Tips & AdviceWhat Homeowner's Insurance Plans Should I Get For My Home?

What Homeowner’s Insurance Plans Should I Get For My Home?

-

Mortgage lenders require that homebuyers arrive at their closing with homeowner’s insurance. Even if your lender does not require it or you purchase a home with cash, you should still consider purchasing an insurance policy. When disaster strikes, you will take comfort in the fact that you can cover the costs of rebuilding your home and recouping your assets. Your home is likely the most expensive purchase you will make in life, and you should take great care to protect it. Strategically deciding which policy to purchase could greatly affect your ability to maintain your standard of living should something happen.

Which insurance options are available, and which makes the most sense for you? We’ve outlined some of the standard insurance policies, other kinds of insurance you may require, and tips for understanding which plan works best for you.

Why is homeowner’s insurance important?

Most mortgage lenders require that you purchase homeowner’s insurance because it protects the asset in the case of an emergency. Lenders want to ensure that the money they invest in your home gets returned on time. If a borrower has to spend significant amounts of money repairing their home, it likely will not leave any leftover to put toward the mortgage. Furthermore, since homeowner’s insurance covers a portion or the entirety of the cost of repairs, policies provide both homeowners and their lenders with financial protection, ensuring they will not have to spend their savings or large sums of money in the case of an unfortunate event.

However, homeowners should care about insurance for their benefit and not solely purchase it to satisfy a mortgage lender’s requirement. If part of your home suffers damage, the type of plan you have influences how much you can replace and the quality of items you can use to replace your home. Spending money out of pocket to repair your home comes at a high cost, as it could cost more to rebuild a home than it originally cost to purchase. As a general guideline, the older your home, the more expensive it will be to restore to its original condition. Therefore, homeowners will likely need financial assistance when it comes to fixing their home, which is where homeowner’s insurance, and the type of plan they have, grows increasingly important.

Simply acquiring homeowner’s insurance is not enough. Homeowners should carefully consider their options and find the type of plan that works best for them. While some policies may be more expensive month-to-month, they will cover more if you need to use the insurance. Some homeowners may need additional insurance based on their home’s location. Homes residing in storm paths are susceptible to damage and are eligible for specific insurance packages which protect against those situations.

Home Insurance Options

A majority of homeowners will purchase a package policy, which combines several types of insurance into one package, lowering the overall cost. Homeowners may have the option to purchase individual policies, referred to as monoline policies. However, purchasing monoline policies typically correlate to higher expenditure and are not as common as they were in the past.

There are several existing standard insurance policies for homeowners to select from, as listed by the New York State Department of Financial Services (DFS). While this information comes from a New York resource, homeowners around the country can select from the following policies.

Package Policy Coverage
Basic Homeowners Policy (HO-1) This policy generally insures your home and contents against only the following listed perils:

  • fire, lightning, and smoke damage
  • windstorm and hail
  • burglary and theft
  • explosion
  • glass breakage
  • vehicle or aircraft damage
  • riot and civil commotion
  • vandalism and malicious mischief
  • bodily injury
  • damage to property of others
  • civil judgments
  • medical payments
  • personal property (at home)
  • personal property (away)
  • additional living expense (if forced to live away from home temporarily
Broad Form Policy (HO-2) This policy generally insures your home and contents against the perils in the Basic Policy and other additional perils such as:

  • falling objects
  • weight of ice, snow, and sleet
  • damage resulting from an accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire sprinkler system
  • freezing of plumbing systems
  • electrical damage to appliances
Special Form Policy (HO-3) This policy is the most widely used policy by homeowners insurers. It covers your home for all risks of physical loss, except those specifically excluded in the policy, such as flood, earthquake, war, nuclear accident, etc. If you want to take out a mortgage on your home, your lending institution may require you to purchase this policy.
Comprehensive Form Policy (HO-5)

This policy generally protects your home against the same perils as the Special Form Policy, described above.

In addition, under the Comprehensive Form Policy, your possessions will typically be covered for all risks of physical loss, except those specifically excluded. (This extra protection may also be provided by purchasing a Special Form Policy with the ”Special Personal Property” endorsement.)

Market Value Policy This policy includes replacement cost coverage, but coverage may not exceed the amount necessary to repair or replace the dwelling using materials of like kind and quality, not exact type. Homeowners use this policy when the replacement value of the property exceeds its market value, as in the case of older homes.
Tenants and Cooperative Policies (HO-4)

Tenants and cooperative policies are available that insure against damage to the contents of a unit and for the insured’s personal liability when people are injured or sustain property damage arising from the insured unit. It is generally not necessary for a tenant to insure the building in which they live, since that is typically the building owner’s responsibility.

Condominium owner’s policies generally provide contents and property coverage for any alterations, appliances, fixtures, improvements, and interior walls within the insured unit; condominium buildings and their common areas are typically insured through policies issued to the condominium owners’ associations.

Make sure you check your existing policy or a policy you are considering buying for a complete listing of covered and excluded perils. In addition, make sure you understand whether contents damaged by a covered peril are covered. If they are not, you may want to consider purchasing additional coverage.

How much does homeowner’s insurance cost?

According to NerdWallet, New York homeowners pay $1,205 annually for their insurance, split into monthly $100 payments. In New York City, homeowners pay an average of $1,710 per year, or $142 per month. Both premiums are neither on the incredibly cheap nor expensive side compared to other states in the country.

Hawaii homeowners pay the least amount for their insurance at $458 a year, or $38 a month. However, those living in Nebraska pay the most at $4,004 a year, or $334 a month. The average for other popular states include:

  • California: homeowners pay $1,284 per year, or $107 a month.
  • Florida: homeowners pay $2,122 per year, or $177 a month.
  • Texas: homeowners pay $3,341 per year, or $278 a month.

What influences the cost of homeowner’s insurance?

Several factors contribute to the cost of homeowner’s insurance, and homeowners should shop around to find the best quote. Those looking to purchase insurance should communicate with their friends and peers to learn how much they’re paying and then ask five different lenders for a quote. Some factors include the following:

Age of the home

The older your home, the more your insurance policy will cost. It costs more to replace or repair items on an older home, as the materials used for those repairs grow more difficult and expensive to source as time goes on.

Location

Homes that reside in areas prone to storms, criminal activity, or far from emergency responders may have higher premiums, as those homes are more likely to suffer damage.

Injury-prone features

Should your home have additional features like a pool, trampoline, etc., your premium may increase as others are more likely to sustain an injury while on your property. Specifically, features that appeal to children and entice them to engage with them without supervision make homeowners more liable, increasing their premium.

Some homeowners may get rid of features like old treehouses, construction equipment, cars, etc., to reduce their rates.

Renovations and repairs

Should homeowners decide to replace and upgrade the elements in their homes; they could reduce their rates. Bringing an older home up to current standards makes it easier to repair in the case of an emergency.

Credit score

Insurance companies find that those will lower credit scores tend to file more insurance claims. Therefore, your credit score can impact your premium. If you are in the process of looking for a home, you likely are working to improve or maintain a high credit score. Therefore, you should be in good standing to have an insurance premium that reflects a strong credit score when you purchase your insurance policy.

Different kinds of homeowner’s insurance policies

There are several other types of homeowner’s insurance policies which you may need depending on the type of building or community where you purchase your home. Homeowners should be aware of the following types of insurance policies.

Master Policy Insurance

If you buy a condo or co-op, your building will purchase this type of plan to cover the common areas in your building. Since the members in the building have their policies for their units, the building takes on the responsibility of covering communal areas like the lobby, elevators, outdoor space, etc.

Before purchasing a home in a condo or co-op building, you should ask about what the building policy covers. Some buildings may have unique bylaws which make homeowners responsible for building upgrades or specific areas in the building.

Loss Assessment Insurance

Homebuyers who live in a condo or co-op may add loss assessment insurance to their policy, as it protects them when they become financially responsible for the damage they cause in a communal area. Even if the building has a master insurance policy, individual homeowners should still consider this type of insurance as the master policy may not fully cover the expenses.

Liability Insurance

A typical component of a homeowner’s insurance policy, liability insurance financially protects you should something happen to another person while on your property. If a guest in your home falls down the stairs, your liability insurance helps cover their medical expenses, pain and suffering, potential lost wages should they remain unable to return to work, etc.

Liability insurance will not cover purposefully-inflicted injuries. If expenses owed from a liability judgment exceed the amount stated on your policy, you will likely become responsible for paying the difference.

Other homeowner’s insurance policies you may need

Depending on the type of area where you purchase your home, you may decide to purchase additional forms of insurance.

Flood Insurance

Homes are not always adequately equipped to handle a natural disaster. Most standard homeowner’s insurance policies do not provide flood insurance, so those who live in flood-prone zones should consider purchasing this additional coverage. If your home floods, you’ll have the financial compensation to repair your home from water damages.

Homeowners can learn about their flood risk through FEMA Flood Maps, and then make informed decisions about the kind of flood insurance they need.

Earthquake Insurance

Earthquakes occur sometimes unexpectedly, with varrying levels of severity. Homeowners who purchase in areas prone to earthquakes should consider purchasing this kind of insurance, since they can severely damage your home and potentially make it uninhabitable.

Homeowners can refer to the FEMA Earthquake Hazard Maps to determine if they need to purchase this kind of insurance.

Wildfire Insurance

While most standard homeowner’s insurance packages cover homes in the case of a fire, some homeowners may need help finding fire insurance. In California, where wildfires predominantly destroy property, homeowners can utilize the FAIR Plan to acquire financial protection against wildfires.

Sewer Backup Insurance

Standard policies do not cover your home in the event that a sewer backup inflicts damages on your sink, bathtub, or toilet. This type of insurance covers the cost of repairing your sewage line and correctly hooking it back up to your town line. Additionally, this insurance covers the cost of removing standing sewage from your home.

What happens in a tornado?

Standard homeowner’s insurance packages protect against torando damages, as tornadoes fall into the category of windstorms. Therefore, homeowners do not need to worry about purchasing additional insurance to protect against tornados.

Conclusion

Homeowners who finance their purchase with a mortgage must purchase a homeowner’s insurance policy before closing. Homeowner’s insurance financially protects you from having to pay for all the repairs or reconstruction in the case of an emergency. Therefore, it is essential to carefully read over various policies to determine which best fits your needs. If a time comes when you need to rely on your homeowner’s insurance, you’ll be grateful to have spent a bit more money each month on something that protects one of your most valuable assets.

It is also crucial to shop around and acquire different policy quotes to ensure you receive the best deal on your insurance. Since homeowner’s insurance can cost a few thousand dollars a year, you can go to various providers to find the best rate and potentially have the funds to finance an additional policy like flood insurance. Taking the time to find a strong policy at a competitive price will prove worthwhile should you need to use it in the future.

Recent posts