In 2021, nearly two-thirds of Americans owned their own homes. Homeownership brings many comforts and complications: it lets you build equity while making you responsible for every faulty wire or loose screw instead of relying on a landlord to fix those issues. Nevertheless, any time you purchase a home and sign a mortgage, you have to sign a nearly infinite pile of documents. Before your eyes glaze over and you lose sensation in your hand, one of the documents you have to sign relates to homeowners insurance, an understated but important insurance product.
The Basics of Homeowners Insurance
Generally speaking, homeowners insurance is not required by law. You can take the liability of homeownership without additional coverage, but this flexibility usually requires that you own the home outright. While more than a third of homeowners have paid off their mortgage, most people in your position are either starting a new mortgage or are in the middle of one, with years or decades left to pay. Given that mortgage companies want to ensure that they are protected in the event of an accident, they will often make homeowners insurance a mandatory condition for home financing.
This insurance product is based on the home in question and will generally cover, at a minimum, the total face value of the mortgage. You may also want to consider additional coverage to account for personal property and the various expenses associated with moving or taking time off from work in the case of a disaster or severe home damage. Such events are inherently stressful, so removing monetary concerns from the problem can be an incredible benefit from a quality-of-life perspective.
Homeowners insurance policies are generally annual policies whose premiums are escrowed into your monthly mortgage payment. The actual policy is purchased annually, but you will typically accrue a balance in escrow over the year so that you are never hit with a large individual payment after signing the mortgage and paying for the first year in advance.
Levels of Coverage
As with most insurance products, you can purchase additional coverage according to your needs. While your mortgage company may mandate a minimum coverage level, you have the option of obtaining more. Bear in mind the following considerations when choosing your coverage amount:
- Mortgage Value — This amount is often what the mortgage provider will mandate and corresponds to the face value of the mortgage. This protects both you and them in the event of a catastrophe that destroys the home.
- Home and Land Value — Depending on your down payment and credit score, there may be a substantial difference between the value of the mortgage and the property you’re purchasing. You may want to consider increasing the insurance benefit to cover the full value of the home so that you recoup your initial investment.
- Personal Possessions — Most situations that destroy a home also destroy what’s inside. If you’ve ever purchased renter’s insurance, this portion of the homeowners insurance policy will function the same way that policy does.
- Expanded Coverage — Some homeowners policies do not cover unique situations. For example, your policy may cover water damage if it comes from an acute situation, such as a burst pipe leading to a temporary flood. But it would not cover water damage related to a slow leak that ruins your ceiling and support beams over the course of six months. You can often purchase riders, or add-ons, that expand coverage to include these situations.
- Convenience Coverage — Most situations that involve using your policy will take a lot of time and make it harder for you to focus on work. Consider building in some extra value to account for potential lost income, letting you focus on your home when it’s most important.
Selecting the Right Agency for You
Due to the fact that so many Americans are looking for just the minimum coverage when it comes to homeowners insurance, some companies and agents have settled down to the level of least resistance. To put it bluntly, they know that many people don’t care about the specific coverage, so they will help people just fill out the forms rather than form a genuine connection and create the ideal policy for their clients. To get the best value from your coverage, however, you should seek experienced agents who genuinely care about providing the best coverage to each client.
Generally, the best agents will give their clients peace of mind and clear explanations, so it’s easy for them to generate positive reviews and recommendations. These agents often work with companies recognized as the best providers, but each agency is unique. You can find valuable reviews online, but the most meaningful recommendations often come via word of mouth. If you know friends or family who lost a home and needed to cash in on their policy, ask them about their experiences. Was their insurance agent there for them, and was the policy fulfilled as promised, or was it a struggle every step of the way? Schedule a meeting with that agent to discuss your needs. If their experience was lackluster, then you may not want to consider working with that agent.
Ultimately, homeowners insurance is a personal decision. Rely on your ability to connect with the agent on a personal level to see if they understand your needs and can explain how your policy will protect you. Make sure to determine your exact needs and select the appropriate coverage. With a bit of diligence now, you can protect yourself and make a potentially high-stress disaster situation into one that’s significantly easier to manage.
By Christopher Gallagher
Christopher is a homeowner who has years of experience working with companies in the insurance industry to make their products understandable and simplify the process of securing insurance.