Owning a home is a major accomplishment and one of the best investments you can make! Protecting your home from harm with Homeowner’s insurance is essential. Nobody likes paying insurance, until you need it, and then you will wonder how you could ever live without it.
For a relatively small annual premium you can protect yourself from a large unexpected expense or a total loss. For a normal size house (1,500-2,000 sqft) with average coverage you can expect between $1,000-$1,200 annual insurance premium. For Larger homes (4,000-5,000 sqft) premiums can range between $2,500 to $3,000 a year. As a general rule of thumb coverage is about $1,500 Per $1M or property value.
Highend homes that are worth 10M or more can be difficult to insure because most major US insurance companies like All State, Farmers, State Farm, etc cap their homeowners insurance policies between 2M and 4M for property value. AIG insurance and Chubb Insurance like insuring highend luxury homes, so they are good companies to get a quote from if you are buying a luxury home.
Lenders require buyers to have insurance to get a loan. The minimum amount of insurance a lender requires is fire insurance, but I strongly recommend to always upgrade your insurance policy to Homeowners Insurance.
Homeowner’s Insurance has two main coverages: Building Insurance & Liability Insurance.
When purchasing Homeowners insurance get at least two or three quotes from different companies.
Homeowners insurance is for your home, second home, and 2-4 unit residential income property.
Building insurance covers anything that is a permanent part of the building. Think, if you turned the house upside down and shook it, anything that doesn’t falls out. The stuff that is loose is considered contents/personal property which can be covered by adding personal property coverage. Building insurance covers your house if it is damaged or destroyed. Double check with your insurance agent if you have accessory structures, such as detached garages, guest houses, solar panels, storage sheds, and pools, to make sure that they are covered in your policy.
How much building insurance coverage do I need?
Building insurance is calculated as a price per square foot to rebuild your property. To figure out your replacement value – take the square footage of your home and multiply it by your estimated $/sqft replacement cost. $200/sqft-$300/sqft should be sufficient price per square foot for standard residential construction. Luxury homes might require a higher price per squarefoot to rebuild.
You own a 2,200 sqft home.
2,200 sqft *$250/sqft = $550,000 replacement cost
Liability insurance is legal protection and covers you if someone is hurt on your property and they file a lawsuit against you. The reason they are hurt doesn’t even have to be your fault (it can be their fault! I have heard of a robber getting hurt while trying to steal and suing the owner), as long as it happened on your property they can sue you. Liability insurance will pay all your legal fees, and pay out the judgment or settlement if you lose. Common examples of lawsuits might be: your dog gets loose and bites someone, or someone slips and falls. Liability insurance should be at least $300,00-$500,000. However if you have a very large amount of equity in your home (if you bought it all cash or have owned it for many years and have almost paid it off) Liability should match your equity. It’s never wrong to up your Liability to the $1M Range, this should be plenty of protection. Keep in mind that the more coverage the higher your annual premium.
Personal Property Coverage (Optional)
Personal property is anything you would pack up and take with you if you moved (clothes, furniture, kitchen items, sporting goods, electronics, rugs, tools, etc.). To determine how much coverage you need, you will need to estimate the cost to replace all of your belongs with new ones.
If you have really expensive things, like antiques, fine art, and jewelry, you will need to get extra or special coverage because standard coverage excludes these costly items.
For your personal property create list of all the big ticket items and keep it with your records. If you don’t feel like making a list, you can take pictures or a video, starting on the outside of your home, and going inside every room, closet to create a record of the contents. If you ever need to file a claim they are going to ask what was lost and needs to be replaced and it is helpful to have some documentation.
Loss of Use Coverage (Optional)
if your home is damaged or destroyed, you may not be able to live in your home until it is fixed or replaced. Loss of use pays for you to live somewhere else while your house is being fixed. If your home was destroyed, it can take a year or two to rebuild. This is optional coverage but recommended, 12 months is the minimum coverage, I’d get 24 months which is best.
Medical Payments Coverage (Optional)
Medical Payments is an optional coverage, but nice to have if someone gets hurt at your property. Medical Payment will pay their health insurance deductible, or pay for a doctor visit, or an ambulance ride to the hospital. Typical coverage is $5,000.
Deductibles can range between $1,000-$3,000 for normal size homes and $5,000-$10,000 for multi million dollar homes. The higher the deductible, the lower your insurance annual premium. You want to balance the amount of the deductible with the amount of money you have in savings that you are comfortable either: fixing a problem yourself, or paying the deductible in order to make a claim.
Let’s say you have a broken toilet that costs $500- that is definitely not worth claiming with a $1,000 deductible because the deductible is larger than the repair. Lets say you have a $2,000 problem- you then have to weigh the advantage of having insurance cover $1,000 of the repair versus having your insurance premium go up next year. If you have very little or no cash, you may want as low a deductible as possible to protect yourself against an unexpected expense. Whereas if you have quite a bit of cash, you can choose to set the deductible higher, and only use insurance for medium to large problems and cover all the smaller stuff yourself.
Sometimes you can get insurance discounts on your home insurance, if the property has a sprinkler system, burglar alarm, or you bundle your auto insurance and home insurance with the same company.
WHAT’S NOT COVERED by Homeowners insurance
Floods (also mudslide) and Earthquakes are not included. Normal wear and tear on the property that requires routine maintenance is not covered. Pest damage from termites, rats, or other critters is excluded. Damage caused from Foundation settlement is excluded.
Certificate of Insurance
Lenders require buyers to have insurance when they get a loan. The lender will want a certificate of insurance from your insurance agent before they will fund the loan- so make sure you get a few quotes and choose your insurance policy before its time to close.