A Beginner’s Guide to Homeowners Insurance

There are so many things to get done when buying a new home, including purchasing homeowners insurance. If you’ve never bought it before, the task can seem daunting. But this is not a job to rush through quickly. Take time to learn about your options and find the right coverage for your unique situation.

Homeowners insurance protects you and your property in two ways. First, it shields you from the risk of severe negative financial consequences resulting from damage to your home and personal property from events like wind, hail, theft, vandalism, fire, etc. A major calamity like losing a roof, for instance, could put you into debt for years.

Homeowners insurance also protects you from liability when you, family members or even pets cause damage to others. For example, your daughter or son accidentally sends a baseball flying through a neighbor’s antique stained-glass window, or your dog breaks through the electric fence and bites a neighbor’s child. Homeowners insurance will safeguard you and your family in these situations.

If this is your first-time purchasing homeowners insurance, it can feel a little overwhelming. How do you know how much is enough? What should be covered? And what do all these terms mean anyway? Let’s start with the basics.

When Should I Buy Homeowners Insurance For My New Home?

In most cases, to purchase homeowners insurance, a person must have a financial interest in the property. If you’re buying the home with a mortgage, the lender will require you to have homeowners insurance at the time of the sale (because the lender has a financial interest in the property, too!). While the homeowner’s policy must be in force when the purchaser takes possession of the property, you shouldn’t wait until the closing date to purchase the insurance. To ensure you’re covered, it’s wise to have your homeowner’s insurance in place at least three-to-seven days before closing, with a policy effective date the same as the closing date. And, don’t worry; you won’t be charged a premium for those extra days.

What Do These Terms Mean?

Insurance, like any industry, has its own terminology. Coverage, liability, limitations, deductibles, conditions – what does it all mean? Here are some definitions that will help you navigate homeowners insurance and choose the right coverage for your property.

Conditions are contractual obligations the insured must meet for the coverage to be effective—for example, timely report of the claim, cooperation, etc.

Coverage Amount is the limit to how much the insurer will pay in case of a loss—the lower the limit of coverage, the lower the premium.

Deductible is the amount of money the homeowner will need to absorb in terms of the loss. For example, suppose the homeowner carries a $5,000 deductible and damages to the home from a covered cause of loss are $15,000. In that case, you can expect the insurance company to pay the homeowner $10,000, which is the amount of the loss minus the absorbed deductible of $5,000. The deductible amount also impacts the premium cost. So, for example, if you choose a $5,000 deductible versus a $500 deductible, you’ll pay less in your premium. Essentially, you are paying upfront in your premium for the peace of mind that comes from knowing the insurer will pay out more if you incur a loss.

Exclusions are events specifically not covered by the policy—for example, intentional acts, repeated seepage or leakage of water over a time period, etc.

Liability coverage protects the policyholder or insured residents for any bodily injury, personal injury or property damage due to the policyholder or insured residents’ negligence. This coverage also has a limit but does not typically carry a deductible. 

HO3 and HO5 Policies are the two types of homeowners insurance, offered as replacement cost policies, meaning the insurer will pay the cost to replace the damaged or destroyed property rather than the depreciated value. An HO3 policy only covers damage to personal property due to specific or named perils (ex. theft, fire, falling objects, volcanic eruption, etc.). An HO5 policy, which can be more expensive, provides personal property coverage on an “All Peril” basis, meaning the carrier pays for damage resulting from any type of loss unless it’s specifically limited or excluded.

How Do I Choose the Right Coverage?

Homeowners insurance typically covers the dwelling and personal property for the homeowner and insured residents, both on and off the insured premises, with some exceptions for certain types of property. Understandably, most people want to get the most insurance coverage for the least amount of money. But it’s not a one-size-fits-all situation.  It depends on the cost of the dwelling and the cost of replacing items. The dwelling coverage limit should be, at a minimum, enough to replace the home if an event rendered it a total loss. The personal property limit should reflect the replacement cost value of your personal items.

Liability coverage can also depend on your lifestyle. The typical recommendation is between $300,000 to $500,000 of coverage on a per-occurrence basis. But let’s say you love to entertain and have a lot of guests in your home. There’s a greater likelihood of someone being injured than if you never entertain guests. You may want to consider higher liability limits or even an umbrella policy, a complimentary personal lines policy that provides additional liability coverage limits above your standard homeowners and auto policy.

Homeowners insurance also provides limited medical payments for the policyholder’s guests (usually a $1,000-$10,000 coverage limit) if a guest is injured on the homeowner’s premises and needs medical treatment, regardless of whether there is a finding of negligence on the part of the policyholder.

While you should never skimp on coverages, you should take the time to fully understand your risk factors and the resulting financial exposures. For instance, many insurance policies limit the amount of coverage available for loss due to a backup of sewers and drains. You may want to investigate your home’s geographic and topographic location, the adequacy of local sewage and storm drain infrastructure, the amount of planned development and any water intrusion history of that property. Choose the coverage that fits your property and your lifestyle.

Part of choosing the right coverage is understanding your tolerance of risk. How much are you willing to pay upfront in premiums to get more coverage and less financial risk? That’s the equation.

How Do I Get Started?

If your head is spinning by now, you’re not alone. A good place to start choosing the right coverage for your property and your wallet is to research insurance companies in your area that provide homeowners policies.

Ask family and friends for recommendations. Talk to the people you trust for referrals, including your realtor, if you’re new to the area. Ask them what they liked and didn’t like when working with the insurer. Was the company responsive and helpful? Did claims move smoothly? Was payment made quickly?

Find a good agent. Choose a local agent who understands the particular risks your property might encounter. For instance, if you live in a region that sustains hurricane damage frequently, you’ll want an insurance agent who understands those challenges. They can accurately assess your replacement costs, risk factors and any special coverage you may need (e.g., jewelry, artwork). From there, you can choose the right deductible – one you can afford and that gives you peace of mind.

Get the most bang for your buck. Although money is tight when purchasing a new home, you need to choose the right amount of coverage for your dwelling and property. Your agent can help with this.

The best way to save money on homeowners insurance is to:

1. Ensure you’re not “overcovered,” that is, buying more coverage than it would cost you to replace the home or property.
2. See if the insurer offers discounts for bundling homeowner and auto insurance.
3. Shop the same Homeowners coverage strategy and limits with multiple insurance carriers to ensure you get the best deal possible.

It pays to do your homework. Find a reputable agent that can help you assess your coverage needs and balance them with your financial risk tolerance. You will be rewarded with peace of mind and the right protection for your most valuable investment.

Learn more about homeowners insurance and how Hi Marley is accelerating and simplifying property claim resolutions, by emailing me at [email protected]!