If you’ve never bought home insurance before, you might not know for certain what to look for in a home insurance policy — what makes a policy good, bad, or mediocre, and how can you tell the difference between a great insurance company and a bad one?
There’s a lot to look out for when it comes to shopping for a home insurance policy. Here’s what you need to consider when choosing a home insurance policy so you can make sure your biggest asset is properly protected.
A basic homeowner’s insurance policy should cover…
Damage to your house
Your homeowner’s insurance policy should cover damage to the inside and outside of your house. This includes your possessions, so make sure to document them.
“I tell my buyers to take a video or digital photos of the entire interior and exterior of the home and save it somewhere fireproof,” says Dawn McCurdy, an award-winning real estate agent in Albany, New York. “Everyone should really do that. It’s invaluable.”
“Whether you own or rent, there are different packages of home insurance offered to protect your home and belongings,” explains Christopher Clark, an insurance agent with Farm Bureau Mutual Insurance Group in Asheville, North Carolina. “Each package protects against a specified number of perils such as fire, windstorm, and theft. Additionally, each package policy usually contains coverage for property damage, additional living expenses, personal liability, and medical payments. Homeowners policies apply to most owner-occupied single-family dwellings and are modified slightly for apartments and condominiums.”
The lowest-level policy, called HO-2, covers the following perils:
- Fire or lightning
- Smoke
- Theft
- Vandalism
- Windstorms and hail
- Damage caused by vehicles
- Damage from aircraft
- Weight of ice, snow, and sleet
- Freezing of household systems
- Riots
- Explosions
- Falling objects
- Volcanic eruptions
- Overflow or discharge of water — take note, this isn’t the same as flooding!
- Damage from artificially generated electrical current
- Sudden tearing, cracking, or bulging of your home
The policy should also cover:
Personal liability
Most people know that homeowner’s insurance covers personal liability. “That’s the slip-and-fall protection,” says McCurdy.
“If someone slips on ice in your driveway and they sue you for their injury, you’re covered. It’s similar to auto liability.”
McCurdy recommends that homeowners purchase a “million-dollar umbrella” in addition to their homeowner’s policy. “It will cover home and auto, and it’s not very expensive,” she explains. McCurdy says she has personal experience that illustrates why this coverage is so important. “Someone had a dog in one of my rentals, and their friend came over, and the dog bit them. They sued for quite a bit of money, and I was covered under my homeowner’s insurance policy.”
Additional living expenses
Your policy should cover additional living expenses, meaning that you will be provided with compensation should you find yourself in a situation where you must live outside of your home while it is being repaired or rebuilt.
In addition, you’ll want to consider a homeowner’s insurance policy with:
The necessary level of coverage
When you pick a policy, you should have three options to choose from: Actual cash value, replacement cost, or guaranteed/extended replacement cost.
When you go with the “actual cash value” option, you’ll be reimbursed for the actual cash value of your home and possessions. Keep in mind, the insurance company will detract some value for depreciation depending on the age of your home and the contents inside.
The “replacement cost” option will reimburse you for the cost to replace everything like new. Generally speaking, this is probably the option you’ll want to go with so you can rebuild if the worst happens.
“This coverage ensures that the homeowner will receive a settlement for enough to repair or replace the home and its contents based on current costs,” explains Clark. “Policies not providing replacement cost coverage means the homeowner will receive a settlement based on the age and condition of the home and its contents, which will be less than the total amount needed by the homeowner to rebuild.”
McCurdy points out that “replacement cost [coverage] should include demo and debris removal of the existing home,” as well.
Finally, the gold standard of homeowner’s insurance is the “guaranteed/extended replacement cost” option. This level of coverage gives you an extra cushion above your policy limit (usually 20% to 25%) and might be a good idea in areas where home prices are always going up.
“This is the most complete coverage for your home,” says Clark, who explains that if your policy contains this endorsement and the limit stated in your policy doesn’t cover your full loss, “The insurance company will pay the difference, subject to a specified maximum.”
Do you need additional coverage?
Do you need additional coverage on top of your standard homeowner’s policy? Natural disasters like earthquakes and floods probably aren’t covered, so if you live in an area that is susceptible to natural disasters such as those, it might be a good idea. McCurdy says a good agent will know upfront if additional coverage, like flood insurance, is required.
It’s not just catastrophic natural disasters to consider. Clark says that homeowners in his state of North Carolina should make sure their policy includes wind and hail coverage. “In North Carolina, carriers have the option to exclude wind/hail coverage,” he says. “Typically, most companies do not provide wind/hail coverage for properties located within the 18 coastal counties of North Carolina.” In other words, if you want that type of coverage, you’re going to have to seek it out.
Another thing to consider is whether you own expensive items that you want to make sure are protected. For example, do you have expensive jewelry, antiques, or artwork that may require additional coverage? “This coverage is limited on certain types of property that are especially susceptible to loss,” explains Clark, “Such as cash, securities, jewelry, furs, manuscripts, and stamp or coin collections.”
Consider if you have any extra liabilities, too. Do you have a pool in your yard? Do you rent your basement out on Airbnb? These scenarios may necessitate additional coverage.
Can you score any discounts?
Once you’ve selected an insurance provider, it never hurts to ask if there are ways to secure discounts and save money. For example, some homeowner’s policies will let you save money if you have a security system in your home.
What is your deductible?
Just like when you go to the doctor — or if you have a car accident and need repairs — you’ll have to pay a deductible on your homeowner’s insurance claims. This deductible is the amount you must pay out of pocket before your insurance plan will begin to pay for any damage or destruction. A policy with a higher deductible means you’ll make lower monthly payments (also known as premiums), and a policy with a lower deductible means you’ll make higher monthly payments. You’ll want to study your finances and decide which scenario works best for you — and if you go with a high-deductible plan, make sure you have savings to cover that deductible in a worst-case scenario.
Should you bundle your home and auto insurance?
Many homeowners will bundle their home and auto insurance to receive a discounted rate from their insurance provider. “Most companies offer discounts for bundling homeowner’s insurance with auto insurance these days,” says Clark.
He cautions, however, that many auto insurers don’t actually retain the homeowner’s policy; Instead they broker it to a list of companies.
“Typically, they do that at a higher cost and provide a nominal ‘bundle discount’ on the auto insurance policy held by the consumer.”
The result, says Clark, is that the consumer may pay a higher net cost thinking they have a bundled discount. “The easiest way to spot this is if the home and auto insurers are not the same company,” he says.
Are you working with a reputable company?
McCurdy says that there are some red flags to watch for when it comes to choosing a reputable insurance company. “If someone is just dictating a price to you but won’t provide a full report of what you’re being sold, or provide a quote in writing, that’s a red flag,” she says. On the other hand, “A green flag is someone who asks a lot of questions.”
It’s important to check your insurer’s credit rating and find out if there are consumer complaints against the company. When doing some digging to make sure you’re working with a trustworthy company, Consumer Reports can be a good resource.
Clark advises making sure the company you choose is domiciled within the United States. Those that aren’t “Tend to charge more for the same coverage in order to cover the additional cost of doing business here,” he says. “That can also make claims handling problematic in the event of a loss. Select a company with offices and claims staff located near the home being insured.”
What is the claims response like?
If you find yourself in the position of filing a claim somewhere down the road, you want to make sure that the company you work with has an easy and well-functioning claims process. Your real estate agent should be a good resource and can probably tell you what they know about how different companies respond to big problems.
You’ll also want a clear understanding of who will handle your claims calls and what kind of settlement rate and response time you can expect. Ask these questions upfront, before choosing a provider.
What is the retention rate at the insurance company?
A good insurance company will keep a lot of happy customers. Before you choose one to work with, check to see what their customer retention rate is. It’s also a good idea to ask friends and family which insurance companies they recommend, as word-of-mouth referrals are usually spot-on.
How much does it cost?
Finally, look at how much your policy will cost you. Remember that price does matter, but it shouldn’t be your first or only consideration.
“Most people are just shopping price,” says McCurdy, who advises against that strategy. “If you get a couple of quotes for the same coverage, they should be pretty close,” she says. If one quote comes in a lot lower, McCurdy says that requires a closer look. “Some companies will quote you for a lower amount of coverage, and that’s why the quote is for less,” she says.
McCurdy also advises making sure that the companies you request quotes from don’t pull a hard credit report. “Most can do a soft pull,” she explains. “Homeowner’s insurance is credit-driven, so your policy may be higher because of your credit score.”
Keep these points in mind when shopping for a homeowner’s insurance policy, and you’ll make sure you’re covered should the unexpected happen.
by Kim Dinan | Posted on April 6, 2020
https://www.homelight.com/blog/buyer-what-to-look-for-in-a-home-insurance-policy/