Insurance 411: What to Know When Shopping for Coverage

Thinking about buying your first home? Get ready: you’re about to pack a whole lot of adulting into the span of just a few months. Creating a budget, raising your credit scores, applying for a mortgage—it’s like learning a new language. And sometimes in the excitement of it all, you can tend to overlook the fine print and settle on a less-than-stellar insurance plan. In short, most of us could use a quick rundown of our insurance options and what to know before we pick a policy.

You’re allowed to shop around for insurance until you find the best deal—with a few caveats. While your lender can’t specify an insurance provider, they can put restrictions on the type of plan you choose or the level of coverage you need before they’ll finalize your loan. Meanwhile, your plan may vary by the kinds of hazards that it covers; for instance, you may need to buy a separate insurance plan to cover floods and other disasters. Sounds confusing? It can be—but don’t worry, we’ve got you covered (pun definitely intended). Here’s the down-and-dirty to get you up-to-speed on purchasing homeowners insurance.

keys to a new home

You Need Insurance

Some things you can go without in life. For instance, we could probably all probably go without watching another commercial. However, homeowners insurance is not one of those things you should try to give up. All mortgage providers require some level of coverage, so if you decide to skip out, your lender will tack on their own plain insurance plan. Typically these plans cost two to three times the market cost of a standard policy—with half the coverage. Do yourself a favor and sign up with a plan before you close on a home.

Flood Insurance Probably Isn’t Including in Your Policy—But You Still Need It

Here’s a sneaky little detail that some homeowners miss: most insurance policies don’t cover floods. And why is that, exactly? Insurance providers usually leave off less-frequent catastrophic hazards in order to keep plans affordable. Instead, they just cover the basics and let you add any additional insurance plans that apply to your area. Even if you live in a relatively flood-free location, though, you may still want to consider purchasing additional flood insurance. FEMA estimates that 90% of all natural disasters involve some kind of flooding, and these floods can wreak some serious damage on your home. So play it safe and go for the extra policy.

Same Thing for Earthquake Insurance

Another type of claim that won’t be covered by your typical homeowners insurance plan? Anything that has to do with earthquakes. Sure, most places aren’t going to get California-level earthquakes on the regular, but they’re a lot more frequent than you’d think. In 2015, for instance, the USGS recorded quakes in about half of all US states, so they’re nothing to treat lightly. Earthquake insurance covers structural damage wrought by seismic activity, but the full extent of coverage—and the cost—varies a lot on where you live and who you buy from, so make sure to read your fine print!

Ditto for Mold Insurance

Picture this: you finally get around to retiling the bathroom when you see it. An overgrown mold colony that’s gone on undetected all these years beneath the original floor. Don’t count on your insurance having your back. Mold removal and remediation is another one of those policy exclusions that most plans don’t cover. But cleaning up the damage could leave you on the hook for thousands of dollars. Some insurance policies do allow you to add an additional rider for mold, or you can purchase separate insurance from another provider. Either way, you’ll need to decide how much risk you’re willing to take. If the idea of a potential mold disaster scares you, then you’ll want to opt for this kind of coverage as well.

Your Lender May Have Their Own Policy Requirements

As you shop for insurance, bear in mind that your lender may have their own specific requirements for your plan. For instance, they might ask you to purchase a separate flood insurance policy, and they’ll definitely require you to purchase a plan large enough to cover the mortgage amount plus the estimated cost to replace the home. Also, your mortgage provider or bank may place limits on the size of your deductible—such as no more than 2% of your home’s total value. Any policy you purchase will have to meet these requirements before your lender will approve the loan.

In Most Cases, Replacement Cost Is Better Than Cash Value

There are lots of differences policy-to-policy, but one of the most important distinctions is whether your plan covers the actual cash value of your home or the replacement cost. Actual cash value means the policy covers the market cost of your home, not the cost to replace. That difference is important, since it could potentially cost you a lot more to rebuild a damaged home than the worth of the property value. Replacement cost policies, however, are typically preferable to actual cash value plans, since they will cover whatever it costs you to repair and rebuild after a disaster or natural event. That should give you some piece of mind!

You’ll Have to Decide Whether You Want to Escrow Insurance Payments

You don’t want to let your homeowners insurance lapse. To keep that from happening, a lot of people choose to escrow their payments—essentially, to tack them onto their monthly mortgage bill along with their estimated property taxes. Doing so makes it more likely that your loan will get approved, since lenders feel their investment is more secure if they know you’ll pay insurance on it throughout the year. And it means you only have one payment to make instead of three, which is great, especially since you probably have enough bills to take care of as it is. When it comes to buying a home, anything that makes life simpler is a definite win!

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