In the United States, most home buyers borrow money in the form of a mortgage loan, and mortgage lenders always requires that the buyer purchase homeowner’s insurance as a condition of the loan, in order to protect the bank if the home were to be destroyed
Home insurance, also commonly called hazard insurance, or homeowner’s insurance is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.
The cost of homeowner’s insurance often depends on what it would cost to replace the house and which additional riders—additional items to be insured—are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims due to floods or war, amongst other standard exclusions (like termites), are excluded. Special insurance can be purchased for these possibilities.
Types of Coverage
The most effective type of home owners insurance coverage is known as “replacement cost,” which covers, up to your policy limits, what it would take today to rebuild your house and restore your belongings.
“Extended” replacement cost coverage provides protection to your policy limit, say $500,000, and then perhaps another 20% of the cost after that. Percentages vary, but in this example you could recoup up to $600,000 on a $500,000 policy, assuming your losses reach that high. Extended coverage can compensate for any unanticipated expenses like spikes in construction costs between policy renewals. Now harder to find due to the industry shift toward extended replacement coverage, “full” or “guaranteed” replacement coverage covers an entire claim regardless of policy limits.
A less attractive alternative is “actual cash value” coverage that usually takes into account depreciation, the decrease in value due to age and wear. With this type of policy, the $2,000 flat-screen TV you bought two years ago will be worth hundreds of dollars less today in the eyes of your claims adjuster. Replacement cost coverage is favored unless you can save at least 25% on the premium for going with actual cash value coverage instead.
Even if you have replacement cost protection for your dwelling and personal property, don’t assume everything is covered. Structures other than your home on your property—such as a detached garage or swimming pool—require separate coverage. So too do luxury items like jewelry, watches, and furs if you want full replacement cost because reimbursement for those items is typically capped.
How much coverage do you really need?
OK, now that you’re clear on what type of policy you have, you need to figure out how much policy you truly require in dollar terms. Let’s say you purchased your home five years ago and insured it for $200,000. Today, it’s worth $225,000. Simply increasing your coverage to $225,000 may nonetheless leave you underinsured. Here’s why.
The key to determining how much dwelling coverage you need isn’t the value of your home but the money you’d have to pay to rebuild it from scratch. Call your realtor or your local homebuilders’ association and inquire about the average per-square-foot construction cost in your area. If it’s $150 and your home is 2,000 square feet, then you should be insured for $300,000.
There’s no rule of thumb for how much your homeowners insurance should cost. Insurers use numerous factors—age, education level, creditworthiness—to determine pricing, so the same policy could run you more than your neighbor. In recent years the average annual premium was $804.
How can you lower your insurance premiums?
The higher your deductible, the amount you pay out of pocket before coverage kicks in, the lower your premium. Landing on the appropriate deductible level requires remembering that insurance should cover major calamities, not minor incidents. Most homeowners should be able to absorb modest losses like a broken window pane or a hole in the drywall without filing claims. If you can, then you’re wasting money with a $250 deductible.
If you’re a first-time homeowner and don’t have a lot of savings, moving up to a $500 deductible will probably stretch your budget. However, if you live in a ritzy home and drive an expensive car, then you should be able to afford a $1,000 deductible. In Columbus, OH, the premium for a $200,000 home with a $500 deductible would be approximately $736, moving up to a $1,000 deductible drops the annual premium to $672. That’s $64 in savings.
Every major insurer offers discounts to various groups, such as university employees or firefighters. Figure about 5%. Ask which affiliations would entitle you to a discount and how much. If an AARP membership would result in a $50 savings, pay the $16 dues and pocket the $36 difference. Many insurers also offer discounts ranging from 1% to 10% or more for installing protective devices like alarms and deadbolt locks, for going claim-free for an extended period, or for insuring both your car and your home with the same carrier.
For more information on home owner’s insurance or to request a free, no obligation quote, please call Jenny McGhee with Liberty Mutual at 614.306.9334 or by clicking here and completing the online form.
You can also use Liberty Mutual’s Coverage Calculator to get an estimate of what your policy might cost but save yourself some time and just give Jenny a call!
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
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