Shopping for homeowners insurance is one of those nagging home buying details that sometimes slips through the cracks. It’s not unusual for insurance agents to receive last-minute frantic phone calls from title and escrow companies requesting a home insurance binder so the deal can close.
To avoid this problem, start shopping for a homeowners policy as soon as your purchase offer is accepted. (Homeowners insurance is not the same thing as a home warranty plan.) The following tips for buying homeowners insurance are designed to save you time and money.
Determine Insurability Before You Start Shopping
Your insurance agent needs extensive information to quote the best rate for a policy. To determine the insurability of the home you plan to buy, an agent will ask:
- When was the home built?
- How old are the plumbing and electrical systems?
- What type of roof?
- What’s the square footage?
- How many claims have been filed over the past 5 years?
- Where is the home located?
If the home is located in a rural area without a nearby fire department, or there is no fire hydrant on the street, some companies may refuse to insure it. In that case, you may have to inquire at a specialty or surplus-lines company, and this quote will take longer to obtain.
Save Money With Higher Deductibles
You can save money by having a higher deductible on your policy. Typically, insurance companies will start giving discounts at a $500 deductible and increase the discount as your deductible increases. Most companies offer deductibles up to $10,000. Be careful, however, because many mortgage companies will not allow you to exceed a $1,000 deductible. So check with your lender before opting for a higher deductible.
How Much Home Insurance Do You Need?
Most agents use a cost estimator to figure cost replacement estimates. This will ensure that your home is insured for the correct amount. If you buy a home that includes a large lot, don't be astonished when you receive an insurance policy for a lot less than what you paid for the home. This is because you are buying coverage for the home and not the land.
In the past, replacement coverage was called Guaranteed Replacement Cost. There is no such coverage anymore. Today it is Replacement Cost Coverage, which means the insurance company designates a percentage of additional coverage on top of the insured amount.
Replacement Cost Coverage is designed to protect the homeowner who has suffered a loss from having to pay additional construction costs from their own pocket. It can cost more to rebuild because of overall inflation or simply because material prices have increased.
For example, if the dwelling coverage is insured for $300,000, and the company has 125% replacement cost coverage, the homeowner would receive an additional $75,000. Insurance agents often recommend 200% replacement cost coverage, which gives homeowners double the coverage.
Customize Policy Options to Your Needs
You can tailor other aspects of your home insurance policy. Liability coverage is a part of your homeowners insurance policy that is often overlooked. This protects the insured against claims arising from bodily injury and property damage to others.
For example, if your 5-year-old was playing with matches and set your neighbor’s house on fire, your liability coverage would pay for this damage. You might have to move out of the neighborhood, but your insurance policy would pay your neighbor.
It is common to see $300,000 in coverage for liability, but the cost to raise it to $500,000 is about $20 more a year. You can have up to $1 million coverage on most policies. Over that, you need an excess liability policy or “umbrella” policy. Umbrella policies give you an additional $1 million liability coverage for a $300 to $500 premium.
Check for Available Discounts
Make sure you are getting all of the credits for which you are eligible. If your home alarm system reports into a central station, you can sometimes get up to a 10% discount. If you are over age 50, you may be eligible for a discount. Companies have different names for age preference policies, from senior discount to mature policyholder discount.
The most common discount is the multi-policy discount. This will save you money on your home and auto insurance. By combining the two policies with the same company, you are given a certain percentage discount on both. The percentage discounts vary among companies, so it’s best to shop around.
Review Your Policies Periodically
Call your agent and review your homeowner policy at least every three years. Needs change, markets change, and coverage changes. You should stay up-to-date on your insurance because you never know when you will need to rely on it.