Insurance Basics For New Homeowners

You’ve been searching for the perfect house for months. Finally, you find the one. After your offer is accepted and a small mountain of paperwork is signed, it’s yours. What are you going to do next?

If you’re smart, before you pack a single box, you will make sure your home insurance has you covered for whatever life might have in store. While your mortgage lender likely requires you to carry some level of home insurance, don’t assume that amount will protect you from financial disaster.

Donald Griffin, vice president of personal lines for the Property Casualty Insurers Association of America (PCIAA), offers these tips.

Tip No. 1: Insure for your home’s replacement cost

Here’s one of the most common mistakes homeowners make: Confusing a house’s market value with its replacement cost. Your home insurance coverage should cover the cost of rebuilding your house if it is destroyed. “The best indication [for coverage] is the cost to build a new home,” Griffin advises. “With an existing home, look at the replacement cost rather than the market value.” This is often less than what you paid for your home; if you’re insuring your house for its market value, you may be overinsuring it.

On the other hand, if you bought a foreclosed home, the price you paid may not accurately reflect construction costs to rebuild it.

To determine the replacement cost, most home insurance companies use software that allows them to enter your home’s features and calculate the cost of replacement. In addition, most policies include coverage for up to 125 percent of the replacement cost.

While it may be tempting to use this buffer as a reason to purchase less coverage, the reduced cost may not be worth the risk you take in having inadequate coverage. Griffin says it can be less expensive to rebuild a home than to do extensive remodeling, and many home insurance claims are for only partial damage to a home.

Tip No. 2: Don’t skimp on liability insurance

There’s the old joke that trial lawyers have never seen a lawsuit they didn’t like. That may be an overstatement, but the threat of legal action is a real concern for everyone – especially if you have assets like a house, savings and investments. If you’re sued for an incident covered under your home insurance (like a slip-and-fall injury on your front steps), liability insurance covers not only the settlement but also your legal fees (up to your liability limit).

According to Griffin, many liability insurance policies will cover you even if an incident happens away from your home. He also recommends buying an excess liability or an umbrella policy that offers coverage of $1 million beyond what is already included in your home insurance and car insurance policies. These policies are relatively inexpensive, often costing $200 to $300 per year.

“You don’t want to lose your home because you failed to buy an insurance policy,” says Griffin.

Tip No. 3: Protect your personal property

Be sure to review the coverage amount for your personal property. Most policies include coverage equal to 50 to 75 percent of the replacement value of your house.

In addition, you may need a separate endorsement, or rider, for some valuables. For example, coin collections, stamp collections, jewelry, furs, fine art, cameras and other expensive belongings may be subject to limited coverage under the personal property provisions of your plan. When requesting a home insurance quote, ask whether these items need to be listed under a separate endorsement to ensure they are properly covered.

Tip No. 4: Don’t overlook coverage for additional living expenses

If your house is destroyed or otherwise unlivable while repairs are being made, you’ll be glad you can tap into your “additional living expenses” (ALE) coverage. This type of coverage won’t pay your mortgage, but it will cover the cost of an apartment or hotel. If you are displaced from your house, you can make a claim for this coverage by submitting paperwork documenting your living expenses.

The ALE standard for most homeowner insurance policies is a benefit worth 20 percent of your home’s replacement value. When you get a home insurance quote, find out if the policy specifies any limitations or exclusions on ALE.

Tip No. 5: Examine what’s not covered

Finally, read the exclusions section of your home insurance policy. Understanding what’s not going to be covered is just as important as knowing what is – before you ever have to make a claim.

In the end, Griffin reminds new homeowners that it is important to choose a financially stable insurance company. Financial strength ratings are available from A.M. Best, for example.

“Remember,” he says, “you are buying a promise from that insurance company that they will be around when you need to make a claim.”

And what about customer satisfaction? J.D. Power and Associates releases annual customer satisfaction rankings of home insurance companies. And state insurance departments generally post their annual “consumer complaint” reports on their Web sites.