Buying your first home is exciting! Make sure to protect your investment by purchasing the right home insurance.
New homeowners have a lot to be excited about, but there are many steps to ensure the homebuying process goes as smoothly as possible. Selecting the right insurance is one of those steps, and with a range of options available, there are many things to consider.
First, you should understand that a standard homeowners insurance policy typically covers the following:
- The structure of your home itself (also known as Coverage A).
- Other structures on your property, such as a detached garage, shed, or fence (Coverage B).
- Your personal property, such as household goods, furniture, and electronics (Coverage C).
- Additional living expenses you may incur if you’re displaced from your home because of a covered loss (Coverage D).
- Personal liability protection that provides coverage if you’re legally responsible for injuring someone else or damaging their property (Coverage E).
- Coverage for medical payments incurred by others if they’re hurt on your property (Coverage F).
Within each of the categories listed above, your insurance policy will detail the types of losses that are covered and those that aren’t. Since all insurance policies include exclusionary language, it’s important to understand the coverage you’re purchasing.
Depending on the property you have to protect and where you’re buying a home, you may need supplemental coverage. You can add additional protection to your policy by purchasing policy endorsements (also called riders). Common policy endorsements include:
- Scheduled personal property: This provides coverage for a specific high-value item like jewelry, artwork, or musical instruments.
- Water backup and sump overflow: This provides coverage for water that backs up into your home through sewers or drains, and is particularly important if you have a finished basement.
- Identity fraud: This will provide coverage for legal fees, lost wages, and other expenses if your identity is stolen.
- Earthquake: Damage from an earthquake is not covered by a standard homeowners policy but is available through this endorsement.
It’s also important to know that not all coverages apply in the same way. Here are a few concepts to be familiar with:
- Named peril vs. open peril: If your homeowners policy lists certain causes of loss (e.g., fire, wind, theft) that are covered, it’s a named peril policy. If your policy states that coverage applies unless a loss is specifically excluded, it’s an open peril policy. By the way the coverage is designed, open peril policies provide broader coverage than named peril policies. You’ll commonly see a standard homeowners policy include named peril coverage for your personal property (Coverage C), with the option to upgrade your coverage to open peril through endorsements or an enhanced policy offering.
- Replacement cost value (RCV) vs. actual cash value (ACV): If a loss occurs and your property is damaged, the amount of money you’ll receive to replace damaged property depends on whether your policy provides RCV or ACV coverage. RCV means you’ll receive the cost to replace the item with one of like kind and quality at present-day prices. ACV means that amount will be adjusted to take into account the age of the item and any depreciation (loss of value) due to its condition. Again, you can sometimes add an endorsement to a policy that offers ACV coverage to upgrade it to RCV.
With so many options, how do you choose an insurance company?
For many, your home is your largest investment. When something goes wrong, you’ll want an insurance company that you trust to be there to help you put things back together. Taking time to research your options will help you find a reputable insurer that’s the right fit for you. Read online reviews and consider the company’s financial stability and customer service reputation. You can also talk to friends and family about which insurance company they use, and the experiences they’ve had.
There are a variety of sources available as you begin comparing companies. You can look at the ratings and reviews from companies like J.D. Power, Trustpilot, Forbes, and U.S. News & World Report. You can also check the financial strength ratings of insurers through AM Best, a leader in rating the financial stability of insurance companies.
Another factor that some fail to consider is the structure of the company. Many insurance companies are publicly traded with investors and stockholders interested in their performance. Another option worth considering is going with a mutual company. Mutual insurance companies are owned by their policyholders and don’t have investors’ interests to consider.
What about cost?
Insurance companies calculate rates based on how likely it is that a loss will occur, and there are many factors that can impact your insurance premium. Here are a few:
- Estimated replacement cost of your home. (Note that this is not the market value of your home, but an estimate of what it would cost to rebuild your home in the case of an extreme loss.)
- Frequency of claims by homeowners in your area.
- Likelihood of natural disasters in your area.
Most insurance companies also offer a variety of discounts to customers. Some common discounts include:
- Paid in full
- Multiline (when you have multiple lines of business with the same carrier)
- Receiving your bill and policy electronically
- Smart home device discounts that reduce the risk of loss
One other important decision you’ll need to make as you get insurance quotes is what deductible you’ll select. A deductible is the amount of money you’ll be responsible for in the event you file a claim. Best practice is to select the highest deductible you’d be comfortable with, because the higher the deductible, the lower the cost of your insurance policy.
Shopping for insurance can feel intimidating and complex. A quality insurance carrier will spend the time it takes to answer your questions and make sure you’re comfortable with the protection you have in place.