New Homebuyers’ Guide to Home Insurance

Shopping for a new home comes with many considerations. From selecting the best neighborhood to property taxes to the number of bedrooms you need, there are a lot of factors to think about when buying a house.

While you might be focused on the aesthetics and location of your new abode, don’t overlook the task of finding a suitable homeowner insurance policy.

To help you better understand what to expect, here are a few homeowners insurance considerations for new homebuyers.

Mortgage Lenders Usually Require Home Insurance

For homebuyers who take out a mortgage, the bank or financial institution will likely require homeowners insurance, since they must protect their investment. For example, if your home were destroyed by a fire, homeowners insurance would help to rebuild it (up to your policy limits).

Homeowners insurance is often rolled into an escrow account for payment, along with your property taxes. An escrow is a separate account where your mortgage lender will collect money for homeowners insurance and make the payments on your behalf. An escrow can be advantageous because it gives you fewer bills to worry about.

Some lenders require a mortgage escrow account for homeowners insurance and property taxes. For example, if you put less than 20% down on the home sale, your lender might require an escrow. If you put more than 20% down, you may have the option to lump your home insurance into your mortgage payments.

If you find a lender that allows you to forgo an escrow account, they may charge a higher interest rate for the arrangement. You’ll still be required to make home insurance and property tax payments on your own. Some homeowners prefer this option because it can allow for more financial flexibility, such as investing money in an interest-bearing account until it’s due.

If your lender does not require a mortgage escrow, they might require you to pay the annual homeowners insurance premium up front. If the lender allows you to pay on a quarterly or monthly basis, your insurance company might charge a small installment fee.

Navigating The Home Insurance Shopping Process

Homeowners insurance covers your house structure (the “dwelling”) and belongings (the “contents”) from problems like fires, lightning, tornadoes, explosions, vandalism and theft. If you’re a first-time homebuyer, you might be unfamiliar with how to buy homeowners insurance and how to determine the right amount of coverage. To help streamline your homeowners insurance shopping process, here are steps to follow.

Understand What Homeowners Insurance Covers

As a new homeowner, you’ll want to know what homeowners insurance covers. A standard homeowners insurance policy includes:

• Dwelling: Pays to rebuild the structure of your home if it is damaged by any cause, except problems that are specifically excluded such as floods.
• Personal belongings: Pays to replace or repair your personal belongings after a problem covered by the policy, like theft or fire. You can typically upgrade a policy to cover contents for any problem except those named as exclusions. This gives you broader coverage for your belongings.
• Liability insurance: Pays for medical expenses and property damage your household members cause to others. For example, liability can pay out if your dog bites someone or your child knocks a baseball through a neighbor’s window. Liability insurance also pays for a legal defense if you get sued over  an injury or damage. Liability limits on homeowners insurance policies typically start at $100,000, but consider upping it to $300,000 or $500,000. Liability insurance should cover what you can lose in a lawsuit.
• Medical payments to others: Helps pay for minor injuries if a guest is hurt on your property. This is generally in small amounts of coverage between $1,000 and $5,000.
• Additional living expenses coverage: This pays extra “loss of use” expenses such as hotel bills, meals and other costs (like laundry services or pet boarding) if you cannot live in your home because of a problem covered by the policy, like a tornado or fire.

Compare Home Insurance Companies

“As soon as you know the house you’re buying, that’s when you should get homeowners insurance,” says Bob Buckel, vice president of product management at Erie Insurance. “This gives your insurer enough time to get all of the paperwork in order before the closing.”

When you’re comparing homeowners insurance companies, here are a few key things to consider:

Customer service rating. It’s important to know how an insurance company handles claims. Customer satisfaction can be a good indicator. Overall, homeowners insurance companies score high for claims satisfaction, according to the J.D. Power 2020 U.S. Property Claims Satisfaction Study.

The study notes that premium increases and claims processes that require a lot of policyholder effort are the top factors that will spur people to look for a new insurer.

Financial stability. Check out a company’s financial strength ratings from Standard & Poor’s or A.M. Best. These provide an assessment of the insurance company’s ability to pay claims in the future. Many insurers post their financial strength ratings on their websites.

It’s a good idea to check on a company’s financial health before you buy a policy. If your insurance company goes out of business, your policy could be switched to another company or managed by the state guaranty association (which could cap the amount of claims they will pay).

Identify the Right Amount of Coverage

When you’re buying a policy, your insurance company will evaluate the characteristics of your home (such as the structure and building materials) to estimate the cost of rebuilding it. They’ll recommend an appropriate amount of coverage for the dwelling.

Things to consider:

Can you get extended coverage in case the home is destroyed? Buckel at Erie Insurance says you should also consider “guaranteed replacement cost coverage,” which pays the full cost to rebuild a house, no matter what amount is listed on your policy.

“For example, if your policy is for $200,000 but the builder says it will cost $250,000 to rebuild your home, the insurance company will pay the full amount as long as you have the benefit in your policy,” says Buckel.

“Extended replacement cost” is similar but sets the additional maximum amount, such as 25% extra. Not all home insurers offer these options.

Do you have enough contents coverage for all of your belongings? Consider your furniture, rugs, clothes, jewelry, musical instruments, electronics, artwork, kitchenware and other items. A good way to do this is by creating a home inventory.

Most policies cover contents at an amount that’s 50% to 70% of the dwelling coverage. For example, if your house is insured for $200,000 and your personal property coverage is set at 50%, you would have $100,000 in personal property coverage.

You can change that coverage level. The amount of coverage you choose will depend on the type of personal belongings you have and what the items would cost to replace.

Insurance Options Beyond Default Limits

You may want to rejigger coverage to either fill in gaps or increase the coverage limits you have.

Natural disaster insurance. If you live in an area that’s prone to flooding, you may want flood insurance. In fact, a mortgage lender might require you to have it if you live in a high-risk area for flooding.

There’s also sinkhole coverage (good for Floridians) and earthquake insurance (a consideration for Californians).

Sometimes you’ll need a combination of insurance types to be fully protected. For example, tidal waves can often follow earthquakes, but earthquake insurance doesn’t cover flood damage.

Sewer backup. If a sewer backs up or your sump pump fails, water backup and sump pump overflow coverage pay for the cost of water damage. This insurance type might also cover water damage caused by tree roots growing in a sewer line.

Umbrella insurance. While the liability coverage within a homeowners policy is a good start, it still might not be enough. If your insurance company limits the amount of liability coverage you can buy and your assets exceed that amount, you may want to purchase umbrella insurance for additional liability coverage.

You can typically purchase about $1 to $2 million dollars of umbrella insurance for about $380, according to Trusted Choice, an insurance group for independent agents.

How To Evaluate a Home Insurance Policy

• Understand coverage levels. Know the maximum amounts that will be paid for your dwelling, belongings, loss of use and liability lawsuits against you—to avoid bad surprises later.
• Choose deductibles. A deductible is the amount deducted from an insurance claim check. You can save money by raising the deductible, if you’re comfortable with paying more if you have a claim. Be aware that some policies have deductibles tied to specific damage, such as a special deductible in some states for wind damage.
• Compare rates. Get quotes from a few different companies. If you already have car insurance, start with that company—you can likely snag a multi-line discount for insuring your vehicles and house with the same company.

Homeowners Insurance For New Homebuyers FAQ