Let’s say you’ve put in an offer on a great house. It’s been accepted. You’re getting ready to close escrow, and in a few weeks you’ll be moving into your new place. Congratulations! You’re embarking on a relationship with a piece of property that will hopefully be long, satisfying, and profitable.
But when it comes time to buy insurance on your new home, there are some things you should know. As an insurance agent with the American Family Mutual Insurance Company in Washington State, I work with homeowners every day who have either more or less coverage than they should have, and most of the time it’s because they (understandably) don’t understand exactly how homeowner’s insurance works.
The first big mistake that homeowners make is to buy more insurance than they need. If you’ve bought your home for $300,000, you need to insure it for $300,000 right? Plenty of agents will gladly write you a policy with a $300,000 limit because the higher the limit, the higher the premium.
However, your home is made up of two parts – a structure and the land underneath it. Why would you insure the land? There aren’t many events that will destroy that. You only need to carry enough coverage to replace the actual structure. If your $300,000 home costs $200,000 to replace and it’s destroyed by a fire, your adjuster is only going to pay out $200,000, even if the limit on your policy is $300,000. (And even if you’ve been paying for that exaggerated limit for ten years.)
Another common mistake is to buy a policy with a low deductible and then to make claims against it whenever something goes wrong. Because we want insurance there to cover anything that goes wrong, keeping the deductible low seems worth the added expense: the lower it is, the more of a loss will be covered by insurance rather than coming out of our pockets.
Unfortunately, that logic ignores the way that claims affect the cost of insurance. A claim on a homeowner’s policy will increase the rate at renewal, which usually happens every twelve months. A homeowner who makes a small claim will increase the cost of his coverage substantially, as well as making his coverage less attractive to competing insurers. Homeowner’s insurance is really there for significant events that will cause the homeowner real financial duress, and when you select a deductible it’s smart to choose the highest number you can reasonably handle. After all, those events are rare.
Finally, I notice that many homeowners attach only minimal liability insurance to their homeowner’s policy. In our increasingly litigious society, having some source of liability coverage is becoming more important every day, and a homeowner’s policy is about the cheapest source of that coverage out there. In most cases, increasing coverage from $300,000 to $1 million only costs a few dollars a year and gives you much more protection in the event that you get sued.
The bottom line is that buying a good homeowner’s policy is a way of securing the most significant asset you’re likely to own. It’s an investment, and like any investment the more you know about it the better. Take the time to understand how insurance works. Have an educated, productive dialog with your agent. And make sure that you’re not buying more than you need or less than you ought to have.