When you buy a new home, you will almost certainly purchase homeowner’s insurance. Homeowner’s insurance isn’t just a nice-to-have; most banks and mortgage brokers will not approve a mortgage unless you arrange to have the appropriate home insurance coverage in place.
Most reputable insurance agencies will have an experienced agent walk you through the different types of policies, show you what options you can add to the required insurance coverage, and explain what types of expenses your policy will cover—and more importantly, what it won’t cover.
Still, it’s a good idea to know some homeowner’s insurance basics before you sit down with an insurance agent to discuss which policy is right for you.
What does homeowner’s insurance cover?
The short answer to this question is: as much as you can afford to pay for. Most home insurance providers offer a pre-determined amount of basic coverage, but you can often expand what’s covered and/or the financial amount of coverage offered—for a price. Basically, the more you want your policy to cover, the higher the monthly insurance premium will be.
When it comes to rebuilding a destroyed home and replacing your possessions, your homeowner’s insurance is based on one of two considerations. Policies that use replacement cost will cover whatever the actual amount is to rebuild your home, repair the surrounding property, and replace your personal possessions (within the maximum reimbursement limits of the policy). A policy that uses fair market value takes an assessment of your home and possessions based on current market values, and only reimburses that amount.
Policies that use fair market value for compensation can cause you to lose out if the value of your home and its contents has depreciated. If financially possible, you should consider getting a policy that gives you the replacement cost for your home and your things.
Home insurance building and exterior coverage
A typical basic home insurance policy covers the costs of repairing or rebuilding your home if it is damaged by fire or extreme weather such as hail, wind, and lightning. More severe natural disasters such as earthquakes, tornados, and floods are generally not covered unless you pay for the additional coverage. If you live in a region that is prone to one of these phenomena, you should ask the insurance provider about adding the associated coverage.
A basic policy usually includes coverage for your garage, but this can vary depending on if the garage is attached (can be accessed from inside the home), semi-attached (only accessible from outside), or is a completely separate building. Again, ask the insurance agent about coverage for your garage (and its contents, including your vehicle if it is damaged or destroyed while parked inside) as well as for any other buildings on your property like garden sheds and greenhouses.
You should also ask about what (if any) coverage is provided for exterior items like:
- Fences
- Sprinkler systems
- Landscaping, including trees and shrubs
- Gazebos or pergolas
- Children’s play houses or gyms
- Yard décor like permanent light fixtures
Does homeowner’s insurance cover the contents of my home?
Yes, but with some restrictions. Most policies offer a fixed amount of cash to cover the contents of your home. Whether or not this amount is enough to replace all of your possessions is a question only you can answer. Small valuable items like jewelry, rare coins, art objects, and antiques usually have the biggest impact on a policy’s contents coverage.
You can use a home inventory app to help catalog the contents of your home and come up with an estimated replacement cost for them. If the amount given in your insurance policy seems inadequate compared to your estimate, you should check into paying for additional coverage for your personal possessions.
Pro Tip: Need help remembering what valuable items you have in your possession? Refer to your Last Will as chances are your valuables will be listed in it.
Highly valuable items may need to have a professional assessment done before your insurance company will offer to cover them. You should also create a record of these items (with accompanying photos) and store this record in a safe deposit box.
What else does homeowner’s insurance cover?
A home insurance policy will typically provide coverage for the following items:
Personal Liability
This coverage can pay for legal damages from an injury someone sustains on your property. Example: a houseguest who breaks their leg tripping on a child’s toy in your living room.
Living Expenses
If your home is destroyed, you and your family may have to live in a hotel or other paid accommodation for several months while it is being rebuilt. Living expenses coverage will cover your hotel and restaurant expenses (within a set daily limit) while construction is underway.
Pet Kenneling/Boarding
A damaged or destroyed home is no place for you or your pets to live. If you are unable to have a friend or family member take your pet in, and your hotel won’t allow you to keep them in your room, your home insurance may cover the cost of a pet kennel or boarding service while your home is being repaired or rebuilt.
What is a deductible?
A deductible is the amount of money you have to pay on your own before the insurance company’s coverage kicks in. Many home insurance policies have different deductibles for different types of events and/or expenses.
For example, if you live in a region where flooding is more common, your policy may have a basic deductible of $500 for any type of claim, but a $1000 deductible for flood damage.
If you are willing to accept a higher standard deductible, you can often reduce the rate of your monthly insurance premium. If you want to do this, ask your insurance company how they can accommodate you.
How else can I lower my homeowner’s insurance premium?
Here are some additional things you can do that may lower your home insurance premium:
- Purchase a home security system to discourage break-ins
- Add fire safety items like smoke and carbon monoxide detectors
- Have an interior sprinkler system professionally installed
- Combine your home and auto insurance to receive an agency discount
- Install flood prevention items like sump pumps and sewer backflow barriers
- Have your roof re-shingled to keep water from leaking into your home
You can ask your insurance company if any of the above (or similar) actions will result in your premium being lowered. You should notify your insurance company after you perform any significant home improvement, as it may result in lower home insurance costs.
Get the right homeowner’s insurance
Unless you are fortunate enough to be able to pay cash for a new home, you will most likely need homeowner’s insurance in order to secure financing.
Now that you have a grasp on the basics, you should feel confident and ready to visit some insurance companies in order to find the right policy (at the right price) for you and your new home.
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