The One Home “Accessory” Every Buyer Needs
By Susan Doktor
We’re not talking about cordless motorized blinds, a first aid kit, or a mobile-enabled home security system— though this one is certainly designed to protect you. We’re talking about the right insurance policy. With umpteen options to choose from when you purchase one, how will you know which is the best homeowners policy for your new home? Let’s take a look at some of the coverage choices available to you. That way, when you speak to an insurance agent—or several agents if you’re a smart shopper—you’ll have the most important questions to ask in your back pocket. After choosing the perfect home, choosing the right policy is one of the most important decisions you’ll make as a home buyer. Nowadays, safety is on everyone’s mind and homeowners insurance is the only way to protect one of, if not the largest financial asset you have.
What You Need to Know About Homeowner’s Insurance
The first thing is that for most people—that is, anyone who takes out a mortgage to purchase real estate—homeowners insurance isn’t optional. Every lender will insist that you carry it. That’s how they protect the investment they make in your home. Lenders will not only insist on it, but they will also dictate many details of the policy you purchase to be sure your property is adequately protected under a wide range of unpleasant and costly circumstances. Fortunately, homeowners insurance also benefits you and, since you’re the one who’s going to pay for it, it’s important to have a clear understanding of how homeowners insurance works, what type of coverage you should purchase, and how much coverage you need.
Understanding Liability Insurance
The first type of coverage you’ll need to consider is liability insurance. Briefly, in the context of homeowners insurance, liability coverage protects you financially should your actions or an accident on your property cause harm to someone else or someone else’s property. Maybe a neighbor slips on your icy stairs and breaks a leg. Or, during an ice storm, a tree branch falls in your driveway and wallops a friend’s car. Each of these people will incur certain costs on account of their injuries. They may have medical bills. They may miss work. They may have to buy a new set of wheels. In insurance-speak, those costs are known collectively as “damages.” When you have liability coverage, your insurance policy will reimburse your neighbor or visitor for the damages he or she suffers—so you don’t have to.
Nobody likes to think about worst-case scenarios, but some injuries are very grave. They may even result in death. Damages in these cases can reach the seven figures. That’s why the coverage limits you choose for the liability portion of your policy are critically important. While requirements vary based on a few factors, generally your lender will insist that you select coverage limits at least equal to the value of your home, minus the equity you may have in it. Again, that’s to protect their own financial interests. So if you purchase a home for $200,000 and put a $25,000 down payment on it, your lender might only require you to carry $175,000 worth of liability insurance. But that’s not a great idea. If an accident on your property results in damages in excess of the $175,000 your lender cares about, you can be held responsible for the overage. What’s more, if you are sued and a judgment is awarded in excess of the limits of your policy, your other assets—the money you’ve saved in a bank account, your vacation home, or your stock portfolio, for example—might be seized to satisfy a high jury award. So consider your net worth when selecting your liability coverage limits to be sure you are adequately protected.
Understanding Property Damage Insurance
While liability coverage is designed, in part, to protect other people, property insurance is all about you and your lender. Property insurance reimburses you for the costs you incur due to a wide range of circumstances. These might include a storm pipe that backs up and damages your belongings or your basement, a lightning strike that damages your roof, or even a catastrophic fire that forces you to leave your home. Once again, your lender will require you to carry coverage at least equal to the value of your home minus the equity you have in it. And once again, it’s often a good idea to carry more.
You have a number of decisions to make when it comes to the property damage coverage portion of your policy. One of the first is whether to carry Actual Cash Value (ACV) or Replacement Value Coverage (RVC). Here’s the difference between the two. Let’s say you have a 5-year old, six-burner double-oven Viking range in your kitchen. (Lucky you, by the way!) If there’s a fire in your home and your range is destroyed, AVC insurance would reimburse you the amount your top-of-the-line range would fetch in a used appliance store—which is probably considerably less than you paid for it. It’s certainly less than what it would cost for you to replace it. RVC coverage, on the other hand, would reimburse you the amount it would take to buy a brand new stove—six over two, just like your old one. So if your home is equipped with lots of high-end features or you own a lot of expensive electronics, RVC may be the best choice for you.
RVC may also be important if you live in a historic home. ACV coverage is unlikely to cover the cost of replacing your Victorian-era mahogany mantle—if you can even find a craftsman to do so nowadays—or your leaded glass windows if disaster strikes your home. For historic homeowners, the list of architectural features that need special protection goes on and on. Consider, too, that these unique details are what make a historic home worth as much as it is, too. RCV coverage allows homeowners to hire the specialty workers it takes to undertake a true revival of a damaged historic home.
Depending on where you live, you may also want to consider certain optional property damage coverage. A flood insurance endorsement (also known as a rider or floater) may be advisable for your home. You can estimate your flood risk by knowing whether and which flood zone your home may be situated in.
Understanding Personal Property Coverage
You buy a home. You fill it with stuff. And many of us invest a lot of time and money when we select that stuff, whether it’s a custom couch and draperies to match or stainless-steel barstools to complement a contemporary kitchen. The part of your policy that covers the loss of your stuff is called Personal Property Coverage. The same rules apply when determining how much coverage to buy. The more expensive your belongings, the higher the policy limits you’d be wise to elect. Personal property coverage also insures you against theft. But a standard policy may not cover certain expensive possessions. You may need to purchase separate riders for such items as jewelry and antiques. You’ll be required to document items covered under these riders with photos and, in some cases, professional appraisals. Incidentally, all personal property policies have limits on how much they will reimburse you for cash. It’s never a good idea to keep too much in your home, even if you have a home vault.
Keeping Insurance Affordable
Researching insurance costs before you purchase a home is an important budgeting strategy. It’s a fixed expense you will pay as long as you own your home so you need to keep it on your radar when you decide how much home you can afford. Your lending institution will keep it on its radar, too. Insurance premiums are typically included in your monthly mortgage statement to make sure you pay them. That’s your lender looking after its own interests, again.
Insurance experts—and your agent should be one of them—offer some money-saving tips you can keep in mind when you shop for a policy. Electing lower coverage limits isn’t usually a good idea for reasons we’ve already discussed. But electing a higher deductible is one way to keep premiums down. Choose your deductible based on how much money you’d feel comfortable paying out of pocket in the event you have to file a claim. If you have a few thousand dollars in an emergency fund, you might choose a higher deductible. You may never have to file a claim at all. The money you save on lower premiums would be pure gravy then. To put things in perspective, the average homeowner only files a claim once every ten years.
You can also save money on your homeowners’ policy by bundling it with other insurance you carry—for example, your auto policy. Insurance companies like repeat customers. They also like it when you equip your home with certain safety features, including security systems and fire and carbon monoxide detectors. They show a little extra love to senior citizens. All of these factors may earn you policy discounts. Leave no stone unturned when you talk to your insurance agents to be sure you’re getting all the price perks you have coming to you. It also makes sense to review your insurance policy annually with your agent. Your needs—and available opportunities to save—may change from time to time.
Lean on Your Realtor
Your Worth Clark agent knows the ins and outs of homeowners insurance, as well as the local business landscape. Have questions? Don’t know where to start looking for an insurance agent? That’s what Worth Clark is there for: to support you as you look for the perfect home and prepare for hassle-free homeownership. Don’t hesitate to consult us. We’re always glad to hear from you and help out.
Susan Doktor is a journalist, business strategist, and four-times-over homeowner who hails from New York City. She covers a wide range of topics, including real estate, finance, technology, and government affairs. Follow her on Twitter @branddoktor.