenders require a year’s worth of payments when you close on the property.
In the end, finding a homeowner’s insurance involves just a few steps. You need to first determine how much coverage you need. You can then review coverage limits, exclusions, and deductibles to narrow your options and make the right pick.
