Homeowners who borrow money to buy a home are required by mortgage companies to purchase homeowner’s insurance – and although an insurance policy protects your big investment, many homeowners don’t fully understand how these policies work.
If you don’t know anything about homeowners’ insurance, you’re probably overpaying for the coverage you’re carrying. Here are six facts every homeowner needs to know before buying insurance.
1. There Are Different Types of Homeowner Policies and Coverage Options
No two homeowners’ insurance policies are the same – they’re all different, especially when it comes to coverage. The most popular insurance plans protect against theft, fire, and other disasters. However, these policies only cover personal belongings for disasters that are specifically listed in the policy. Other policies provide more protection for both your personal belongings and your home’s structure, but they can cost more. Some policies are specifically tailored for owners of a condo or co-op, covering only a portion of the building.
Regardless of the policy type, homeowners’ insurance provides three different coverage options when disaster occurs:
- Cash value coverage: The cheapest option, cash value coverage provides coverage up to the policy limits less depreciation.
- Replacement cost coverage: Fully reimburses any losses up to your policy limit. This coverage also doesn’t deduct any depreciation.
- Extended (or guaranteed) replacement cost coverage: This coverage replaces your home as it existed prior to the disaster even if policy limits are exceeded.
When choosing a homeowners’ insurance policy, you’ll also need to decide how much coverage you need. Keep in mind that the price you paid for your home includes the building and the land. A disaster that completely destroys your home most likely will not destroy your land. Therefore, you may only need enough insurance to cover the building and not the land. If your insurance covers what you paid for the building and the land, you may be overpaying.
2. Some Types of Damage Aren’t Covered
While standard homeowners’ policies provide good protection, they don’t cover everything. Fire and theft are the most common coverage events – but floods and earthquakes likely aren’t included.
Insurance companies typically require homeowners to purchase special policies for disasters beyond fire. If you live in a high-risk area that sees frequent natural disasters, you need to check whether or not your insurance policy actually covers the damage you might incur. Other perils that often aren’t covered include sewer backups and mold. Few insurance companies offer policies for this type of damage, so give your policy a careful, close read.
3. Home Maintenance Matters
Some homeowners’ insurance policies contain a statement that can seriously affect your coverage. In your policy, you’ll likely find this line: “damage must be sudden and accidental.” This means that if the damage is intentional or occurred over a long period of time, your policy won’t pay your claim. Before an insurance company will pay a claim, they verify that the home has been properly maintained. Otherwise, your claim could be denied.
Because of this, it’s important that you maintain your home, preventing it from becoming unsafe or easily damaged. To satisfy this requirement, you need to look for water leaks, have your roof inspected regularly, and take quick action to repair any problems.
4. Your Credit Affects the Rate You Pay
Your credit rating plays a huge part in determining your mortgage as well as the interest rate you pay, but did you know it also affects your homeowner’s insurance premiums? According to the Huffington Post¹, a person with medium to fair credit will pay about 32 percent more for homeowners’ insurance than someone with excellent credit. A person with poor credit could wind up paying 100 percent more.
While some states have laws prohibiting credit-based insurance rates, others do not. Regardless of your home state, it’s a smart idea to keep an eye on your credit score and health. A strong credit score could save you hundreds of dollars in the long run when it comes to your insurance premiums.
5. There’s A Deadline to Make a Claim
When disaster happens, you need to act quickly – especially when it comes to insurance claims. If you need to file a homeowners’ insurance claim, make sure you don’t wait.
Many policies have a window for reporting an incident. Some allow policyholders to take their time, but others have claim windows as short as 14 days. That’s just two weeks to get cost estimates and your claim filed. If you fail to file a claim within the specified time period, your claim may be denied and you could be out thousands of dollars.
6. Home Improvements Get You Discounts
One of the factors insurance companies use to determine rates is the perceived future risk. Essentially, the more you protect your home from disaster, the lower your monthly rate will be. You can lower the insurance company’s risk by installing certain technological devices such as smoke detectors and alarm systems. It also helps to improve the security of your home by installing upgraded windows and doors, plus new deadbolts.
If you do decide to make improvements like these, be sure to let your insurance company know, and inquire about any discounts that might apply. Your insurance company won’t readily offer these discounts or lower premium prices, so inform them every time you make an upgrade to your home that improves its security and its value.
Choosing the Best Homeowners’ Insurance
Before you purchase homeowners’ insurance, you owe it to yourself to compare rates in order to select the best policy for you. That’s the only way to ensure you’re paying a fair premium, with all of the coverage you’d like included.
Luckily, you can easily compare quotes from different insurance companies online. Most major insurance companies offer immediate quotes online – and some websites will shop around for you and find the lowest quote corresponding to the type of coverage you need. And you’ll only need your zip code to get started.
Like anything, it’s always a good idea to be aware of the latest research. We recommend comparing at least 3 or 4 options before making a final decision. Doing a search online is typically the quickest, most thorough way to discover all the pros and cons you need to keep in mind.