What Homebuyers Need To Know About Homeowners Insurance

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Homeowners insurance is an important protection for you and your new home, and is required by most lenders when buying a house.

We’ve listed some information about the different types of insurance to help you during the homebuying process. Read policies carefully so that you understand the standard exclusions and exceptions.

Key Takeaways

Remember to check customer reviews in addition to rates when shopping around for insurance.
Ask questions! Make sure you understand what is being covered, and how much you’ll be reimbursed in the event of a loss.
The national average cost of homeowners insurance is $1,383 per year for $250,000 in dwelling coverage*.

There are two types of insurance all homeowners must carry

1. Homeowners Insurance

Homeowners insurance protects you in the event your home is damaged or destroyed by fire, certain natural disasters, or if you’re a victim of theft. To get a mortgage, you’ll be required to have enough homeowners insurance to cover the loss of your property.

Be sure to shop around different companies. Most people know to compare the price, but remember that you’ll probably only be dealing with your insurance company if something happens. Make sure the company you go with has great customer reviews, and a good rating with the Better Business Bureau.

Some companies may offer a multi-policy discount for insuring your vehicles in addition to your home. So it may be a great time to shop your auto insurance around as well.

Here are some terms you’ll want to familiarize yourself with as you begin your search:

Premium – This is how much you pay for insurance, usually every six months or annually.

Deductible – This is the amount you’ll pay out of pocket if you file a claim. A higher deductible will lower your premium, while a lower deductible will give you a higher premium.

Dwelling Coverage – The amount a homeowner receives to rebuild or repair the physical dwelling in the vent of a loss caused by a covered hazard.

Liability Coverage – This takes care of any medical bills that arise if someone gets hurt on your property.

Personal Property – Your personal property is the entirety of your belongings within your home. Furniture, electronics, clothing, appliances, etc are all considered personal property.

Replacement Cost – This policy covers the full cost for replacing your home with equal or like-quality materials in the event of a total loss. You can choose what the maximum amount is, so make sure it’s enough if you were to lose everything in a disaster like a fire.

Actual Cash Value – This is a policy that would reimburse you with the current cash value of your personal property or dwelling loss, minus any depreciation. You can insure your dwelling with an actual cash value policy, but insure your personal possessions with a replacement cost policy.

Sub-limits – Sub-limits put a cap on the amount your insurance company will pay for the loss of a specific item in a claim. For example, jewelry sub-limits are usually between $1,000 and $5,000. If you have a claim where jewelry is lost or stolen, the insurance company will only reimburse you up to the sub-limit amount. Keep reading to see how a “rider” or “floater” can fully protect your valuables.

Riders or Endorsements – These two terms mean the same thing. They are additional coverage for a category of items, like a stamp collection, jewelry, or a sewer backing up. Sewer and drain backups aren’t standardly covered on most homeowners insurance policies. So if a backed up drain causes water damage, you may have to foot the bill. If however you have an endorsement or rider for that on your policy, then it will be covered up to the chosen limit.

Floater – Floaters are similar to riders and endorsements, except they apply extended coverage to a specific item. So you would purchase a floater if you want additional coverage for an engagement ring, but a jewelry rider if you want to cover the entire collection. Or perhaps given the value of the engagement ring, you might purchase both.

Hurricane Deductible – In 19 states (and in high-risk areas) you may be required to pay a different deductible if you are claiming a loss due to a hurricane. Typically the storm must be categorized as a hurricane, and make landfall in order for the deductible to be triggered. You can expect the deductible to be between 2% and 5% of your dwelling coverage.

Make sure you call and speak to a representative of the company you choose to get all your questions answered. If you aren’t certain you understand what is and is not being covered; ask! You don’t want to find out after it’s too late that you had the wrong type or amount of coverage.

The national average cost of homeowners insurance is $1,383 per year for $250,000 in dwelling coverage*. You can see a breakdown for the average homeowners insurance premium by state here.

2. Title Insurance

When you purchase a home, the title will be transferred to your name, making you the new legal owner of the home. Your lender will hire a title company to conduct a title search, to make sure none of the previous owners have used the home as collateral against any other loan they may have taken out in the past, or if there are any claims against the property. Once they determine the title is clear, the purchase can proceed.

There are typically two title policies required on a purchase transaction. The first one covers the lender since they are placing a lien in the amount of your loan, and need assurance that any future claims will be paid. The second one is an owner’s policy to insure you, the homeowner. Buyers generally pay the cost for the lender’s policy, while the sellers generally pay the cost of the owner’s policy that you will receive.

Additional insurance that may be required

Private Mortgage Insurance (PMI)

PMI protects the lender in the event you default on your loan, or stop making payments. You may be required to pay PMI until your loan-to-value ratio (LTV) is below 80%, meaning you have 20% equity in the home. Depending on the type of mortgage you have, it can be avoided by making a 20% down payment, or removed when you reach 20% equity in the home. You may reach 20% equity sooner than your lender is expecting if you make additional payments towards your principal. In that case you might have to notify your lender and ask them to remove it for you.

Flood Insurance

Most standard homeowners insurance doesn’t cover damage or loss from flooding. Flood insurance may be required if you are near a large body of water, or if your home is located in a flood zone.

Windstorm Insurance

In areas that are prone to tornadoes, cyclones, and high-speed wind damage, you may be required to purchase additional windstorm insurance. Ask your insurance company if this is required for your area.

Hurricane Deductible

While there is no such thing as hurricane insurance, your standard policy likely won’t cover damages caused by a hurricane unless you have flood and/or windstorm insurance; as it is the heavy winds and flooding that causes the damage. The hurricane deductible is typically much higher than the deductible on your policy, and can range anywhere from 2% to 5% of a home’s value. The hurricane deductible usually applies to damage caused by a hurricane as categorized by the National Weather Service or National Hurricane Center. The deductible may not be required if damage occurs after the hurricane is downgraded to a tropical storm.

Additional insurance may be desired or required depending on the location of your home. If you have concerns or questions, be sure to ask your insurance agent about available and recommended coverage.

Mortgage Life Insurance

If you die before your home loan is repaid, mortgage life insurance protects your family by reducing or paying off your loan. This insurance is usually a decreasing term life policy, meaning the death benefit equals the remaining balance on your mortgage. It’s important to consider your family’s total financial picture, not just the amount of money it would take to pay off your home, when considering a mortgage life insurance policy.

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