When you’re in the process of buying a new home, you often spend lots of time thinking about lenders and realtors, but another factor to consider is your home insurance policy. For most people, a house is the most valuable thing that they own.
If unexpected events or natural disasters occur, your insurance policy is what you’ll be looking to for help. This isn’t something you pick out on a whim. Here’s what to look for when evaluating your home insurance options.
The purpose of homeowners insurance is to cover damages to a home, theft, and personal liability issues. How much an insurer will cover will depend on the specifics of each policy. According to the National Association of Insurance Commissioners, the most basic home insurance policies cover the following circumstances, know as “perils”:
- Fire, smoke, wind, hail, lightning, explosions, civil unrest
- Theft, vandalism
- Trees and other falling objects
- Weight of ice, snow, sleet
- Freezing, rupturing and sudden overflowing of plumbing, HVAC, or sprinkler systems
Outside of these perils, homeowners will have to add endorsements to their policies to cover additional situations and items including:
- Recreational items like pools and trampolines
- Aggressive dogs
- Exotic pets
- Damage as a result of public utilities (e.g., sewer backup)
Not Covered: Earthquake and Flood
It’s important to note that homeowners’ insurance does not flood-related damage. If you live on a floodplain, you will need a separate flood insurance policy administered by the National Flood Insurance Program. Earthquake damage is also not covered under a basic homeowner’s insurance policy. While there are some insurance policies that offer an earthquake endorsement, it’s likely that you would need to buy a separate earthquake policy if you live in an earthquake-prone area.
Valuing Your Property
Home insurance policies are based on the value of your dwelling (the house itself) and personal property (items you own). Any home insurance you choose should provide enough coverage to replace your dwelling and personal property.
The dwelling value should be based on the actual cost to rebuild your home. Real estate values (current or what you originally paid) are not relevant for determining replacement costs. Using a real estate valuation could potentially leave you with not enough coverage should you actually need to rebuild your home.
You can value your personal property in one of two ways: Actual cash value (ACV) and replacement cost (RC). When using ACV, an insurer pays out claims based on the current value of your belongings. A claim payout based on RC would cover the cost to buy brand new items to replace your belongings.
As you can imagine, an RC policy is more expensive than an ACV policy. How you value your items will depend on how much you think they will depreciate in the future.
Costs and deductibles
If you’re in the process of moving or buying a new home, you’re probably concerned about the cost of home insurance. Home insurance carriers base the price of policies on multiple factors including:
Your deductible value will also influence the annual cost of the policy. Most insurance policies have a deductible between $500 and $1000. The higher the deductible, the lower the premium. You may want to choose a higher deductible if you live in a newer home in an area with a low risk of severe weather events.
Bundling: A source of savings
If you are looking for a more affordable policy, you may want to consider bundling home and auto insurance with the same company. Many insurance carriers offer discounts for customers with policies across multiple lines of business.
Home insurance Carrier Reputation
When choosing a company to help you protect your home and valuables, you should look beyond cost. An insurance carrier’s reputation should be an important factor in determining if you want to develop a long-term business relationship. Here’s what you should look for:
You don’t want to work with a company that ultimately wouldn’t be able to pay out a claim. Independent ratings agencies create reports about the financial stability of organizations. Consider reviewing them.
Reputable home insurance companies should settle legitimate claims promptly. You should check with your state’s insurance commissioner to see how quickly potential insurance companies settle claims. Another important factor is how often an insurance company disputes claims with its customers.
When customers regularly renew their policies, that’s a good sign that the insurance company is providing good service. If you are negotiating a policy with a company, ask the representative about customer satisfaction scores and retention rates. You may also find this information in consumer review magazines.
There are multiple online review sites where you can read the opinions of home insurance customers. While you shouldn’t completely trust what anonymous people say online, a large number of negative reviews can be a bad sign. An independent agent may also have some knowledge about particular insurance companies based on the opinions of their other clients.