Buying your first home is a significant milestone, but it can be both exciting and daunting. There are so many things to do to complete the process, it is easy to overlook the smaller details. Unfortunately, some of these, such as insurance, can end up providing a costly surprise down the road. The right homeowner’s insurance will not only protect your investment, but it can shield you from unforeseen financial burdens.
So, what is the right first time homebuyer’s insurance?
The Homeowner Insurance Basics
Before we can delve into the types of home insurance coverage, there are some basic terms, you should understand.
- Dwelling: This refers to repairing or replacing the home if it is damaged by a covered event or issue.
- Other Structures: If you have additional structures, such as a shed, barn or fence, you will need to ensure that it is included in your policy. Typically, other structures are set at 10% of the dwelling coverage, but it may be possible to increase this amount if it is insufficient.
- Personal Property: This refers to belongings that may be damaged or stolen during a covered event. The limits for personal belongings are usually set at a percentage of the dwelling coverage, but it is possible to purchase higher limits.
- Liability: This insurance pays for damage or injuries accidentally caused to other people. The typical starting limit is $100,000, but you can increase this amount, as it will need to be sufficient to pay for judgments against you, settlements and legal defense costs if you’re legally liable for other’s property damage or injuries.
- Medical Payments to Others: This pays for injuries of non household members injured on the property.
- Additional Living Expenses: This coverage is also called “loss of use” and it pays for additional costs such as meals, and hotel bills if you are unable to temporarily live at home due to damage from a covered event.
- Replacement Cost: Replacement cost refers to the amount needed to replace damaged items with new, similar versions.
- Actual Cash Value: This is a depreciated value, so your payment for damaged items would be the cash value less depreciation for age. For example, if you have a five year old television, you wouldn’t get reimbursed for a brand new model, but rather the cost of a five year old one.
- Named Peril: Perils are incidents or problems that cause damage. Named peril refers to hazards that are specifically listed.
- Open Peril: This refers to being covered for all hazards unless they are specifically listed as an exclusion.
The Types of Homeowners Insurance
As the name suggests, homeowner insurance is coverage to provide financial protection against damage to your home and liability for accidents that occur on your property. Homeowner’s insurance is not legally mandated, many mortgage lenders require that you provide proof of insurance before they will finalize the loan. So, this leaves it up to you the level of coverage that is best suited to your needs.
There are eight types of homeowner insurance policies, which include the following.
HO-1
This is the most basic form of homeowner insurance offering the bare bones cover including financial protection against, fire, lightning, explosion, aircraft or vehicle damage, smoke damage, theft, vandalism or windstorms.
Generally, HO-1 only provides coverage for the home structure at actual cash value. So, you won’t get the amount needed to fully rebuild, rather the value of the home less depreciation. Typically, HO-1 will not cover personal property or liability.
While this is the most basic coverage, you need to check your lender’s requirements, as the lender may require a higher level of protection is in place.
HO-2
Commonly known as broad form cover, HO-2 covers all you would get with HO-1, plus coverage against damage from falling objects, freezing of plumbing or AC, weight of snow and ice, cracking or bulging resulting from a sudden accident, accidental overflow of water or steam and accidental, sudden damage from electrical currents.
HO-2 also includes dwelling coverage, personal belongings cover, personal liability, medical payments to others, additional living expenses coverage resulting from loss of use.
HO-3
HO-3 policies are the most common type of homeowners insurance. It provides cover for your home and belongings, liability, additional living expenses, and medical payments to others. It protects against all perils unless specifically excluded, with payment to repair or replace up to the policy limits.
HO-4
This is not a homeowner’s insurance policy, as it is commonly referred to as renters insurance. While it covers belongings, it does not cover any damage to the home itself, which needs to be protected with landlord insurance.
HO-5
Also known as a comprehensive policy, HO-5 is the highest level of coverage for a home and belongings under all circumstances unless listed as an exclusion. There is also cover for liability, additional living expenses and medical payments to others. The policy pays out replacement costs rather than actual cash value.
HO-6
This homeowner’s insurance is designed for those living in a co-op or condo. Commonly referred to as “Walls-in” cover, it provides protection for personal belongings, liability, medical payments to others, additional living expenses and walls, floors and ceilings of the property.
HO-7
This is similar to HO-3, but it is designed for mobile homes including trailers, single and double wide homes, sectional homes and modular homes.
HO-8
This is generally used to cover older homes where the cost of rebuilding is likely to be greater than the market value of the home. For example, registered landmarks or historic homes are likely to need a HO-8 policy. It offers protection against the same perils as HO-1, but coverage for medical payments to others, additional living expenses and liability is included.
Common Insurance Mistakes First Time Homebuyers Make
Navigating insurance can be complicated, and first time homeowners often make mistakes that can lead to unexpected expenses or costly errors.
Being Underinsured
While it is tempting to try to keep your costs as low as possible, being underinsured can lead to significant, costly surprises. It is common for homeowners to underestimate how much it would cost to rebuild their home, which leads to insufficient dwelling coverage.
You need to make sure that your home is insured for the replacement cost rather than market value. A good rule of thumb is the 80% rule, which refers to having coverage equal to at least 80% of the replacement cost of your home to ensure full compensation for any partial losses.
Not Checking Exclusions
Even if you opt for a comprehensive policy, it is still crucial that you understand what is and is not included. Standard policies may exclude things like sewer backups, floods, earthquakes, wildfires and more. You should check the exclusions list and assess the risks in your area, purchasing additional coverage to fill any gaps.
Ignoring the Deductibles
The deductible is the amount you will need to pay out of pocket when you make an insurance claim. So, if a covered event would pay out $1,000 and you have a $500 deductible, your insurer would only send you $500.
A higher deductible can often make your premiums lower, but you need to think about how you would handle the financial burden if you need to make a claim. It can be a little tricky to find that sweet spot that balances affordable premiums with manageable costs should you have a loss, but give it some thought. If you can’t imagine how you would make up the deductible if you need to make a claim, then you should aim for a lower deductible amount.
Evaluating Your Coverage Requirements
As we just touched on, failing to have the proper coverage can be a costly mistake, so it is important that you understand how to evaluate your coverage requirements.
Work Out Your Dwelling Coverage
The first thing you need to determine is the rebuild cost of your home. Multiply the square footage of the home by the per square foot building costs in your local area. You will need to include the labor, cost of materials plus any unique characteristics or features of your home that will alter the estimate.
You can also consult real estate agents, insurers or builders in your area to provide estimates of the local construction costs.
For example, if your home is 2,500 square feet and the local building costs are $100 per square foot, you will need at least $250,000 in dwelling coverage.
Value Your Personal Property
The next stage is to assess your content coverage requirements. Many people are surprised when they start to add up the cost of their belongings. So, it is important to conduct a home inventory, walking through each room and listing all of your belongings. You can then estimate the replacement cost for all items including those in your attic, garage and other storage areas.
If you have high value items such as art or jewelry, you may need additional coverage, so it is a good idea to document these items and consider having a professional valuation done.
Assess Liability Needs
Your liability coverage needs to be high enough to protect your assets should you be legally liable for an accident or event at your home. Take a few moments to think about the potential risks that could lead to a potential lawsuit and how you would handle the out of pocket costs.
Consider Any Additional Coverage
Next, you need to think about whether there are any specific risks associated with your home. Do you live in an area prone to certain hazards, which would require additional coverage? Does your new home have a pool or other feature that provides a specific risk that may not be covered in a more general policy? Do you have high value items that may require additional coverage?
| Coverage Type | Why It Matters | What to Look For |
|---|---|---|
| Homeowners Insurance | Protects the structure and belongings from damage or loss | Ensure it covers fire, theft, weather damage, and has replacement cost coverage |
| Flood Insurance | Standard policies usually don’t cover floods | Check flood zone status; consider federal or private flood insurance |
| Title Insurance | Protects against legal claims on property ownership | Choose a reputable title company; confirm coverage for past liens or ownership issues |
| Mortgage Insurance (PMI) | Required if down payment is <20%, protects lender | Understand cancellation terms once equity reaches 20% |
| Home Warranty | Covers repair/replacement of appliances and systems | Look for comprehensive plans and read exclusions carefully |
| Liability Coverage | Protects against injury claims on your property | Ensure adequate limits in your homeowners policy |
| Loss of Use Coverage | Pays for temporary housing if your home is uninhabitable due to a covered event | Verify daily limits and time period coverage |
Review The Policy
The final step is to review the policy to check if the coverage limits are appropriate for your needs. If you’re still unsure, you can get professional advice from an insurance advisor to double check you have adequate coverage.
Additional Cover to Consider
Depending on your circumstances and location, it may be necessary to purchase supplemental homeowners insurance policies.
- Flood: Standard insurance policies don’t cover flood damage, so if you live in a flood prone area, consider this additional cover.
- Earthquake: In regions that are susceptible to seismic activity, this additional coverage is crucial. This provides a separate policy that covers damage resulting from earthquakes that are typically excluded with standard policies.
- Sewer Backup: A sewer backup can cause extensive damage, so adding this cover to your policy will ensure you’re protected for the cost of clean up and repairs.
- Scheduled Personal Property: If you have high value items, you can schedule them separately to ensure that you have full coverage beyond your standard policy limits.
Factors Influencing Home Insurance Premiums and Coverage
There are a number of factors that will influence the premiums and coverage of your homeowner’s insurance.
- The Property Location: Where your property is located can have a significant impact on not only the building costs, but also the risk of hazards in the area.
- Home Characteristics: There are a number of factors such as the age of the home, materials, size and conditions that will influence your coverage and premiums.
- Your Credit Score: Many insurers use credit based score models to calculate insurance rates. So, if you have a higher score, you may get a more preferential rate compared to those with a lower score.
- Discounts: Many insurers offer discounts if you have safety features, such as a security system, or other circumstances.
Do You Need a Home Warranty?
Another often overlooked aspect of homeowners insurance is a home warranty. This is more like a service contract rather than an insurance policy, but it provides financial protection for repairs or replacement of your home systems or household appliances.
This can provide excellent reassurance for new homeowners who are just getting used to the costs involved in home ownership. When an appliance or system is covered by your home warranty, should it fail, the company will send a technician to diagnose the issue and provide a resolution. You may need to cover a service call fee, and there are typically coverage limits, but it can help to avoid costly problems.
You can take out a home warranty to cover your home system, such as your electrical, plumbing and HVAC systems, appliance plans or combination plans to cover everything. You may also find plans that offer extra coverage for pools, septic systems, lawn sprinklers and more.
Of course, you need to take care that your warranty does not cost more than replacing or repairing the covered items, but this could be a good option if you’re concerned about an unpleasant, costly surprise.
Shopping for the Right Insurance Policy
Once you know your requirements, it’s time to shop around to get the best policy for your specific needs. This may be a little daunting, but there are some tips and tricks that can help you.
Compare Multiple Quotes
While it is tempting to simply take out a new policy with your existing insurer, you may not be getting the best deal or the right coverage levels. A good rule of thumb is to get at least three quotes. This will allow you to check you’re choosing a competitive policy that meets your needs.
Evaluate the Insurer Reputation
Getting a good price is important, but you also need to feel confident that if you run into any insured issues, you can get assistance quickly. Although there are some decent insurers out there, there are some that fall short with their customer care and are slow to pay out on claims. So, take a few moments to check review platforms and consumer websites to see what current and previous customers are saying about your potential insurers.
Check if You Can Bundle Your Policies
You can access discounts from many insurers if you bundle your home and auto insurance. So, if your auto insurer offers competitive pricing for home insurance, you could save even more with a bundle.
Verify the Claims Process
When you have a covered issue, you need to know that you’ll be able to have your claim processed promptly. Therefore, it is important that you understand how the claims process works with a potential insurer.
Can you report a claim online or via an app, or do you need to phone the call center? How do you submit photographs and other documents to support your claim? How does the insurer keep you updated on the status of your claim?
Confirm Your Deductible
As we covered earlier, your deductible amount can play a role in the cost of your premiums. So, double check the deductible amount is appropriate for your circumstances.
Getting the right homeowners insurance is a vitally important step in the homebuying process. While there are lots of things to organize and do, when you’re buying your first home, don’t overlook the importance of getting the right coverage to avoid costly surprises later. Once you understand your coverage needs and what you need to consider when purchasing home insurance, you can enjoy your new home with the peace of mind that your investment is protected.
