Now that you've found the right house, it's time to find the right policy to protect it. Most buyers get a comprehensive homeowner's insurance policy, which provides coverage for fire damage, water damage (not by flooding, which is covered by federal flood insurance), personal possessions, personal liability, vandalism, theft, and loss of use of the house. If you are financing your home purchase, your lender will require you to buy at least basic hazard insurance. Here's some basic information to keep in mind as you shop around:
Basic coverage
The most comprehensive insurance policy is guaranteed replacement cost coverage, which will pay to rebuild your home even if the cost to rebuild exceeds your policy limit. This kind of coverage costs from about $450 to $1,300 a year or much more, depending on the area and the price of the home. Even if you can afford it, it's not available everywhere or for every property -- older homes, for example, may not be eligible. Some big insurance companies have started to limit the amount they'll pay to 120% of the policy's face value.
Straight replacement cost coverage, or cash value coverage, is a cheaper and more limited option -- about 25 percent less per year than guaranteed replacement coverage. It will pay to rebuild your house if it's destroyed, but coverage is limited to the policy amount. Make certain you're insured for enough to rebuild.
Special coverage
In addition to regular homeowner's insurance, you may require special coverage for hazards such as earthquakes or floods. California is targeted for earthquake coverage, but at least 16 other states are considered at risk for quakes: Arkansas, Colorado, Idaho, Illinois, Indiana, Kentucky, Massachusetts, Mississippi, Missouri, Nevada, New York, South Carolina, Tennessee, Utah, Washington and Wyoming. Earthquake coverage can be costly, but you should consider it if you live near a fault, your home is more than 50 years old and/or built on a slope, landfill or flood plain.
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If you live in flood-prone areas, you may need flood insurance too, because water damage from dams and waterways is not included in standard homeowner's policies. Flood insurance is available through the federal National Flood Insurance Program, and an average policy runs about $370 a year.
Applying for insurance
Insurance representatives need certain information about you and the property before they can tell you if they'll write a policy and how much it will cost. You'll need to provide:
- Your Social Security number
- The age and location of the home that you want to buy
- The proximity of fire stations to the home
- The age and condition of plumbing and electrical systems
The insurance company will also want to make sure that you're a good risk. If you previously filed claims, or you frequently pay bills late, you may be denied coverage.
Shopping around
Start shopping for insurance as soon as you sign the purchase contract so you're not stuck if the insurance carrier you choose refuses to insure your home. Some insurance carriers, for example, won't insure homes that are built on slopes or have shake roofs or antiquated electrical systems.
TIP: You may get pitched on mortgage life insurance, which just pays off the lender in the event of your death.This is not always advisable, especially if the interest rate on the loan is low and you have survivors who may need the mortgage for tax reasons. Instead, increase your regular life insurance coverage so your survivors can invest any proceeds after your death to provide enough money to continue paying the loan.
