Buying your first home can be an exciting event, but your transaction won't be complete until you choose a home insurance policy to protect your investment.
"One of the biggest mistakes homeowners make is they don't include the issue of insurance on their checklist when they are looking at homes," says Pete Moraga, a spokesman for the Insurance Information Network of California.
When shopping for a home, it's important to also shop for a policy that is reasonably priced and covers all the basic things that can go wrong, he says. Here are five tips for finding the right policy and avoiding unnecessary costs:
5 tips for buying first home insurance
1. Know your exclusions
There are a variety of mishaps that aren't covered by standard homeowner's policies, so read through your policy carefully, Moraga says.
Floods, earthquakes, sinkholes and other earth movements, such as mudflows and mudslides, are not covered by standard policies. The National Flood Insurance Program (NFIP) enables homeowners and renters to buy supplemental flood protection. The cost will depend on your risk of experiencing a flood. Kevin Foley, an independent insurance agent in New Jersey, says many homeowners regret decisions not to buy flood insurance following natural disasters.
Damage from floods is one of the most common and costly problems you can face as a homeowner. You may be at risk even if you don't live near a river or on a floodplain. According to the Federal Emergency Management Agency (FEMA), about 25 percent of flood claims come from areas where there is a low to moderate risk for floods. You can determine your home's flood risk online at FloodSmart.gov.
"Too often I hear people say, 'If only I had known it was available, and what it cost, I would’ve spent the money," Foley says.
If you live in earthquake country, you should consider purchasing earthquake coverage as an endorsement to your home insurance or as a separate policy, Moraga says. The cost varies from state to state, based on your risk of experiencing an earthquake. According to the U.S. Geological Survey (USGS), the 10 most earthquake-prone states are Alaska, California, Hawaii, Nevada, Washington, Idaho, Wyoming, Montana, Utah and Oregon.
Ron Moore, a senior product manager for MetLife Auto & Home, says other typical home insurance exclusions include damage from power failures, sewage drain backups, mold, insects, war, neglect, nuclear hazards, intentional damage, and losses due to poor workmanship or defective materials.
2. Prepare to pay more if you live in hurricane country
Where you choose live will affect your home insurance rates. Moraga says you should be aware of hurricane deductibles, if you plan to buy your first home in an area frequently hit by high winds.
"It depends on where you live," Moraga says. "You need to be aware of it."
Hurricane deductibles typically amount to between one and five percent the insured value of your home, according to the nonprofit Insurance Information Institute. They are used by insurance companies to reduce their losses from widespread storm damage. These deductibles may apply if you live in the District of Columbia, Hawaii, or in states along the Eastern Seaboard or the Gulf of Mexico.
Such deductibles may take effect when the National Weather Service gives a name to a tropical storm, announces a hurricane warning or watch, or reports a hurricane’s intensity.
3. Don't buy too much insurance
You can save money by making sure you aren't overinsured, Moraga says. Homeowners often assume that their policy should equal the market value of their home. In reality, the policy only needs to provide enough money pay for the repair or replacement of the home.
"You never want to base your coverage limits on real estate values," he says.
In some cases, the property your home rests on can account for most of its real estate market value. The land won't need to be replaced following a flood or a fire. Your goal should be to have only enough insurance to cover construction costs.
4. Avoid force-placed insurance
Force-placed or "lender-placed" insurance may be imposed if you allow your home insurance to lapse, Moraga says. "That happens when you fall behind on your monthly payments."
Because your lender has a financial stake in your home, it has the right to purchase a replacement policy for you. If this happens, your payments may be significantly higher than if you had purchased a policy on your own.
Michael Barry, a spokesman for the nonprofit Insurance Information Institute, notes that many people pay their home insurance premiums, along with their mortgage payments and property taxes, through an escrow account.
Money is deposited in escrow accounts by borrowers to fulfill debt obligations associated with buying homes. These accounts make sure that borrowers set aside enough money to pay their homeowner's insurance premiums and property taxes. Lenders pay insurance and taxes from these accounts when they are due
And beware if you miss a mortgage payment. "Sometimes not paying the mortgage also results in a lapse of insurance coverage," Barry says.
5. Look for insurance discounts
Barry says insurance companies typically offer discounts if you agree to buy auto insurance along with your homeowner policy. This is called "bundling" your policies.
Insurance companies often reward you for taking actions that make an insurance claim less likely to happen. For example, if you install a burglar or fire alarm that is monitored by an outside security service, you may be entitled to a price break.
Also ask about discounts for installing deadbolt door locks, sprinkler systems, or smoke detectors. You may be eligible for a price reduction if you make upgrades to your plumbing, heating or electrical systems.
Moore says some insurers will give you a discount simply for being a new homeowner. "Don't be afraid to let them know."