Most of us take homeowner insurance for granted. When we finance a house, the mortgage holder requires insurance. We often assume any national insurance company is trustworthy, without realizing their coverage can be quite different. Have you read your policy? Do you really know what your homeowner insurance policy covers?
Sadly most of us don't know what's not covered until we have to submit a claim … and then it's too late.
Probably a lot of you can relate to that statement. In fact I don't remember more than one claim we've made in 30+ years … and it was denied! I was furious but didn't have the time or energy to research or fight the decision. And I'm guessing that's part of the insurance company process. Deny a claim and wait for the policy holder to fight back, because 20 or 30 percent of the time, we just disappear into the woodwork.
So here's why I didn't fight back then, and why I want to encourage everyone to fight back now:
- While I was quite a bit younger, I was also seven months pregnant.
- My au pair called to say the basement toilet was overflowing. Our three year old was sitting on the washing machine and the water was coming out faster than she could mop it up.
- My husband and I rushed home. We carried more than 100 packing boxes upstairs because we were living in our rental house, while building a new home. With lots of room, we decided to store everything in an unused bedroom … in the basement, duh!
- Next we unpacked all the boxes with books. We had hundreds of books drying out all over the house. After a week, we threw them all out because they smelled terrible. That's because the water was backing up from the septic tank, OMG.
We submitted a claim against our homeowner insurance policy. It was denied because it was due to local flooding which raised the water table, which is why our septic tank overflowed into our house. Now that I think about it, maybe flood insurance would have covered this?
How Many Types of Homeowner Insurance Are There?
We'll start with buying a house, when you're overwhelmed with paperwork and rarely have enough time to read the hundreds of pages placed in front of you. My advice is to let the person handling your closing know you'd like a short explanation of every form you'll be asked to sign. If they balk at this explain that without a reasonable overview, you'll need to sit there and read the documents … which would take hours.
- Private mortgage insurance (PMI) – is required by lenders when your down payment is less than 20 percent. It's part of your monthly mortgage payment. Once you pay down your mortgage (typically 22%), you no longer have to pay for PMI.
- Mortgage protection insurance (MPI) – protects a homeowner who becomes disabled or dies. The policy is similar to life insurance. It might make sense for those working in high-risk jobs like roofing, who can't buy life insurance.
- Title insurance is required by your lender. It's sold by title companies that research property records and resolve problems before closing. You buy this insurance when you buy a house, and again when your refinance the house.
- Homeowner insurance is required by your lender. It's primary benefit is to repair damage to your home or even rebuild it, after a covered event like fire, theft, vandalism, wind storms, frozen pipes or accidental damage. Most policies also cover outbuildings but it's important to verify rather than assume this coverage.
- Special riders to homeowner insurance policies cover events or property not included in your policy. For example, a windstorm insurance rider may be necessary in states like Florida, due to the frequency of hurricanes. They're also used for things like jewelry, fine art and antiques.
- Flood insurance – backed by the US government, is the only insurance you can buy for flooding events. Flood maps are being redrawn and many more homeowners will soon be required to buy flood insurance.
- Umbrella insurance – allows homeowners to get more coverage than the limits of standard homeowner policies. Do your homework as some policies will only increase dollar limits while others will expand coverage to more losses.
Home Insurance: Private Mortgage Insurance
It's getting more difficult for home buyers to save enough money to put down 20% when buying a home. Lenders are willing to finance these purchases but require you to pay what's known as PMI or private mortgage insurance. It typically adds a quarter to a half percent on top of your mortgage rate. Here's an example of the costs from the FreddieMac.com website.
Mortgage Protection Insurance that's Not Well Known
While I've read Bankrate's article, Mortgage protection insurance: Should you buy it?, I never heard of this insurance until writing this article. If relatively inexpensive it might make sense for homeowners with young children. However, you should compare this option with life insurance that leaves the surviving spouse with choices on how the insurance money can be used.
Home Insurance: Title Insurance
You get lots of good information here on Home Tips for Women, along with some of my personal opinions. Title insurance is one of those things that to this day, infuriates me. You pay the title company to research and make sure title to your new home is clear at closing. This used to be rather tedious work and you received pages of hand written notes. There used to charge you for going to the recording office but today most records are online.
What makes me mad is that title insurance covers problems missed by the title company when doing their research. Just in case they (title company) missed something like a lien on the property. This type of insurance is used primarily in the US because our system of land recording assigns risk to the buyer. The land registration system used in other countries, places the burden on the government. You can learn more on Wikipedia …
What's important for homeowners to understand about title insurance:
- Lenders require title insurance but only enough to cover the mortgage. If you want to cover your equity (downpayment and future principal paid monthly), you need to buy an owner policy.
- When refinancing your home, you have to buy a new title insurance policy. If you do this within four years, some companies like First American Title, will give you a discount (if they sold you the original title insurance).
Homeowner Insurance: Homeowner Insurance
Homeowner insurance policies are important, and you should never assume they're all the same. They also change frequently so keep an eye on letters from your insurance company as they often list new restrictions or “we no longer cover …”. One thing my insurance agent told me that I like is that Allstate policies are now written to cover everything except those items specifically excluded. This feels like a big improvement to me, so you don't have to keep track of all those letters.
Homeowner insurance is one of your most important insurance policies, along with health and automobile. It's really hard to understand all the options without sitting down and talking to your current insurance agent. Here's a framework for understanding this insurance (hint: use to organize questions for meeting with your agent). Focus on the concepts as different websites I reviewed when writing this article used different terminology. And never be shy about asking for clarification when you don't understand something.
- Residential structure coverage – pays for repairing or rebuilding your home when it's damaged by a covered loss. Here are the important things to pay attention to when comparing policies:
- What is the estimated cost to rebuild your home (worst case scenario). Take photos periodically to document what needs to be replaced like a new deck or backyard fence.
- Many policies cover outbuildings. Get confirmation in writing that your additional structures like a garage, are covered. When adding outbuildings, call your agent to add them to the policy. You'll also want to confirm coverage because some policies limit outbuildings to 0% of the coverage you have for your home.
- Review the list of covered (or excluded) losses documented in your homeowner insurance policy. Coverage typically includes fire, windstorms, hail, lightning and vandalism. Damage caused by floods (see flood insurance below), earthquakes, termites and pets is often not covered. Mold and wood rot gets very tricky – it's only covered when the damage causing it, like a burst frozen pipe, is covered.
- Personal property – otherwise known as “your stuff” is covered, including when it's stored elsewhere like a storage unit (there might be a 10% limit to this coverage). Coverage will compensate you for personal items like furniture, clothing and electronics if damaged by a covered loss, and riders can be purchased to increase the amount of coverage. Here are things to pay attention to:
- Review allowances for personal property which maybe limited to a percentage of your dwelling coverage.
- Consider your options for coverage – full replacement cost or cost less deductions for depreciation.
- Review coverage limits for certain items like jewelry, silverware, boats and collections like coins or precious metals. You typically can purchase extra coverage which may require supporting documentation.
- A home office may require extra coverage for electronics which exceed normal family use. For example, I have multiple computers, camera and video equipment.
- Landscaping – may be covered by your policy with some limits, like 5% of total coverage and/or up to $500 per items.
- Additional living expenses – covers reasonable housing and living expenses if a covered loss makes your home uninhabitable. There may be limits to this coverage so you want to understand how many days (or a dollar amount) which probably covers repairs but less than the time it takes for cleanup and rebuilding.
- Liability coverage – covers bodily injury and/or property damage done by you or covered residents of your household. Here are the basics about what is/isn't covered. Examples are someone falling down your stairs or a child accidentally throwing a ball through a neighbor's window. Make sure to read your policy to understand the details of your coverage.
- Coverage for legal defense if you're sued, and damages to the injured person up to your policy limit.
- Medical payments for guests who are accidentally injured on your property, per limits in your policy.
- Not covered are situations where you or a family member are legally responsible for causing bodily harm or property damage.
- Identify coverage – is provided with some higher-end, homeowner insurance policies. You should compare coverage and annual costs to other options for this growing problem.
Riders for Homeowner Insurance
Insurance companies know a lot more about potential problems where you live. That's why they require extra coverage, call riders, for problems that occur frequently where you live.
- Windstorm insurance riders – are needed in states where wind damage is common. It shouldn't be hard to realize states with frequent hurricanes and/or tornadoes are the ones where a windstorm rider is needed. Learn more about windstorm insurance and be sure to file your claims quickly to avoid concerns about the true cause of the damage.
- Mold insurance riders – could double the cost of your homeowner insurance, with prices higher in humid southern states. Texas and California have also had high profile mold cases, driving costs higher. You're better off getting a mold inspection before you buy a house. Then you can monitor your home for problems which should be manageable when found and repaired quickly. Learn more about insurance coverage for mold in this HouseLogic article.
- Most common homeowner riders – are for high value items. These include things like jewelry, fine art and antiques. You should discuss your concerns with your insurance agent to determine if you really need a rider and if yes, get help determining the value of what you're insuring.
Homeowner Insurance: Flood Insurance
Depending on where you live, the need for flood insurance might be obvious. It makes sense when you live along the shore or near a river that overflows it's shores regularly. And the US government is redrawing their flood maps which means flood insurance will be required for more homeowners. My husband knew our New Hampshire condo would have flooded if Hurricane Sandy didn't turn and clobber New Jersey. So we proactively bought flood insurance, although it became a requirement with the new flood maps.
You might think you know what's happening where you live. And you might be surprised to learn you're not …
FEMA's flood visualization tool told me there have been 21 flooding events in Rockingham county over the last 15 years. I moved to New Hampshire in 1999, so I should have been more aware of these events. You can find for more details online to jog your memory. I only remembered two events – one when I donated furniture to families who got flooded out in Newmarket, NH. The other occurred where we live in Hampton Beach.
So what are the benefits of flood insurance? The same FEMA website with the visualization tool, can tell you by county what it's worth. For Rockingham County, the average flood policy claim paid $17,100. If you didn't have flood insurance AND and a federal emergency was approved, you would have gotten on average, $3,100. If your flood insurance policy was $500/yr over 20 years, you'd have paid $10,000.
The benefit of peace of mind and reimbursement for your out of pocket costs for a single flood event, might make sense to you now.
Umbrella Insurance Might Also Be Important
Some people don't feel that the liability coverage of their homeowner insurance is adequate. They have the option of purchasing an umbrella policy that not raises the coverage limits in their homeowner and automobile policies. Some (but not all) umbrella policies will also expand the list of covered losses, to things like slander or accidental damage to school property caused by your child (see a more complete list here)
Home Warranties Aren't Really Insurance
It's common practice in many areas, for sellers to pay for a one year home warranty. Realtors like this because they avoid problems between sellers and buyers after the closing. With the warranty, buyers have more confidence they can handle unexpected repairs without breaking the bank. If they have 1 or more problems during the year, homeowners follow the same process to report problems (phone or online) regardless of the contractor needed to make the repairs.
The home warranty company matches the problem to a contractor from their network and sends the work order to them. The contractor handles scheduling and sends a technician to diagnose and fix the problem, charging a fixed service fee (roughly $50) for each repair. This process works in theory until the cost of the repair exceeds the $60 charge. The repair technicians are motivated to get in and out quickly, so it's not unusual for them to return every few months to fix the same symptom versus the underlying problem.
There are major flaws in the home warranty model. It's really a service contract that's priced to sell as a real estate marketing tool. They don't ask how old a house is, so the cost for 5 and 20 year old houses is the same in a given city. But the 20 year old house is much more likely to have an HVAC system fail and need replacing. So the home warranty company will substitute lower cost replacement parts and/or take weeks to get multiple estimates. Trust me, it wasn't fun living with my Arizona house at 95º F for more than a month. Learn about the games First American Home Buyer's Protection played to save money. We lived without heat 3 months (December to March) and 15 months later, without A/C (June and July temperatures above 110º F). The problem was never fixed by my home warranty company. I got my own estimates and hired my own HVAC company to replace a 20 year old Trane heat pump.[table “” not found /]
How Much Does Homeowners Insurance Cost?
What you pay for homeowner insurance might seem mysterious and it is. The insurance companies have their business models to minimize their risk so we can get a glimpse into the factors affecting our costs but we're not really sure.
- Location of your home – appears to be a major factor when you look at this table with average costs by state (check your state's average homeowner insurance cost). How close you are to a fire station and any bodies of water are also important.
- Your home's replacement cost – and risk factors like age and construction quality, roof condition, a wood-burning stove and a pool or hot tub.
- Your personal profile – as indicated by marital status, credit history, claims history and if you own a dog, the dog breed.
- Homeowner insurance limits – with respect to liability limits and deductibles.
Note: If you work at home, you want to buy an endorsement to your existing policy or buy a specific in-home business policy.
How to Compare Homeowner Insurance Policies (Hint: Not Just Cost)
You don't necessarily want the cheapest homeowners insurance because the coverage won't be as good. But you don't want to buy insurance from one company without comparing their coverage and cost. Homeowner insurance policies are typically one year and ideally you want to shop your business around every year. The time you spend talking to various insurance agents offers a great opportunity to learn a little more about changes in the industry, especially how it's adjusting to climate change.
If you don't have enough time, do it every other year (my approach).
Here's a table you can use for to compare homeowners insurance companies. My tendency is to stick with those ranked in the top 10, although I don't always trust review websites because they make their money by selling leads to these companies.
|Current Policy||Company A||Company B|
|Structure replacement cost|
|Structure rented to others|
|Structure used for business|
|Food spoilage/power outage|
|Standard personal property|
|Replacement personal property|
|Personal property riders|
|Flood policy coverage|
|Expanded liability (umbrella)|