First Time Home Buyer: Top 10 Facts You Should Know About Insurance

You’ve purchased your first home and you’re ready to move in. But one little thing is stopping you: home insurance. 

Although you might feel tempted to nab the cheapest policy possible, take a breath. The wrong move here could end in disaster down the road, so it’s important you take the time to understand offered policies. 

Luckily, we’ve compiled almost everything you need to know about first time home buyer insurance. And it’s all in 10 easy-to-read facts. 

1. Basic Policies Include Four Coverage Types

Any policy from a reputable company should meet a basic level of standard. These standards include dwelling, personal property, liability and additional living expenses coverage. 

Dwelling Coverage

Dwelling coverage protects you against damage to your home and any structures attached to it, such as a patio or garage. It even covers appliances and internal systems, such as wiring and furnaces. 

The insurance companies provide a list of damages that dwelling coverage protects you against. Several of these include: 

  • Fires
  • Thefts
  • Hail
  • Wind 
  • Burst pipes

Dwelling coverage varies, so always ask for a list of covered perils and what parts, exactly, the policy covers. 

Personal Property Coverage

Personal property coverage insures everything inside your home, such as clothing, electronics and furniture. 

The insurance helps allay the costs if you must replace items in your home due to a covered disaster. 

Liability Coverage

If someone hurts himself on your property, liability coverage provides funds for any medical bills, litigations or property damage that result from the accident. 

This type of coverage usually includes pets. 

Additional Living Expenses Coverage

If a covered disaster strikes and the damage forces you to live somewhere else temporarily, this coverage will alleviate the costs of hotels, food and other living expenses. 

Conditions for this coverage vary widely, so be sure to pay close attention when reading through policies. 

2. There Are Three Coverage Options

When shopping for insurance, you’ll come across three terms that represent different coverage options. Agencies offer these three options for each policy so that homeowners can decide on limits. 

Actual Cash Value

The first is “actual cash value.” This means the policy will cover costs to replace the home or items within it minus the depreciation value. 

In other words, the policy covers the cost an item or your home is worth at that time rather than what you paid for it. 

Replacement Value

The second coverage option is known as a replacement cost. 

This does not include the deduction for depreciation like the actual cash value of something. Instead, it covers the costs associated with rebuilding a home. 

Those insured would have the cost of the original home covered. 

Extended Replacement Value 

The final term is the extended replacement value, also known as the guaranteed replacement cost. 

An extended replacement cost offers more protection than the others. It offers the finances to rebuild the home as it was before the damage occurred. 

The significant factor about this policy type is that it provides replacement costs that can be higher than the policy limit. Homeowners won’t have to worry about increased costs due to inflation or natural disasters. 

3. Basic Coverage Doesn’t Cover A Lot

Basic coverage might sound like enough for most homeowners. After all, standard policies cover damages that are common worries. 

But there are many incidences basic coverage doesn’t protect you against. The most important that an insurance company might not include are natural disasters or incidences that are prevalent around your location. 

Individuals in Florida, for instance, should consider additional coverage for sinkholes

If you live in a location prone to a specific type of natural disaster, consider taking out an additional policy for it. 

But even if you don’t live in an area prone to disasters, there are still numerous circumstances not covered in a basic policy. Mold and sewage backup are two of them. 

Read through additional coverage options before deciding on a policy.  

4. There Are Eight Homeowners Policies

Next comes the HO policies. There are eight HO policies in all. We’ll cover them quickly here: 

  • HO-1: Basic coverage with the four essential policies
  • HO-2: Offers additional named perils beyond those listed for HO-1
  • HO-3: Covers against all perils unless mentioned in a policy’s exclusion section
  • HO-4: Renters insurance that covers possession and liability but not the building itself
  • HO-5: The broadest coverage that covers against all perils not mentioned in an exclusion section
  • HO-6: Condo insurance that offers protection for liability issues and personal belongings and, usually, the walls, floor and ceiling
  • HO-7: Similar to the HO-3 but for mobile home owners  
  • HO-8: Created for owners with older homes and covers perils similar to HO-3 as well as issues associated with aged dwellings

In addition to the eight HO policies, you may also hear of something called an HO-B policy. It’s similar to an HO-3 insurance policy but offers better protection for individuals living near water. 

Knowing these policies helps homeowners find the coverage that is right for them and their new property. 

5. HO-3 Is Popular

HO-3 is the policy most homeowners purchase. It offers extended coverage for more damages than a standard agreement and is affordable, making it a favorite among consumers. 

This insurance type covers any and all damages unless they are outlined as exclusions, meaning policyholders enjoy more security than is offered in other plans. 

However, HO-3 does include exclusions that can be costly. Common exclusions include damages from earthquakes, floods and mold. 

Such exclusions and ambiguous definitions led many Katrina victims to have difficulties filing successful claims after the hurricane. 

6. Extra Coverage Isn’t a Waste

Because there is ambiguity in what insurance agencies may define as “wind damage” or the like, it’s best to seek extra coverage for possibilities tied to your location. 

In fact, some companies require additional coverage, such as flood insurance, to obtain a mortgage.

On top of this ambiguity is the fact that about 10% of insurance claims are denied.  

One of the biggest mistakes you can do is fool yourself into thinking basic coverage will suffice. It’s the reason two-thirds of US homes are underinsured. 

7. Bundling Lowers Costs

Most companies, like Morison Insurance Brokers Inc., offer lower pricing if you bundle. Bundling involves purchasing multiple policies through a single company, such as automobile coverage and home coverage. 

Bundling can save homeowners anywhere from 5% to 25% on each policy, and the convenience of working with one company instead of several is optimal. Ensure the insurance company is reputable and that you won’t get cheaper quotes elsewhere.

8. Many Factors Impact Rates

A multitude of your insurance rate. Chief among them is how much it would cost to rebuild your home. 

However, companies also consider your new home itself, including the structure and materials your home is made of. Some materials are considered riskier than others.

Wooden abodes, for instance, typically increase prices because the material burns easier. Stone, on the other hand, drops the price. 

Other considerations include the home’s age and any additions that may pose risks, such as pools. 

Adding to the rate’s cost is your actions and history. If you have a prior history of filing claims or troubles with past insurance companies, businesses consider you risky and up your rates. 

Other things that impact pricing include credit history, pets and location. 

9. Common “Hazards” Can Increase Rates

Do you want a pool with crystal-clear water? Expect a higher rate. 

Additions like pools, pets and even trampolines are seen as safety hazards. When you consider statistics, it’s easy to understand why insurance companies hike up prices: 

  • Treating trampoline-related injuries costs about $270 million per year
  • The number of trampoline injuries has risen higher than pool injuries
  • In the opening half of the 2012 year, 1 in 3 liability claims was for a dog bite
  • Many companies have a list of dog breeds they consider high risk

Know anything you own that insurers may see as a safety risk could cost you money. 

10. There Are Ways to Reduce Insurance Costs

Insurance is expensive, and we know everyone wants to reduce their home insurance costs as much as possible. The good news is that there are several ways to save beyond bundling. 

First, having good credit helps. Insurers see you as a less risky investment, so they offer better rates. But if you don’t have stellar credit, don’t worry; it usually doesn’t impact rates stupendously. 

Increasing security measures also lowers rates. Contemplate an inexpensive home security system or other tactics to up safety. 

Other ideas include: 

  • Adding fire extinguishers throughout the house
  • Installing hurricane shutters
  • Installing a back-up generator 

Of course, don’t forget the easiest way to decrease costs: to increase your deductible.  

First Time Home Buyer Insurance the Easy Way

Let’s face it: home insurance policies are convoluted, and understanding how first time home buyer insurance works is tiring.

But don’t let the learning curve dissuade you. Home insurance is important, and you need to make sure your plan covers you and your loved ones in case anything happens down the road. 

And we can help you. Check in with our site often to learn more helpful tips on owning, financing and modifying new homes, and don’t forget how it might impact your insurance!  

Related Posts

About The Author