Those looking to buy their first home will face plenty of difficult decisions—how much are you willing to spend and what are the best options for financing that home in the long run? The result is that many don’t put as much effort as they should when selecting a home insurance policy to protect that massive investment they just made. You should always spend the time to make sure you understand your policy, however. Not doing so could result in major disappointment when you need to make a claim down the line.
There are many issues that need to be considered when choosing a policy, and price is certainly one of them. Make sure you make a decision with the help of a qualified insurer to ensure that you’re making the right decision for your home. In the meantime, we’ve collected a few myths from the home insurance world to help set you straight and let you know what questions you need to ask when time comes to select a policy.
MYTH NO. 1: “I’m required to have home insurance if I want to own a home.”
This is a common misunderstanding, probably because you are legally required to own car insurance if you drive. There is no legal requirement to own home insurance, however.
That said, unless you plan on paying for your home entirely from your current savings account, you’ll probably end up needing to get home insurance. Most lenders will require you to have a policy before they lend to you. After all, they’re essentially investing in your home until you’ve paid off your mortgage, so they want to protect the investment. That’s where home insurance comes in.
This is different than mortgage insurance however: Most mortgages will require you to take out a policy if you put less than 20 percent down on a home, in order to protect the lender if you default on the loan. Even with a sizable down payment, most lenders will still require home insurance.
MYTH NO. 2: “I just moved to South Florida but I’m not worried about the weather…my home insurance policy will protect my purchase if a hurricane comes through!”
This statement is certainly not true and it’s important for homeowners in at-risk areas to understand what is covered by their policy and what’s not.
Conventional home insurance policies cover acts of nature that can’t be predicted—such as fires, lightning strikes, wind and hail damage. Even rioting is covered by most policies. However, standard home insurance takes the location of your home under consideration and specifies occurrences that the provider deems are predictable, and requires separate policies for them.
In Florida, for example, you’ll need additional policies to handle not-uncommon hurricanes. Earthquakes get the same treatment out on the West Coast, and low-lying residences in floodplains will require additional policies as well. Always be sure to check in with your insurer to understand what is, and isn’t, covered in your policy.
MYTH No. 3: “The amount I pay for home insurance is almost 100 percent tied to how much my home is worth.”
This is an overly simple understanding of the pricing behind home insurance. Sure, the amount that you pay for an insurance policy is absolutely tied to the value of your home…but only in part.
Some distinctions may make you a less-than-ideal candidate for home insurance, which may result in you being denied coverage. Although claims are the entire point of insurance, some providers will note how often you make them. Claims stay on your record for three years (as with auto insurance). If you have a large number of claims on your record, you may struggle to switch carriers in the future.
Some lifestyle choices will affect your pricing, and may result in you being denied coverage outright. Do you have a pet Rottweiler or Pit Bull? You’ll be paying more than the owner of a Chihuahua; small dogs are considered less risky than big ones.
Poor credit could also cause your rates to be higher. Although only a small portion of insurance providers do credit checks, but those that do will increase your rates if you don’t have a stellar score.
And, just like with everything else in homebuying: Location, location, location. A three-bedroom in Ohio will insure much more cheaply than one in hurricane country.
MYTH No. 4: “If my home and belongings are destroyed in a fire or another event, my policy pops in and pays to replace it all, no problem.”
Unfortunately not. Most policies provide for relatively “minor” repairs, such as a new roof after a hailstorm, or small damages caused by an oven fire. They don’t cover the value of rebuilding your entire home, or even the price you paid for the home. If this is something you want to prepare for, you’ll need to set your structure coverage for the amount it would cost to rebuild your home.
Limits are often set on belongings as well, which means that most policies will pay for 50 to 70 percent of the value of your structural coverage for belongings lost in an incident. If your structural coverage is $200,000, that means your provider will only pay $100,000 to $140,000, unless your policy has been set otherwise.
“High value” items, such as art, also feature maximum caps that insurers won’t pay more than to replace. These caps are often around $2,000. That’s OK if it’s a painting valued at $400…but you’ll be shorted about $7.998 million if, by some circumstance, you own a small, early Picasso.
The key when shopping for home insurance is to understand both where you’ll be living and what you need insured. Policies can be set for almost anything but you must make sure that all of your bases are covered. Again, make sure you speak to a qualified provider when on the market for home insurance. If you already have auto or similar insurance through a provider, consider bundling for some extra savings.