What is the Guide for Purchasing a Home Insurance Policy?

Buying your first home is exciting. You’re thinking about location, size, school districts, and mortgage options. But there’s a crucial step that many first-time buyers overlook until the last minute: homeowners insurance.

This isn’t paperwork to satisfy your lender. It’s protection for your property, possessions, and finances. This guide walks you through everything you need to know to choose the right policy.

Homeowners insurance is essential for two main reasons:

• Lender requirement: If you’re financing the home, your lender will require coverage. They want to protect their investment. Without proof of insurance, your mortgage will not close.

• Your protection: Insurance covers your home, your belongings, and liability if someone gets injured on your property. Without coverage, one fire, storm, or theft could cost you tens of thousands of dollars or more.

If your policy lapses, lenders may purchase lender-placed insurance. This coverage is typically expensive, protects only the lender, and may not cover your belongings or liability.

The key to effective insurance is insuring your home for replacement cost, not market value.

• Market value reflects the price of the home, including land, location, and demand.

• Replacement cost covers rebuilding your home today, using current labor and material costs, with the same size and features.

For example, a $350,000 house may have a replacement cost of $250,000. If you insure only for market value and a disaster strikes, you could be underinsured by $100,000.

Most homeowners insurance policies include six main parts. Knowing what each covers ensures your protection is complete:

• Dwelling (Coverage A): Protects the physical structure of your home and attached structures like plumbing and wiring.

• Other Structures (Coverage B): Covers detached buildings such as sheds, garages, and fences. Typically 10% of dwelling coverage.

• Personal Property (Coverage C): Protects belongings like furniture, electronics, and clothing. Usually 50% of dwelling coverage.

• Loss of Use (Coverage D): Pays additional living expenses if your home is uninhabitable. This can include temporary rentals or hotel stays.

• Personal Liability (Coverage E): Covers legal expenses if you are held responsible for injury or property damage. Most experts recommend at least $300,000.

• Medical Payments (Coverage F): Pays for minor medical bills if someone is injured on your property, even if you aren’t legally liable.

Homeowners policies may use one of two methods to value personal property:

• Actual Cash Value (ACV): Pays for the replacement cost minus depreciation. A 5-year-old laptop would not be replaced with a brand-new one.

• Replacement Cost Value (RCV): Pays the cost to replace items with new ones of similar quality. This ensures you receive sufficient funds to replace belongings but usually comes with a higher premium.

Choosing RCV is safer, especially for high-value items like electronics, jewelry, or furniture.

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Two common homeowners policies are:

• HO-3 (Special Form): Covers your dwelling on an open-perils basis (all risks except those excluded). Personal property is covered only for listed perils. Most policies in the U.S. are HO-3.

• HO-5 (Comprehensive Form): Covers both dwelling and personal property on an open-perils basis. Usually pays replacement cost for belongings. HO-5 is often used for high-value homes or those with expensive contents.

Standard policies do not cover everything. You may need endorsements or separate policies for:

• Flood damage: Available through the National Flood Insurance Program or private insurers. Lenders usually require it for homes in flood zones.

• Earthquakes or earth movement: Must be purchased separately.

• Sewer or sump pump backups: Limited coverage unless added as an endorsement.

• Maintenance issues, wear and tear, neglect, or pests. These are excluded.

Understanding exclusions prevents surprises when filing a claim.

Insurance costs vary based on your home and choices:

• Deductibles: Higher deductibles lower your premium but increase out-of-pocket costs. In high-risk areas, perils like hurricanes may have percentage-based deductibles (1–10% of dwelling coverage).

• Home characteristics: Age, size, building materials, roof condition, and proximity to fire services affect your rate. Masonry homes often cost less to insure than wood-frame homes.

• Discounts: Bundling home and auto insurance, installing alarms or sprinklers, or maintaining good credit can lower premiums.

Always make sure the deductible is affordable. Paying $5,000 for a claim with a $1,000 deductible might be manageable, but $5,000 could strain your finances.

Buying a home is the right time to shop for insurance. Here’s how to approach it:

• Compare quotes: Get at least three to five quotes with the same coverage limits and deductibles.

• Check property history: Request a loss history report (C.L.U.E. or A-PLUS). Previous claims may affect rates.

• Vet insurers: Look at financial stability (AM Best, Moody’s) and customer service (J.D. Power, NAIC Complaint Index).

• Home inspection: Issues such as water damage, old wiring, or roof problems may affect coverage or cost.

• Read your policy: Review terms, exclusions, and endorsements carefully. Ask questions if something is unclear.

• Update annually: Home renovations or new high-value items require adjusting your coverage.

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