Your home is perhaps your most valuable physical asset. You’re paying a mortgage on it and it’s where you create lasting memories. It only makes sense to properly protect this valuable place with insurance.
Home insurance, or homeowners insurance, is often required if you’re taking out a mortgage on a house. But there are different types of insurance options out there that you might not want, especially if you’re shopping for home insurance without the help of an independent insurance agent.
How Does Home Insurance Work?
Homeowners insurance covers your home for most sudden and accidental events that cause damage to your house and your personal belongings. It comes with a lot of automatic coverages built in, but some home insurance policies are more comprehensive than others.
Most homes are insured for replacement cost, which is the amount that your home is expected to be rebuilt for. This is different from market value, which is what your home is worth on the market. It’s almost always more expensive to build a new home than it is to buy a home, which is partially why your home’s replacement cost is probably higher than what you paid for it.
Your independent insurance agent can help you establish what your home’s replacement cost is and give you options for how you want to insure it.
How to Buy Home Insurance
You can buy home insurance through most online insurance companies, but you might not be aware of what each coverage option means or what it covers. As with any type of insurance, home insurance comes with some exclusions — things that aren’t covered.
If you truly want to protect your home, you can buy home insurance through an independent insurance agent. They’ll understand each type of home insurance and will have access to many different insurance companies, allowing you to maximize your home coverage at an affordable price.
1. Before you buy a home
If you’re buying your home with a mortgage, you’ll almost certainly be required to show proof of insurance to your bank or mortgage company. Because even though you are buying the home and are the new owner, your bank or mortgage company still has a financial interest in the home, since it’s lending you the money.
If you have damage to your house, your bank or mortgage company won’t want to pay to fix it, which is why they require you to have insurance before signing your loan.
Even if your lender doesn’t require you to buy insurance, or you’re paying for your new home with cash, it’s still a good idea to buy home insurance. If your new home is destroyed and you don’t have insurance, you’ll be faced with the choice of:
- Spending all that money a second time to rebuild it
- Putting another down payment on a new house and losing the money you just paid
- Having to move into a rental home or apartment
If you look at your house as a financial asset, it only makes sense to protect it with insurance.
2. Decide which type of home insurance you want
There are two main types of home insurance: replacement cost and actual cash value (ACV).
Replacement Cost: Most people opt for replacement cost because they would like to rebuild their home if it gets destroyed. If you have $300,000 of coverage on your home and it gets destroyed, then the insurance company will pay you up to $300,000 to rebuild.
Each state has slightly different laws when it comes to this payout. Most states will pay you whatever it costs to rebuild, up to your policy amount. So if it costs $275,000 to rebuild, they will pay you $275,000 and not the full $300,000. Other states will pay you whatever you have on your policy, even if it costs less to rebuild.
Actual Cash Value: The other option is to have an actual cash value policy, or ACV. This is where you decide how much insurance you want on the home. This is commonly used on lower value homes where you might not want to rebuild it. For example, if you buy an older home for $50,000, you could buy an ACV home insurance policy with $50,000 coverage on it.
If your home is totally destroyed on an ACV policy, you would receive $50,000 in cash. But if your home is partially destroyed, your claims check would take into account depreciation and the age and condition of the home, meaning your claims check might be much less than it would actually cost to repair or replace the damage.
3. Compare insurance companies
Your home insurance premium is based on many factors, such as:
- The type of home insurance you want
- How much coverage you select
- Where it’s located
- The condition of the house
- Your home’s claims history
You’ll need to submit information about yourself and your home to get a home insurance quote. Many insurance companies also give out a wide range of discounts on home insurance, such as:
- Bundling your car insurance with the same company
- Having a security system
- If your home is located in a gated community
- Having smoke alarms
If you let an independent insurance agent do the legwork for you, she/he will have multiple insurance companies to get quotes from. They’ll likely get a quote from all of them and then present you with a few options, explaining the differences between each type of coverage and the pros and cons of each company.
4. Find the best option
The best home insurance option for you might not necessarily be the cheapest. You can always remove coverages and strip down your policy to the bare bones to save money, but you will likely regret doing so if you have a claim.
The best option and best insurance company for you will have the best mix of strong coverage options, competitively priced, and with a company that you feel good about.
Be sure to review your options with an independent insurance agent, who can give you recommendations and advice on which insurance company and policy to buy.
5. Finalize your new homeowners insurance policy
Once you have a closing date, you can buy your new home insurance policy. You can usually make it active up to a month ahead of time, which means you don’t have to wait until the last minute to buy home insurance and close on your house on the same day.
For example, today is September 1st but you don’t close until September 20th, you can buy a policy today with an effective date of September 20th, meaning you won’t have coverage until you take possession of the house.
To buy a home insurance policy, you’ll likely need to sign an application, which can usually be done online or in person. Your insurance company will also likely run a loss report on your property, if it hasn’t done so already. If there have been any losses in the last three to five years that haven’t already been reported, then your premium could go up.
You’ll also need to submit payment. Your lender might be paying your home insurance premiums on your behalf, and will then include your premiums in your monthly escrow payments. In this case, you or your agent will need to select “bill to mortgagee” in your payment. Your lender will receive a bill and pay it, but you should be able to issue your policy before this happens.
If you’re paying for the policy by yourself, you can typically select monthly payments, quarterly, semi-annual, or annual payments.
6. Cancel your old insurance
If you have an existing homeowners or renters insurance policy, you’ll likely want to cancel that on the same date that your new policy goes into effect.
However, if you are still the owner of your old house or still have your rental lease in effect, then you’ll probably want to keep your old insurance active until you either sell your old house or officially end your rental agreement.
You could have a gap in coverage if you cancel your old policy too quickly. If you’re still the owner, you need to keep insurance on it until you’re no longer the owner. Similarly with a rental agreement on an apartment or rental house; don’t cancel your old insurance until you’re completely free of that agreement.
What to Watch Out for When Buying Home Insurance Online
Many online insurance companies will walk you through getting a home insurance quote. However, you might be missing out on key coverage options or ways to lower your premium.
Insurance isn’t rocket science, but it can be complex with a lot of options that don’t make sense right away, so it helps to have an expert who can guide you through the process. When buying online, it can be tempting to skip or lower key coverage options to save some more money, but if those coverage options were fully explained to you and how they could affect a claim, then you might opt in for them.
The Benefits of an Independent Insurance Agent
Making sure your home is fully protected without overpaying is what an independent insurance agent does best. They can be a resource for any questions you might have, and somebody to turn to if you have a claim.
An independent insurance agent will also give you quotes from multiple companies and will do the legwork in finding you the best option for your home. Talk to an agent today to give your home the protection it needs.
TrustedChoice.com Article | Reviewed by Paul Martin
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