Own a home? Looking to buy a home? You’re going to need homeowners insurance. There’s no getting around it, especially if you'll be financing the purchase: Before handing you one dollar of their money, any lender will require proof that the property is insured. But for some reason, home insurance isn’t as talked-about as health. auto. or even life insurance. What do you need, and how do you find the best deal? We asked some insurance professionals to give us some of the lesser-known facts of home insurance life.
Get a CLUE
You probably know about your FICO score. but what about your home’s CLUE?
The Comprehensive Loss Underwriting Exchange (C.L.U.E. is the formal insurance acronym) is a database that holds a record of any claim made against a property. Underwriters can find the date of the insured loss, type of claim and how much the insurance company paid on the claim.
Laura Adams, senior insurance analyst at insurancequotes.com, says, “A tip for home buyers is to request that the seller provide a copy of the home's CLUE report. It's only available to homeowners and is free to pull every 12 months, similar to credit reports. This will help buyers understand what damage has occurred to a property.” And that's good to know, because "a home's claim history affects the [insurance] rate a new buyer must pay. Claims that a previous owner makes years before you buy his or her property can cause you to pay more." Click here to get a copy of your home's C.L.U.E. report.
Calculate the Needed Coverage
It’s a simple calculation, right? You need enough home insurance to cover the value of your home. Not so fast! You need enough insurance to rebuild your home, preferably at today's prices. According to Adam Johnson at QuoteWizard.com, “Often shoppers make the mistake of insuring [a house just] enough to cover the mortgage. but that usually equates to 90% of your home's value. Due to a fluctuating market, it's always a good idea to get coverage for more than your home is worth. Purchasing replacement cost value over actual cash value is a great idea too. Replacement cost value ensures any damages will pay out enough to restore to its original condition.”
“You can rest easy knowing that you could rebuild your home after a major loss without worrying about depreciation, policy limits or insurance construction costs once you've repaired or replaced the damaged property," agrees Joe Vahey, vice-president and personal lines product manager at Erie Insurance Group in Pennsylvania. "This is definitely a better option than actual cash value, which takes depreciation into account when calculating the amount of your reimbursement.”
Of course, replacement cost value policies are more expensive. In determining the amount of coverage you need, a good rule is to multiply the total square footage of your home by the cost of construction per square foot in your area. Local real estate agents, builder’s associations or insurance agents can help you find that number. Some of the factors that might affect your replacement cost include:
- local construction costs
- the house's size and the type of exterior wall construction
- whether some or all of it was custom built
- local building codes for natural disaster-prone areas (earthquakes, hurricanes, landslides, etc.)
But be careful. Some policies might not fully cover the cost to rebuild your home to the newest building standards.
What Else Needs Insuring?
Home insurance isn’t just about replacing the home. Vahey advises considering your liability coverage. which protects you if somebody gets hurt on your property (and some instances away from your home, as well). Have at least $300,000 in coverage
and possibly an umbrella policy too, which could add $1 to $5 million to your home and auto insurance policies. “Lawsuits aren't as uncommon as you might think, and they have the potential to wipe out many people's net worth,” he warns.
What if you live in a flood or hurricane area? Or an area with a history of earthquakes? Standard home insurance policies don’t normally cover these types of natural disasters. You'll want riders for these. There’s also sewer and drain backup coverage you can add on, and even identity recovery coverage that reimburses you for expenses related to being a victim of identity theft .
Say your home suffers major-league damage. You can restore it to its original glory (thanks to your replacement cost value policy), but it's going to take at least six months to a year to rebuild. Where will you live in the meantime? Loss of use coverage will reimburse you for the costs associated with staying in a hotel or renting an apartment.
Protecting Your Stuff
Home insurance doesn’t just cover your home. It also covers your personal possessions – some of them. Policies differ, but they will typically cover 50% to 70% of the amount of insurance you have on your home.
In order to know if you have enough coverage to replace your possessions, make periodic assessments of your most valuable items. According to John Bodrozic, co-founder of HomeZada.com, “Many consumers are under-insured with the contents portion of their policy, because they have not done a home inventory and added the total value to compare with what the policy is covering.”
He continues, “In addition, many items they own may not be covered, especially collectible items like art, jewelry, coins, wine, etc. The consumer needs to know the value of these collectibles and shop for the special riders above and beyond the standard policy.” (Click here for a A Quick Guide on How to Insure Jewelry ).
Now Go Shopping!
Finally, contact local agents for quotes. According to Tom Austin, co-founder of Bungalow Insurance, a Philadelphia independent insurance broker, "there aren't many online options (only about 5% of homeowners insurance was sold online), so if you want to get multiple quotes, you'll have to see an agent.”
How many quotes? According Sarah Brown, insurance expert at Obrella.com, “Contact five or more companies so that you know what people are offering and you have leverage in negotiations. If you know how much coverage you need, they won't be able to sell you unnecessary policies and you'll be able to get the best price.”
Before deciding on a policy, make sure you understand your deductibles and how they work. Don’t get caught off guard when you file a claim (see Will Filing An Insurance Claim Raise Your Rates? ). Deductibles for special events, such as hurricanes, could be a percentage of your home’s value, rather than a flat amount. Also check out Eight Financial Safeguards If Disaster Strikes and Hurricane Insurance Deductible Fact Sheet .
The Bottom Line
If you're currently a homeowner, re-evaluate your coverage each year. If you’re in the process of house-hunting or building a home, start shopping now. It might seem a long way off before you need to decide on a policy, but mortgage underwriters will likely ask for proof of insurance earlier than you think. If you find yourself having to make a quick buy, comparing quotes or even getting enough quotes could become difficult. Hopefully, you'll be in your house for a long time – so ensuring it's well-protected shouldn't be a rush job. For more information, see Find the Best Homeowners Insurance and Recognizing Good Homeowners Insurance Companies .