Home insurance is not a topic that should draw your attention only when you have a house or plan to buy one. Even if you are not (yet) a homeowner, familiarizing yourself with the topic can be beneficial because you can adjust your spending and credit behavior so that you have a perfect credit score when you are ready to apply for a mortgage. Home insurance also is a pillar in risk management for homeowners because the costs of repairing and maintaining a residence sometimes are high, and without proper insurance, such expenses might wreak havoc in your budget. By understanding home insurance and taking specific steps to get adequate coverage, you slowly but surely will plant the seeds of long-term financial success, especially when it comes to things like polished credit, better financing and refinancing options, and a better overall risk profile.
What Is a Home Insurance Policy?
Insurance connoisseurs mean the same thing when they talk about "home insurance," "homeowner's insurance," or "hazard insurance." In essence, this type of insurance protects you if something happens to your residence. From a legal standpoint, the insurer covers everything from personal belongings and other home contents to liability that could arise if someone had an accident in your house or within a limited territory that fits within the policy coverage scope.
Let's simplify this rather convoluted legal definition further. When you sign up for a home insurance policy, you and your family are covered, and so are the contents of the house as well as anyone who might be injured inside.
The Insurance Services Office has defined standard policy types that most insurance companies must comply with. So don't be surprised if you see the same policy applied from one company to another. Basic policy types include:
- Is one of the most basic homeowners policies
- Some states no longer accept this kind of insurance (check with your insurance agent for more information about availability in your state of residence)
- Your house and its contents are covered against 11 perils
- Fire or lightning
- Glass breakage as long as the glass is structurally attached to the house or building
- Civil commotion or riot
- Malicious mischief or vandalism
- Hail or windstorm
- Fire and other perils causing loss of property on premises
- Broader coverage than what you get with HO-1
- Your house and its contents are covered against 18 perils
- The 11 perils covered by HO-1
- Collapse of building
- Weight of snow, sleet, or ice
- Freezing of domestic appliances, AC systems, plumbing, and heating
- Falling objects
- Sudden and accidental damage to electrical equipment
- Sudden and accidental damage to water systems
- Accidental discharge of water from within house systems as varied as plumbing, air conditioning, and heating
- This is a special homeowner's insurance policy that your insurer would customize to your needs and residence
- Your house and its contents are covered against 19 perils
- The 18 perils covered by HO-2
- All other perils, except nuclear accident, war, earthquake, flood, and other risks that your insurance company would indicate in your insurance policy. Check the fine prints as well as terms and conditions to figure out those perils.
- This applies to renters insurance
- It covers all 19 perils but excludes the dwelling itself-that is something that the property owner's insurance policy would cover. Note that HO-4 also includes liability coverage.
- This policy applies if you own a co-op or condominium
- Again, the actual structure is not covered because the owner's association normally provides the necessary structural coverage
- Your policy covers things like improvements you make to your co-op or condo, liability coverage, and personal property coverage
- This policy is suitable for older residences
- Covers HO-2 perils but reimburses the policyholder for repair expenses or the residence's actual value (this is because a peril, such as fire, could cost an insurer more to repair the house than the unit's fair market value)
Home Insurance as a Cost of Buying a Property
Home insurance is definitely part of the homeownership experience, so you should factor that cost into your overall monthly budget. The way it works, your mortgage lender sets up an escrow account, and divvies up part of the money you send each month. Then, the lender sends a check to your homeowner's insurance provider at the end of the month, with the rest of the money in the escrow account being allocated to property taxes.
Home Insurance vs. Mortgage Insurance
Home insurance and mortgage insurance are interrelated, but both concepts are distinct. Mortgage insurance protects your mortgage lender against losses that could result from things like job loss, poor health, your untimely death, and any other event that could make you default on your loan. Within the insurance sector, mortgage insurance can be a generic term that can further be broken down into mortgage life insurance, private mortgage insurance and mortgage title insurance. All these coverage types serve to give peace of mind to your lending institution, so that it knows it wouldn't lose that much if you were unable to make good on your financial promises.
Selecting the Perfect Insurance Company
To select the perfect home insurance provider, start local. Talk to the attorney who helped you during the closing process and/or reviewed paperwork like appraisal report, inspection report, deed, and promissory note. Then, reach out to local real estate brokers for more information. If you currently are a policyholder, ask your insurance agent if the organization provides home insurance.
Another way to get good home insurance information is to call your state's or city's Office of Insurance Commissioner along with your local Better Business Bureau branch.
Remember, you also can reach out to friends, relatives, and colleagues for more information-this is my favorite source of information about insurance because acquaintances are more likely to give you the plain truth about the way a company operates and whether it offers cheap yet quality service.
Don't stop there, though. If real-life, offline information gathering does not work, go online. Read reviews about the best home insurance providers and winnow down the list to providers operating in your residence area.
Reducing Your Home Insurance Premiums
There are various ways to reduce your home insurance premiums. Note, however, that the list below is not exhaustive and you should talk to your insurance agent to see whether there might be other tips not covered here.
- Shop around and go online as well as offline
- Stay with your current homeowner's insurance provider and ask for discounts
- Review the worth of your belongings and the limits in your policy at least every six months
- Take care of your credit score and keep it high
- Seek out other rebates and reductions, such as seniors, members of the military or government employees
- Strengthen security systems in your home
- Increase your house's resistance to disaster
- Go the "combo way" and buy multiple policies-such as car, health, life and home-with the same insurer
- Increase your deductible
You have no ability to influence the premium that a prospective homeowner's insurance provider will quote to you. But by shopping around and doing your homework, you can boost your odds of getting a good deal, especially if you can show your insurance agent that competitors are offering the same service or coverage at more affordable rates. Besides things like premiums, home insurance also pertains to elements as diverse as policy types, coverage types, and perils that are contractually excluded from a typical policy.