Real estate transactions are tricky and it’s all too easy to get overwhelmed with the sheer amount of things you need to take care of. However, there are some things you absolutely shouldn’t forget. Home insurance is one of them, and the more you know, the better able you are to save money and protect your assets.
Who Needs Home Insurance?
Anyone who is buying a home would be wise to consider home insurance, but most people won’t have a choice in the matter. If you’re taking out a mortgage to cover the cost of your new home, your lender will require you to take out a home insurance policy. Essentially, they want to know that their investment, i.e. your new home, is protected in case of disaster.
While homeowners who manage to buy their home without taking out a mortgage aren’t required to take out an insurance policy, they are advised to. You never know when accidents might happen or if disaster will strike, so it’s worth being prepared for any eventuality. Which leads us on to our next point.
What Does Home Insurance Cover?
A standard home insurance policy typically doesn’t cover as many things as homeowners expect it will. As such, always do your research and know exactly what you’re covered for. In general, a standard homeowners insurance policy will cover you for the following:
- Damage to the interior and exterior of your home caused by disasters such as fire and adverse weather (hail, lightning, etc.).
- Damage to personal belongings, and detached structures such as garages, fences, and sheds caused by disasters such as fire and adverse weather (hurricane, hail, lightning, etc.).
- Theft of personal belongings.
- Damage caused by criminal acts.
- Accidental damage, such as water damage from burst pipes.
- Liability protection.
- Additional living expenses (ALE), in case you need to abandon your home for any period of time.
What Isn’t Normally Covered by Homeowners Insurance?
There are several things a standard policy won’t cover, however. Flood insurance, for example, normally needs to be purchased separately and is seldom included in a standard policy. Interestingly, while internal water damage is typically covered, any form of external water damage normally isn’t, not just natural floods. As an example, a broken sprinkler may damage the inside of your home, but it normally won’t be covered.
Sewage problems are also not normally covered, and a ‘Sewage Backup Coverage’ typically needs to be purchased separately. Wear and tear and anything that can be prevented through reasonable home maintenance, such as leaking roofs, pest infestations, and mold, are also not typically covered.
Depending on your location, things like snow and ice damage coverage may or may not be included. Earthquakes or hurricane prone areas also might require a separate policy to cover these natural disasters. ‘Acts of God’ are also not typically covered, and definitions are generally rather vague.
How Does Homeowners Insurance Work?
Each home insurance policy is different and homeowners are able to customize it to best suit their needs. Most insurance companies offer three levels of coverage, with the cheapest offering the least coverage.
Actual Cash Value
This policy covers the cost of your home plus the cost of your possessions. Depreciation is deducted, so that you’re covered for what they’re worth now, not the price you originally paid for them. It’s the cheapest option, but also returns the least in case of a claim.
This policy covers the cost of your home plus the cost of your possessions without deducting depreciation, up to a pre-set limit. As such, you’d be able to repair or replace your home and belongings up to the value you originally paid.
Guaranteed Replacement Cost
Also known as extended replacement cost, this is the most comprehensive coverage and the most recommended. With this policy, you’re covered for whatever it costs to repair or rebuild your home and replace your possessions, even if it exceeds your policy limit. As inflation and the value of goods increase over time, it’s best to cover yourself for more than your home and possessions were worth when you bought them. With this policy, you can do just that.
How Much Does Homeowners Insurance Cost?
It’s difficult to put a price on homeowners insurance, as each policy will differ depending on a huge number of variables. However, the average policy across the U.S. costs just under $1,000 per year. First-time buyers may pay more, as they typically don’t immediately qualify for discounts and benefits, and some policies can exceed $2,000 per year.