The Benefits of Homeowner’s Insurance (and why it’s important)

(guest post courtesy Wally De La Rosa for Money.com)

(Photo by CHUTTERSNAP on Unsplash)

There is a lot involved with becoming a homeowner. From pre-approval to open houses and making your first offer on a property, first-time buyers have a lot on their plate when it comes to getting their dream home, and their insurance policy is no simple appetizer on the menu.

While states don’t require insurance as an enforceable statute of the law, your lender will require enough coverage to cover the amount of your mortgage loan until the loan is paid off.

As with everything related to your home-buying journey, knowing what you’re looking for in advance will help you find a policy that best fits your needs and budget.

This post should give readers a better understanding of the factors that influence their premiums, the types of policies, and cost-saving tips to get started.

WHY INSURANCE IS IMPORTANT

The last thing homeowners should worry about after going through a lengthy mortgage process is the possibility of damages to their home. After all, you worked so hard at finding the right place and getting the best mortgage deal, not to mention the time it took to save up for a down payment.

But when you have a mortgage, your bank needs to make sure all their losses are covered in case something unexpected happens, like a fire or a flood, and a homeowner’s policy helps protect you and your lender during such events.

If a homeowner fails to explore options before signing on their home, it’s up to the lender to decide which policy to select and purchase—they’re allowed, but they must give you advance notice before moving forward. The downside to letting this happen is that your lender will be looking out exclusively for their own interests, meaning you and your family might not be covered under their chosen policy, and it might be pricier.

There are four main coverage areas found in any homeowner’s policy, namely, dwelling and personal property coverage, liability protection, and loss of use coverage.

As their name suggests, each coverage class aims to protect the homeowner against known perils that affect their home or belongings. In the case of liability protection, it’s main purpose is to protect you or your family members against lawsuits for injuries or property damage caused to others. It also pays for damages caused by your pets.

Loss of use coverage helps homeowners pay for living or housing expenses incurred in the event of their home becoming inhabitable during a disaster.

KNOWING THE MAIN TYPES OF INSURANCE POLICIES

There are several different layers of coverage that you can apply to your homeowners’ policy. This will vary for every homeowner depending on certain factors that affect their risk, like location.

HO1

The most basic policy. It covers damage inflicted by these 10 perils:

■ Fire and lightning

■ Hail and windstorms

■ Explosions

■ Civil unrest

■ Aircraft damage

■ Vehicle damage

■ Smoke

■ Vandalism

■ Theft

■ Volcano eruption

HO2

A step up from HO1, it includes the previous named perils plus:

■ Falling objects

■ Snow

■ Water discharge (not flooding)

■ Sudden cracking, bulging or burning of a built-in appliance

■ Accidental damage from electrical currents

■ Freezing

HO3

The most commonly purchased policy. It covers all perils except floods and earthquakes. If you live in a flood zone or earthquake-prone state, you might want to consider taking out a rider or add-on coverage for those perils.

HO4

This is renter’s insurance. Applicable only to tenants and their belongings while living under rent.

HO5

This is the highest level of protection offered. It will cover structure and belongings at replacement cost regardless of which peril caused the damages.

HO6, HO7, and HO8

The first of which covers condominiums. Keep in mind that common areas and structures are typically covered by your Homeowner’s Association, HO6 will only cover your belongings and the inside of your home exclusively.

The second, HO7, is mobile home insurance, not to be confused with RV insurance. This also applies to manufactured homes which are built and then transported to a plot of land.

HO8 is coverage for older, pricier homes that are more expensive to replace due to material costs.

TIPS FOR SAVING ON HOMEOWNER INSURANCE COSTS

As with other insurance products, there isn’t a single recommended carrier homeowners have to choose from, but a variety of providers with different rates, policies, and benefits from which to consider.

The driving force behind insurance rates is the likelihood that a homeowner will file a claim. A good way to gauge your potential premiums is by considering any previous insurance claims you may have filed, as well as past claims related to your property.

Your home’s condition, neighborhood, and cost of building materials also play part in setting your insurance rate.

The single best piece of advice is to shop around for multiple quotes prior to closing day, similar to how mortgage shopping works. This way, you ensure you only pay for the coverage you need and find a deal that works for you.

Aside from keeping your home in tip-top shape, and having excellent credit, there are other steps you can take to secure a better policy deal.

For example, some carriers incentivize homeowners who meet certain home security criteria, like having 360 monitoring around the house. Some carriers also offer exclusive bundling discounts when you stack multiple insurance products under the same roof. This can be especially rewarding when you bundle your auto and home insurance under the same carrier.

Last but not least, carriers offer discounts for periods of inactivity, making it useful to review your policy every year, making sure your insurance policy is keeping up with your home’s value and appreciation.