Your home is your family’s sanctuary — it keeps a roof over your head each night and keeps family heirlooms and your life’s possessions safe. And its four walls are easily your biggest financial investment, all in one go. It’s no wonder you need to appropriately insure your home against anything life throws at you.
The truth is, home insurance is hard to navigate with a laundry list of what’s included in your standard policy and what isn’t covered that you ought to add, as well as playing around with rates, deductibles, claims and other optional insurance.
With so much to wade through, here’s your starter’s guide to home insurance to get a better understanding of the nuts and bolts involved and what you’ll need to consider in this important part of homeownership.
After you’ve found your dream home and gone through the legwork with home inspections, securing a mortgage and adding your custom touches, you will learn that navigating home insurance is another rite of passage for new homeowners.
In fact, for the most part, most mortgage lenders insist it’s mandatory that homeowners have home insurance to protect your house and its possessions against damage and theft. They’ll usually insist on insurance that’ll cover the full or fair cost of the repairing or rebuilding of your property so that if a worst-case scenario happens, you have a safety net.
The last thing lenders want is for you to dip into your pockets to tend to these losses, detracting you from focusing on your mortgage payments.
What Your Basic Home Insurance Covers
If you think buying home insurance is a matter of simply buying one policy, it turns out that it’s much more complex.
As a general rule of thumb, most home insurance coverage comes in two parts: dwelling insurance (also known as buildings insurance) and contents (or personal property) insurance.
Your dwelling coverage insures you for precisely this — the physical structure of your home, including the floors, walls and ceilings along with attached structures, such as your garage. Should your home face fire, theft or vandalism, this policy will take effect, insuring you up to your policy limit.
An important distinction that’s worth noting is that your dwelling coverage insures your home at its replacement cost value, not at its market value. Market value factors in other external components separate from the labor and materials involved in a rebuild, such as the cost of your land and the neighborhood you live in.
Your contents insurance coverage includes the inventory in your home, from your furniture to your electronics and your clothing, once again to a certain amount fixed as your policy limit. If you face theft or your possessions are damaged due to a variety of outlined perils, this coverage would help you recover and buy back what was lost.
But pay attention, because of a lot of caveats are about to kick in.
What Your Policy Doesn’t Cover
Now that you have the nuts and bolts worked out in your standard insurance policy, you may need to pad it with extended policies.
For starters, a basic policy conventionally provides 50 percent to 70 percent of your dwelling coverage for your personal property. If your dwelling insurance covers you for $200,000, for example, your personal property coverage may be at around $100,000 and upward.
But think carefully about your possessions and if you own anything of considerable valuable, such as jewelry, fine art, heirlooms and other rare collectibles that bump up the value of your assets. Your traditional contents insurance policy will restrict coverage on these luxury items so you’ll need additional coverage if you, literally, have a treasure chest of trinkets.
Iron out the details in your policy and make sure you understand the coverage you’ve signed up for: In some cases, some categories, such as jewelry, watches and furs, are only covered for theft.
You may need to add extended replacement cost coverage, too, if you know repairing your home will cost more than the limit set for your dwelling coverage. Your insurer determines the cost of rebuilding your home during normal circumstances, but if you lose your home in a natural disaster and demand for labor and supplies means repair costs skyrocket, the onus may be on you to pay for the inflated costs beyond what’s covered from the initial quote.
If you’re worried about this aspect, extended replacement coverage typically adds another 25 percent to 50 percent of coverage, depending on the insurer.
Natural Disaster Coverage
While your basic policy covers you against damages due to theft, fire or vandalism, it won’t be useful during many natural disasters such as earthquakes, floods and wildfires. Here’s an overview of additional coverage you may need depending on where you live:
Across the board, earthquake coverage is typically excluded on home insurance policies due to the widespread financial risk insurers would have to take on. But if you live in certain states — California, Hawaii, Alaska, Nevada, Montana, Wyoming and Tennessee as prime examples — you should seriously consider adding earthquake coverage to your home insurance.
Homeowners who reside in states that are prone to hurricanes should go over their policy with a fine-tooth comb to figure out if windstorm damage — namely damage from severe wind or hurricanes — are included in the policy. While hail is on most basic home insurance policies, that basic coverage typically doesn’t extend to hurricanes, especially in states most vulnerable to windstorms.
If this is the case, you’ll need to take out a windstorm endorsement as an add-on or as a separate insurance policy.
Once again, standard homeowners insurance doesn’t cover damage from flooding so if you live in a designated flood area, you need to scope out the risk of flooding and what your insurance options are. Keep in mind, flooding can occur in inland areas, too, and from melting snow, an overflowing creek or pond, and water running down a steep hill.
Flood insurance can be purchased via the federal government through the National Flood Insurance Program, run by the Federal Emergency Management Agency, or through private insurers.
Sewer Backup Coverage
Insurance policies need careful inspection, especially when it comes to water damage, as some incidents are covered while others will leave you on the hook. Sewer and water backup is a prime example. Most standard policies will protect against water damage caused by frozen plumbing or water overflow, but they won’t cover sewer backups that damage the home and even involve contaminating your water system and making your living conditions unsanitary. You’ll also need an extra policy to cover you here.
Additional Policies You May Need
Picking out your home insurance policy and add-ons is an exercise in thinking of everything that could go wrong. After you’ve covered the bricks and mortar and covered your bases against Mother Nature, you’ll now need to ruminate on other aspects of your home you’d like to protect.
A common add-on is coverage against other structures. Anything attached to your home is included in your dwelling insurance, but if you have detached sheds, driveways, gazebos, swimming pools or guest houses, these need to be accounted for via additional insurance. A small perk: Most standard policies include insurance of about 10 percent of the dwelling coverage amount to apply to non-dwelling structures. If your dwelling insurance limit is capped at $100,000, that’s $10,000 in coverage for unattached parts of your home.
Check to see if this feature is in your standard policy and do the math to see if you need to add to it.
Other home insurance add-ons include fungus and mold coverage, personal injury coverage, medical payments coverage, personal liability coverage and even food spoilage coverage.
How Your Rates Are Determined
Similar to car insurance, your home insurance rates are determined by a combination of factors, such as the value of your home, the cost and availability of building materials, the neighborhood you live in and crime rates in the area.
Insurers will look at your past claims as a homeowner, along with past claims made at the property if it isn’t a new home. In summary, insurers are trying to assess their risk of having to pay out a claim. If it turns out your home is prone to flooding or burglaries, chances are those factors will reflect in inflated prices.
Homeowners with expensive valuables, pricy upgrades to their home and other requirements that need additional coverage will pay more too. If you’re willing to pay for a higher deductible, that will lower rates.
Get your credit score in check too, as insurers use it in their overall assessment of whether you’ll make a claim or not. Bad credit history will tamper with your rates because insurers will think you’re untrustworthy and more likely to file a claim compared to your neighbors who are paying off their credit cards and other loans on time.
How to Lower Costs
Homeowners can deploy many strategies to cut the cost of their insurance without sacrificing any important add-ons they need. Installing a home security system that will contact local law enforcement in case of a break-in could lower your insurance by a cool 5 percent so long as you can provide the contract or your bills to your insurance provider.
Sprucing up the safety in your home with smoke detectors, carbon monoxide detectors, dead-bolt locks, windows with security-level closures and sprinkler systems can put a dent in your premiums. If you’re willing to raise your deductible, this will reflect in what you pay for your policy.
Finally, shopping around for rates and policies and comparing quotes, prices and promotions could help you snag a good deal.
Prioritize finding an insurer with a solid reputation, strong ratings and a reliable claims response process. You could try to save a few dollars only to find out you’ve picked a policy that can’t be put to work when you most need it.
Don’t leave the decision-making on home insurance to the last minute — some policies don’t take effect immediately so if you’re waiting for a hurricane to arrive on your doorstep before taking out insurance, you’re taking a major risk. In most instances, policies take effect after you make your first payment, within 30 days, or if you’re moving into a new home, at your closing date.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.