What do first time home buyers need to know about insurance?

You’ve been living in your parents basement (okay maybe that was just me!), saving up and looking to find that perfect home for months.  You worked with a great realtor and they helped you find ‘the oneyour dream home.  You are ready to jump into home-ownership with two feet!  You moved fast, made a great offer and it was accepted by the sellers!  Wahoo!

You’ve signed tons of paperwork and given so much information to the bank that you are just waiting for them to ask for a blood sample. The last thing  you need to get your final mortgage approval is homeowners insurance (and maybe that blood sample) .

And then you will hear those magical words from your bank or lender ‘Clear to Close’.

So what should you do?  Maybe you start by calling your current auto insurance carrier.  This makes sense because bundling can be a great way to go.

But maybe then you make a few more calls, ‘shop it out’ to get the best price.  Right?  I mean… all home insurance is the same…. price is the only difference.

Not.

But anyway, we will save that conversation for another day!  I always cringe when people try to tell me home insurance is all the same and the only difference is price.

Anyway- there you are comparing all these quotes!  Maybe you got 2 or 3.  Or 5.  And this is when I really feel bad for you.  Because these quotes are confusing, the insurance sales people are even more confusing (it’s ok to admit it publicly!) and you are pretty sure that these proposals are not all the same, but you really can’t tell the difference.

So lets talk about some of the basics in most of these quotes and maybe address some things that may not be so obvious…. (and sometimes I have to scracth my own head at the less obvious things trhat are thrown in and not really explained!)

So what exactly is included in home insurance coverage?

Oh boy I’m so happy you asked!

Tired of reading? Here is a 2 minute video on the Basics!

 

So here we go:

Home Insurance Basics From A to Z

(Actually A-F for you note takers)

Dwelling

(Sometimes referred to as ‘Coverage A’)- This covers the structure of your house itself as well as anything permanently attached.  Now, insurance companies are only insuring to rebuild your house so this has nothing to do with purchase price or market value.  This amount should be the cost to rebuild your house if, worst case scenario, there is a total loss and it needs to be built from the ground up.

*This has nothing to do with the purchase price of your home.  That is the market value.  It also has nothing to do with the loan amount you took form the bank.  The insurance company is not insuring your mortgage, or insuring the purchase price of your home- they are insuring to rebuild you house in the event of a total loss.  So put those numbers tot he back of you mind for now.

Other Structures 

(Sometimes referred to as ‘Coverage B’) – This covers any unattached sheds, garages, pool houses, gazebos, etc. This coverage is automatically included even if you have none of the above (no we can’t remove it.)  And it is a % coverage based on the dwelling amount.  Usually 10%-20%,but this can be increased.  

Personal Property

(AKA Coverage C) – This covers all your stuff that you are going to move into the house.  Clothing, furniture, electronics, etc.  This is also a % of the dwelling amount, but sometimes (but not always!) can be changed if you need more or less coverage for all your belongings.  Now its important to note- if you have anything small and high value (especially jewelry, art, collectibles) these need to go a on separate rider for proper coverage.  So that engagement ring, Rolex, Picasso, Yankees memorabilia – we need to talk about it to make sure it is covered.

Loss of Use

(AKA Coverage D) – This covers any additional living expenses due to a covered claim.  This would be anything more that what you usually spend on housing, groceries, etc.  This important coverage comes into play when there is a covered claim- say a fire, and you can’t live in your home.  Where do you go?  Generally a hotel.  What do you eat?  Generally at restaurants and take out.  All of this adds up quickly. 

If the repairs are going to take a few months the insurance company will often move you and your family to a more permanent housing situation like a rental home.  Loss of use covers this, since even if you are not able to live in your house- you still have to pay your mortgage, taxes and other expenses.

Liability

(AKA Coverage E)- This covers bodily injury or property damage either occurring on your property or as a result of actions of you or someone covered under your policy.  So for instance if someone slips on your steps and hurts themselves or your you dog bites the mailman, this would be covered under liability.

We love dogs!  But dogs and dogs bites are a whole separate can of worms for another post, but just know that they are usually covered under the liability portion f your home insurance.  Usually is the key word here.

 

Medical Payments

(AKA Coverage F)- This is your first party medical, sometimes called guest medical and covers you in conjunction with the liability coverage on your home policy.  This pays for medical expenses for guests who are hurt on or around your property, up to the limit on your policy.   So…. if someone falls and is hurt on your property- this would cover their hospital expense, ambulance, dental work, etc.

Coverage usually doesn’t excess $5,000 or $10,000 for this – so your personal liability covers when there are claims of negligence that caused the injury or a lawsuit filed due to the incident.

Replacement Cost vs Actual Cash Value (ACV)

You also have to pay attention to if you policy offers are Replacement Cost or Actual Cash Value coverage.

These coverage terms apply to the Dwelling coverage (which you now know is your house) and the Personal Property coverage (which you now know is your ‘stuff’).

A Replacement cost policy is ideal– sometimes you will see ‘Guaranteed Replacement’ or ‘Full Replacement’, etc.   (Hint- this is what you want!) These polices will replace your home and your stuff without taking deprecation into account.

Actual Cash Value is the replacement cost minus deprecation.

For example, say your $20,000 roof is 15 years old and your home insurance policy has a $1,000 deductible. If a storm destroys your roof and you have actual cash value roof coverage that depreciates the roof’s value by $1,000 per year, the insurance company would coverage $4,000 and your cost for a new roof would be $16,000 (your $1,000 deductible plus $15,000 for the depreciation).

With replacement cost coverage, you’d only have to pay the $1,000 deductible for your new roof.

An even simpler example- your 40 in TV that you bought in 2013 for $1,000 is stolen.  With the updated in technology how much is the TV worth (say on Craigslist?)  Probably not much.  $100? $200?  That would be the actual cash value.  What you want instead is coverage for a brand new 40 inch TV, which would be replacement cost.

So be sure to get Replacement Cost Coverage on your Dwelling and Property.

You want coverage which will replace you stuff completely with like kind and quality.  Not the Craigslist value of your stuff.

And be careful of policies that offer ‘limited replacement’ or ‘similar construction’- as these are not replacement policies.  If you are not sure, be sure to read the policy or ask your agency for clarification.

So what are the there things that aren’t covered on a home insurance policy?

Well…. it really depends on the type of policy you have or choose to purchase.

One thing that is always excluded  on a standard home insurance policy (or all home insurance polices… is flood.  What is flood?  You can check out my post on what a flood is and is not and who needs to be concerned with flood flood damage here.

There are generally 3 types of home polices and what they cover varies:

  • Basic

  • Broad

  • Special

With a basic and broad form policy- if it is not named on the policy as covered, isn’t not covered.  Pretty simple.  In insurance we call this ‘named peril coverage.’

Basic Form Policy

typically covers damage caused by about 10 different covered events-

  • Fire
  • Lightning
  • Windstorm or Hail
  • Explosion
  • Smoke
  • Vandalism
  • Aircraft or Vehicle Collision
  • Riot or Civil Commotion
  • Sinkhole Collapse
  • Volcanic Activity

This type of policy is very limited in coverage and few insurance carriers even offer it.  It is usually offered by insurers when the property is not in good condition, is being renovated, is vacant or is old and does not have proper wiring, plumbing or heating updates.

Broad Form

Broad Form policies offer more coverage than Basic Form.  They include coverage for all of the same hazards in a Basic Form policy plus several additional hazards which are expressly named.  Like the Basic Form policy, a Broad Form policy covers only named perils.  Again- if the coverage is not specifically listed, it is excluded.

You typically get the coverage included in Basic Form policy  plus the following;

  • Burglary/Break-in damage
  • Falling Objects
  • Weight of Ice and Snow
  • Freezing of Plumbing
  • Accidental Water Damage
  • Artificially Generated Electricity

So in short if a basic or broad policy spells out and names that peril (or type of loss), you are covered!  Otherwise, no coverage (or no soup!) for you.

(Sorry I couldn’t resist, but if this is before your time you need to check out the full episode of Seinfeld on You Tube.)

 

And finally ….

Special Form

Special Form coverage is the most comprehensive of the three types of polices and is sometimes called ‘all risk’ or ‘comprehensive’ coverage (although this is a little misleading because there are coverage exclusions.  However the wording of the policy is the reverse of the Basic and Broad Forms.  In a Special form policy the insurance company lists what is excluded or not covered.  So if it’s not specifically excluded, it’s covered. 

This can be extremely beneficial to you as a homeowner and is the ideal coverage to have.

Now there are exclusions and you have to read and understand your specific policy but, common exclusions are: Wear and tear, inherit issues with the structure, vermin, termites, rodents, flood, earthquake, neglect, power failure, war, nuclear, ordinance or law and intentional acts.

And I’m just going to put it out there because I know you are wondering- bed bugs are not covered by insurance.

Finally there is coverage that you can add on or ‘buy back’- such as sewer back up coverage, flood, earthquake, ordinance and law, theft, and many others.

Some cool coverage that most of our carriers are now offering are service line coverage, identity theft, equipment break down (like ‘home warranty’ coverage), and others.  So talk to an insurance professional about options that fit your specific needs.

Shameless plug- as independent insurance agency we work with a variety of insurance carriers and can find an option that fits your specific needs and customize a policy for you!

The last thing to consider is if you have anything small and high value, like jewelry, art, collectibles, etc. -you have to add them as a rider to your home insurance policy for proper coverage (or get a separate policy all together).

I’m saying this again- your $10,000 engagement ring is not covered under your insurance policy unless you specifically add it.

Most home insurance policies offer limited, or no coverage at all for these items so it’s important to talk to your agent about anything small and high value that may need to be added or scheduled to the policy.

Now that you know the basics about home insurance (and then some) there is another thing to think about- your deductible.

In the Rivertowns- Ardlsey, Dobbs Ferry, Irvington and Hastings on Hudson as well as Westchester County and the surrounding deductibles tend to average between $1,000- and $5,000 (or more).  Similar to an auto insurance deductible this is what you are responsible for in the event of a claim and the insurance company covers anything over this amount.

So- if you have roof damage of $10,000 and a $1,000 deductible, the insurance company would cover $9,000 of the damage and you would be out of pocket for the other $1,000.

This deductible would apply to every claim, although there are some exceptions.  It is not like health insurance where once you pay your deductible you don’t have to pay again that year or ever.  You are responsible for your deductible every time you have a claim.

Let me say that again-

Every time you file a claim you are responsible for some portion of it- your deductible amount.  

The most common deductibles are:

  • $1,000
  • $1,500
  • $2,500
  • $5,000
  • $10,000

Now you have to be careful.  I see a lot of the direct insurance companies moving all new and renewal home insurance policy deductibles to percentage (%) deductibles.  They also typically have a mandatory hurricane deductible of 3% or 5% especially in Westchester County, New York City, and Long Island.  

What does this mean?  I don’t do math without my iPhone, but a simple example:

With $500,000 of Dwelling Coverage:

  • 1% deductible would be- $5,000 (for all types of claims except a hurricane)
  • 5% Hurricane deductible would be (are you sitting down?)- a WHOPPING $25,000 (5% of $500,0000)  in the event of a loss caused by a hurricane.

SO if your roof blew off and the damage was the $10,000 in our above example and this damage was due to another ‘Hurricane Sandy’, your insurance company would pay NADA.  $0.  Since your deductible is higher than the damage.

If the other agent didn’t explain that, I bet you are a little surprised right now.  But better now than when you have no roof, right?

So what deductible do I recommend? Again, I’m so glad you asked!

Generally I recommended  a deductible that you are conformable with between $1,000 and $5,000.  

You want to be sure that you understand that insurance is for sudden and catastrophic damage to your home.

Insurance is not a maintenance policy.

Let me say it again- insurance, is not a maintenance policy.

Insurance is for a sudden event that causes damage that is is a financial difficulty. 

So if you discover a slow leak in your roof?  Unless you can pin point what caused the leak in the first place- this is most likely a maintenance issue and is not covered.

However, if we have a bad storm and wind and rain cause the roof to peel like in this photo (and we have had quite a few storms with high winds in the Hudson Valley in the last few years), this damage would be covered.

I’m going to let in you in on a not so secret, secret.  If you file 3 claims in 5 years on your home insurance policy, you are likely going to be facing non renewal on your home insurance.

Even 2 claim in a 3 year period- and you could be int he same boat.  And once you are non-renewed for claim- you will find getting a new insurance company to insure your home is going to be challenging.  This is what you will be facing:

Although you HAVE to have home insurance (if you have a mortgage) insurance companies do not HAVE to offer you coverage.

I have personally seen someone with 3 claims in 5 year have to get home insurance which costs $10,000 per year.  $10,000!  When the average policy is $1,200-$2,400 in this area, you can see that in the long run claims can really cost you.  Especially small claims.

So talk to your agent before filing a claim (or me, if I am your agent please call me!)  Don’t panic- remain clam, get more info, and then decide if filing a claim makes sense.

I always cringe when someone says- ‘The contractor told us to file a claim with insurance.’

Ugh.

Anyway, no one buys insurance thinking they are going to have a claim (which is kind of ironic) but  what are the most common claims and how much do they cost?  Here is a cool information on the most expensive home insurance claims:

 

 

Not to scare you but the average homeowner will have a claim every 7 years. 

Hope for the best, but get an insurance policy that could cover the worst. 

 

 

Don’t be scared, though!

One of my favorite clients to work with is someone buying their first home.

Its really exciting to be a part of your home buying process and help you protect what is most likely going to be the biggest investment of your life!  It’s also fun to educate you on the in’s and outs of insurance (if you want to know!).

And also, I sincerely empathize with what you are going through! The process is overwhelming, exciting and scary at the same time!  But I promise you- in the end it is worth the stress, the paperwork, and the feeling that you may just throw in the towel (or cry!)

Our agency specializes in first time home buyers.  We have helped literally hundreds of new home buyers with navigating their insurance needs. 

One thing that is always confusing and that I have to clarify is that the first year of your insurance is always, always, 100% of the time paid inf full, by you.

So if you home premium is $1,200 per year and it is a line item in your closing costs- unless you have a buyers concession or other extenuating circumstance, you will pay that $1,200 when you purchase the policy.

After the first year- your bank will pay the insurance on your behalf from your escrow account.  But since there is no money in your account when you close- you prepay the first year and then (just to use round numbers) $100 a month of your mortgage payment is put aside for your home insurance so that next year the bank can pay the $1,200 premium on your behalf.

I know it feels like your paying twice that first year, but you’re really not!

Want to discuss your insurance needs to make sure you are properly covered?  Please give us a shout, we are happy to help!

Or…. if you are still confused (or maybe even more confused!), and want to talk with an expert who can walk you through your options…. lets set a time to chat!

Or shoot me an email if that’s more your style- Nicole@thejohnsagency.com.

I speak insurance, so you don’t have to!  And you will be checking off the last and most important thing before becoming a home owner!

And then you too will feel the joy of home ownership and make sure your big investment is protected!  

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