Whether you're a first-time homebuyer or a veteran homeowner, understanding home insurance is critical for protecting your investment.
1. Get a CLUE.
"It's important for new homebuyers to think of insurance as part of the home search process and to look at obtaining coverage for the home as far in advance of closing as possible," says Mary Bonelli, a spokeswoman for the Ohio Insurance Institute.
Besides getting a home inspection, request a copy of a C.L.U.E. report. C.L.U.E.--Comprehensive Loss Underwriting Exchange--is a database owned by LexisNexis Risk Solutions that gives insurers access to information on claims that have been filed against the property in the last five years. As a prospective buyer, you can't get a report from the company, but you can ask the homeowner, who can ask LexisNexis, for a copy, Bonelli says. According to LexisNexis, a growing number of buyers are requiring sellers to provide a copy of the report as a contingency for a purchase offer. The loss history will reveal problems that could make insuring the home difficult or expensive. Ask an insurance agent about the home's insurability and for an estimate of the premium.
2. What home insurance does cover.
A standard home insurance policy covers the home and your belongings, as well as your liability for any injuries or property damage you, your family members or pets may cause others. It also provides additional living expenses in case you can't live in the home while it's being repaired after an insured disaster.
Policies are fairly standard among states, except Texas, which has its own policy definitions. Here are the basic types of home insurance in most states:
• HO-1, a bare-bones policy that protects against 10 perils. It has been discontinued in most places.
• HO-2, a broad policy that covers the house and contents against 16 disasters.
• HO-3, the most popular and broadest policy. It covers against all perils except those specifically excluded (earthquake, flood, nuclear accident, neglect, war, government action [such as seizure of the property], power failure, building code laws [it would not cover the cost to bring your house up to code, for instance], losses from faulty construction materials, defective maintenance, and faulty zoning.).
• HO-6, a policy for condominium and co-op owners. The policy provides coverage for liability, personal property and structural parts of the building you own.
• HO-8, a policy designed for older homes whose replacement cost far exceeds the property's value. The policy usually reimburses you for actual value--replacement cost minus depreciation, according to the Insurance Information Institute. Some older homes whose values have depreciated may not qualify for replacement cost coverage.
You need to understand the difference between actual cash value and replacement cost coverage, Bonelli says. Actual cash value coverage pays for the cost of replacement, minus depreciation. If your five-year-old sofa were destroyed, the payout under actual cash value coverage would equal the sofa's value, considering its age. Replacement cost coverage would pay for buying a brand new sofa.
A standard home insurance policy covers the home and your belongings, as well as your liability for any injuries or property damage you, your family members or pets may cause others. It also provides additional living expenses in case you can't live in the home while it's being repaired after an insured disaster.
Policies are fairly standard among states, except Texas, which has its own policy definitions. Here are the basic types of home insurance in most states:
• HO-1, a bare-bones policy that protects against 10 perils. It has been discontinued in most places.
• HO-2, a broad policy that covers the house and contents against 16 disasters.
• HO-3, the most popular and broadest policy. It covers against all perils except those specifically excluded (earthquake, flood, nuclear accident, neglect, war, government action [such as seizure of the property], power failure, building code laws [it would not cover the cost to bring your house up to code, for instance], losses from faulty construction materials, defective maintenance, and faulty zoning.).
• HO-6, a policy for condominium and co-op owners. The policy provides coverage for liability, personal property and structural parts of the building you own.
• HO-8, a policy designed for older homes whose replacement cost far exceeds the property's value. The policy usually reimburses you for actual value--replacement cost minus depreciation, according to the Insurance Information Institute. Some older homes whose values have depreciated may not qualify for replacement cost coverage.
You need to understand the difference between actual cash value and replacement cost coverage, Bonelli says. Actual cash value coverage pays for the cost of replacement, minus depreciation. If your five-year-old sofa were destroyed, the payout under actual cash value coverage would equal the sofa's value, considering its age. Replacement cost coverage would pay for buying a brand new sofa.
3. What home insurance doesn't cover.
Standard home insurance policies don't cover floods or earthquakes. You must purchase separate policies to get coverage for those disasters. Your lender will require you to buy insurance through the National Flood Insurance Program if you live in a flood-prone area. Also, in some coastal areas, home insurance policies exclude damage from wind; homeowners there need a separate windstorm insurance policy to cover wind damage. Earthquake insurance is optional, but recommended in many areas, such as California.
4. The limits.
Standard policies put dollar limits on valuables, such as jewelry, furs, fine art, and antiques. You may need to buy a "floater" or endorsement to provide extra coverage.
Insurance Information Network of California Spokesman Tully Lehman recommends completing an inventory of your belongings, working closely with your agent and asking lots of questions to make sure you have enough coverage.
"The more detailed you are the more accurate the policy is going to be," he says.
Bonelli says consider purchasing additional liability coverage through an umbrella policy if your home has a pool or spa.
"Certain types of luxuries may end up costing you additional money from an insurance standpoint," she says.
5. Insure the cost to rebuild, not the market value.
After the housing market imploded in 2008, more than 25 percent of the 800 people polled by the Insurance Information Network of California mistakenly thought they should reduce their home insurance because market values had dropped.
Don't fall for that line of thinking. Insure your home for the cost to rebuild it, not its market value. The rebuilding cost doesn't include the value of land. That amount could be more or less the market value, depending on labor and materials costs.
6. The benefits of shopping around.
"Shop around not only for who provides the best coverage at the best price, but who provides the best service," Lehman says. "Insurers are not created equally."
Check the insurance company's financial rating and go to your state's insurance department website to find free data on consumer complaints against the company.
7. You need to update.
Review your insurance needs with your agent every year. Lehman tells of one homeowner who over the years added bedrooms, bathrooms and amenities to a two-bedroom, one-bath house he purchased near Lake Tahoe in the 1970s. Unfortunately, he never upgraded the insurance policy, and the home was destroyed in the Angora Fire in 2007. The policy didn't cover the beautiful home that burned; it provided coverage for the modest house he purchased.
When in doubt about your home insurance coverage, check your policy and talk to your agent. It's better to address questions now than to get caught short after the damage has been done.