People and Property: Understanding Homeowners’ Insurance

Maybe you’ve been diligent about socking away a portion of every paycheck. Or you just made a killing in the stock market. Or perhaps your company had a banner year—even during the COVID-19 crisis many businesses did—and you have a big bonus to show for it. The good news is you have enough cash on hand to make a down payment on your own home and you’ve decided to take the plunge.

Soon you discover it’s a complicated process! Figuring out how home financing works and learning how conventional, FHA, and VA loans differ from one another. Calculating your mortgage payments under various loan scenarios. Adding up all the expenses you’re taking on when you finally sign on the dotted line. And one of the most consequential and costly choices you’ll have to make when you buy a home is what kind of homeowners’ insurance you’ll need to carry.

One choice you won’t have is whether you need to purchase homeowners’ insurance at all. Your mortgage lender will insist that you do and will even mandate some of the features of your policy. But the best homeowners’ insurance for your needs won’t necessarily be the same as what your lender requires. That comes down to various factors, including your financial position now and for as long as you intend to own your home. So let’s break it down. Then you can make the smartest insurance decisions from the outset and also understand how your policy needs may change over time.

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Protecting People: Why You Need Liability Insurance

No man or woman is an island—especially when you live in a fabulous house that friends and family love to visit. Then there’s your mailman and the people you hire to fix your furnace, paint your bathroom, or otherwise take care of your home. Liability insurance protects visitors who may be injured on your property. In some cases, it also protects their personal property if it’s damaged on your premises.

Let’s say Grandma steps on the Lego pieces your kids leave on the playroom floor. She falls down, has to visit the ER, and smashes her glasses in the process. Liability insurance would cover the cost of her medical bills and replacing her bifocals, too.

But those are relatively minor expenses in the scheme of things. Some accidents, unfortunately, are far more serious and, while nobody likes to think of it, can result in death. Juries routinely award million-dollar verdicts in death cases. That’s why carrying sufficient liability insurance is essential. If you’re sued and your liability insurance limit doesn’t equal the size of the jury verdict, you may be required to pay a plaintiff from your personal funds. Your mortgage lender may only require you to carry insurance equal to the amount you owe on your home because that’s the extent of their financial interest in your property. But most insurance experts will advise you to elect more coverage than your lender demands. The higher your net worth, the more you stand to lose and the more insurance you may need to protect your assets in the event of a serious accident.

The Importance of an Annual Policy Review

Over the years, your net worth may increase. With any luck, so will your home’s fair market value. That may be one reason to increase your insurance limits. Or let’s say you decide to sink a pool in your backyard or adopt a Doberman Pinscher. If, statistically speaking, your home becomes a riskier place, your insurance agent may advise you to increase the limits of your coverage, too. Most agents will offer to review your homeowners’ policy at the end of its one-year term and that’s a pretty good idea.

By the way, if you do install a pool or make other major changes to your home—whether they increase or decrease risk—let your insurance company know. The information on your policy must be accurate. Otherwise, your insurance company may decline to pay a claim when you file one.

Protecting Stuff: Why You Need Property Insurance

Sometimes, calamity strikes. A fire in your home is one frightening example. But smaller incidents can be costly in their own right. Property insurance is there to ease your financial pain when your home suffers major or minor damage, indoors or out. If your roof shingles are torn off in a windstorm and accompanying rains wreck the ceiling and carpet in an attic bedroom, property insurance will cover the cost of repairing them both—minus your deductible, of course.

There are a couple of caveats worth mentioning, though. First, your insurance company expects you to maintain your home. If your roof was leaky or otherwise in poor repair before the storm, your claim for indoor damage might be denied. So be sure to keep up with repairs that put your home at risk. Second, flood damage is typically not included in standard policies. If you live in a flood-prone district, it might be wise to purchase a “rider”—extra insurance that specifically compensates you for flood-related losses, including mold damage, which can have a serious impact on the value of your home.

Property insurance also protects you against burglary and vandalism. If you keep a lot of expensive things in your home you may want to pay particular attention to the coverage limits of any policy you’re considering. Standard coverage may not pay you enough to replace high-end electronics, antiques, and jewelry. Once again, you may need to purchase separate riders for these items to be fully protected. You’ll probably be required to submit professional appraisals of items you insure through a rider. But regardless of whether you purchase riders for these items, insurance experts recommend that you keep a detailed record of what’s in your house, including photographs and receipts for items you’ve purchased. Be sure to keep your records somewhere outside your home, such as in the cloud. When it comes time to make a claim, documentation can speed up the claims process and help you secure the best settlement possible.

ACV or RVC: Two Property Insurance Acronyms to Understand

One of the most significant choices you’ll make when selecting a homeowners’ policy is the reimbursement model your insurer will follow when paying claims. Policies can be written in two ways. An Actual Cash Value (ACV) policy reimburses you for the current cash value of the items that are lost or damaged during a covered event. Used belongings, no matter how much you originally paid for them, will be valued at the going rate on eBay or in a consignment store. It won’t cover the cost of replacing that perfectly serviceable MacBook you’ve relied on with a brand-new model. If the stunning oak woodwork in your Victorian home is damaged by fire, your insurer would not reimburse you for the expense of having a master carpenter come to your home and restore it. For that, you need Replacement Cost Coverage (RCV) which has significantly higher benefit limits. Naturally, and RCV coverage costs more than ACV coverage.

How Much to Budget and How to Save on Homeowners’ Insurance

The average homeowners’ insurance premium in the United States is $1,015 a year. Your home’s value, your zip code, and any riders you select will factor into your final cost. But there are ways you can save no matter where you live or how valuable your home is.

The first option is to select a high deductible with your policy. Insurers may give you a choice of deductibles ranging from $500 to $2500.The higher your deductible, the less you’ll pay in premiums. Choosing the maximum rather than the minimum deductible for your policy can save you 20% or more annually. When you select your deductible, consider the amount of money you could comfortably afford to pay out-of-pocket if you had to make a claim. And keep in mind you could be lucky: only one in 20 homeowners files a homeowners’ insurance claims each year.

You can also save on your homeowners’ premiums by bundling multiple insurance policies with one carrier. Nearly every large insurer rewards customers who purchase multiple policies by discounting them all. Homeowners’ insurance can be bundled with auto, life, motorcycle, and other policies for considerable savings across the board.

You may be surprised to learn that, depending on your state of residence, your credit profile can have an impact on the insurance rates you’ll be offered. Before you purchase a policy, download a free copy of your credit report. If it’s blemished by late payments or accounts in collection, clean it up. Make sure you’re current with all of your bills. According to some estimates, a little bit of credit repair can lower your insurance premiums by as much as 20%.

Various improvements you make to your home can also earn you lower premiums. Installing a smart home security system, a new roof, or storm shutters can reduce your policy costs. Some insurers offer discounts for military service members and veterans, retired homeowners, and other groups. The main thing to remember about discounts is that you have to ask for them. And most importantly, to find the lowest-cost, most protective policy for your home, be sure to shop around. Many online insurance marketplaces make it easy to compare quotes in no time at all.