Homeowners Insurance 101: What You Need to Know
Q: We are about to settle on our first home, and we don't know the first thing about buying homeowners insurance. How do we get started, and what do we need to know?
Congratulations on buying your first home! Start by getting a price quote from the company that handles your auto insurance -- you generally get a discount on your auto and home insurance if you have both policies with the same company. If you have an auto insurance agent, find out whether he or she works for one company or is an independent agent who works with several companies. An independent agent can give you price quotes from several insurers. You may also want to contact a few big insurers separately, such as State Farm, which doesn't sell through independent agents. And if you have any military connection in your family, it's worthwhile to contact USAA, too (see USAA's page for a list of who is eligible). If you don't have an independent agent, you can find one in your area through the Independent Agents and Brokers of America agent search.
But before you start comparing quotes, you'll need to decide how much coverage to get. A home's insurance value is based on the cost to rebuild the house, not the market value. And even though market values are still down in many areas, rebuilding costs are on the rise. You can get an estimate of the home's rebuilding cost at AccuCoverage.com, which asks a lot of questions about the size of the house and the building materials and details, then uses the same building-cost database that insurers use. Or you can work with the agent or the insurer to come up with an estimate.
Homeowners insurance automatically provides coverage for your possessions based on a certain percentage of your home's insurance value -- 75% is typical. So if your home is insured for $200,000, you'll also have up to $150,000 of coverage for your possessions. But homeowners insurance policies usually have lower limits for certain kinds of items -- such as $2,000 or $3,000 for all of your jewelry, for example. If you have any particularly valuable possessions -- such as jewelry, artwork or special collections -- you may want to get extra coverage for those items. See What Does Homeowners Insurance Really Cover? for more information about special coverage for valuables.
You'll also need to choose the deductible amount. One good way to lower premium costs is to choose a deductible of at least $1,000. That will reduce your premium and discourage you from filing small claims that could get you dropped by the insurer or cost you a claims-free discount. Then be sure to keep enough money in your emergency fund to cover the deductible, in case you need to file a claim.
Before you settle on an insurance company, check out the insurer's complaint record through the National Association of Insurance Commissioners Consumer Information Source. Saving a few dollars in premiums can backfire if your insurer ends up hassling you about claims.
If you're concerned about flooding, which isn't covered by homeowners insurance, go to www.floodsmart.gov to see the home's risk of flooding and get prices for flood coverage through the National Flood Insurance Program. You can buy flood insurance through most homeowners insurance agents. Your mortgage company may require flood coverage if you live in a high-risk area, but it can be worthwhile to get the coverage even if it's not required. See Protect Your Home and Finances Against Floods for more information.
When you move into your new home, it's the perfect time to conduct an inventory, which will streamline the claims process if you have to file a claim in the future. Take photos or a video of every room, keep receipts for valuable items, and keep a copy of the file somewhere away from home so it's easy to access if needed. See How to Prepare for an Emergency for details.
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