For most Americans, buying a home is by far the largest investment they will ever make. Whether the home is fully paid or is owned with payments to a mortgage company, homeowners’ insurance coverage is essential to protect the value of the property and the financial security of the owner.
Two Out of Three Homes are Under-Insured
After years of rising home values, and with the costs of repairing or replacing a home rising just as rapidly, two out of three homes in the U.S. are now seriously under-insured.
According to insurance industry estimates, the level of shortfall in coverage averages 22 percent below replacement value, leaving millions of homeowners at risk of financial disaster. To manage that risk, homeowners need to be certain that they are purchasing the right amount and the right type of homeowners’ insurance coverage.
The Right Choice is Not Easy…and Mistakes Can Be Costly
Choosing the right homeowners’ insurance policy for a specific property can be a daunting task, and mistakes in choosing the right insurance company or coverage can be costly. In this article, we will discuss the top five mistakes to avoid when purchasing homeowners’ insurance.
Mistake #1: Not Buying Enough (or the Right) Coverage
One of the most common mistakes homeowners make when purchasing property insurance is not buying enough coverage, or not buying the right insurance coverage for their true needs.
- Without proper coverage, your mortgage company could obtain forced hazard insurance at your expense.
- If someone is injured on your property, you could be sued without liability protection.
- If there is a burglary, you could lose valuable property with no way to replace it.
- After a storm, you could be faced with flood damage, without enough money to repair it.
- If you operate a business at home, you could have an uninsured loss or liability.
How to Avoid Mistake #1
To avoid Mistake #1, don’t buy based only on the lowest price, don’t underestimate the replacement cost to rebuild the property, don’t buy homeowners’ insurance for the wrong type of use or occupancy, and don’t fail to understand the true risks that may threaten the property.
Don’t Buy Based Only on the Lowest Price: The goal is to buy a homeowners’ insurance policy with the most value, not to save money with the cheapest price. A policy with premium payments that are substantially lower than others may be missing important coverages or may be offered by a less than reputable source. Determine the coverage you need first, then compare price offers for that amount of insurance.
Don’t Underestimate Replacement Value: A property should not be insured for the amount of the mortgage, or for the original purchase value. Rather, the coverage should be based on what it would cost to rebuild the dwelling in the current market at current prices for building materials and construction labor.
Don’t Buy for the Wrong Type of Occupancy: Standard homeowners’ insurance is for a dwelling that is owner occupied and used as a residence. Damage from a hazard or liability arising from an injury may not be covered if the property is a rental occupied by tenants, or if the home is used as a workshop, warehouse or for some other business purpose.
Don’t Fail to Understand the True Risks: Earthquake insurance is not just for California. Seismic activity occurs throughout the west, below the Great Lakes, and in the mid-Atlantic states. A hurricane can strike anywhere on the Gulf or east coast. Some hazards, such as tornado, flooding or wildfire, can occur in any part of the United States. Bear in mind also that buying homeowners’ insurance is for protection against liability, because literally anyone can be sued for injury or negligence.
Mistake #2: Not Understanding What is (or is Not) Covered
One of the biggest mistakes when purchasing homeowners’ insurance is failing to understand what is (or is not) covered by the home insurance policy.
- Homeowners’ insurance in Florida might not include hurricane or flood insurance.
- Homeowners’ insurance in California does not cover earthquake or flood insurance.
- Standard homeowners’ insurance does not cover damage from sewer backups or mold growth.
- Most insurance policies contain specified risks that are not covered, known as exclusions.
- Some personal property is not covered unless provided for in a policy endorsement.
How to Avoid Mistake #2
To avoid Mistake #2, don’t assume all risks are covered, don’t fail to understand policy exclusions, don’t assume all personal property is included, and don’t assume that all insurance policies have a single flat deductible.
Don’t Assume All Risks are Covered: Standard homeowners’ insurance policies cover fire, theft, lightning and storm damage, but does not include hurricane, earthquake or flood insurance. In most cases, each of the latter hazards requires a specific type of coverage. Some policies cover foundation issues, roof leaks, plumbing failures and damage to fences, while others do not. Termite damage is never covered.
Don’t Fail to Understand Exclusions: In addition to windstorm, flood and seismic hazards, the exclusions section of a homeowners’ insurance policy may also exclude risks like damage from the backup of a sewer line or damage from mold that causes damage over time. Some common exclusions are earth movement, pest infestation, mold, wear and tear or neglect, power surge caused by the utility, business liability, intentional damage and war or other government actions.
Don’t Assume All Personal Property is Included: Personal property is usually covered by a homeowners’ insurance policy as a percentage of the overall limits for the dwelling. If a homeowner needs to insure high value items, such as jewelry, artwork and collectibles, this may require an endorsement to specify covered items and risks.
Don’t Assume a Single Flat Deductible: With a flat deductible, the homeowner might pay the first $1,000 of a loss. However, a percentage deductible requires the homeowner to pay (for example) the first four percent of a loss. A split deductible uses both a flat deductible and a percentage for specified hazards.
Mistake #3: Not Shopping for the Best Policy and Insurance Company
The third common mistake when purchasing homeowners’ insurance is buying the cheapest option, rather than taking the time to shop for the best policy.
- Generic homeowners’ insurance may not adequately cover your unique property, occupancy and assets.
- By accepting a first offer, you may miss out on important coverage, discounts or options.
- Make sure offers are based on the true value, location and risks of the subject property.
- Shopping for price without comparing coverage is a good way to purchase a bad policy.
- Even a great policy will fail to protect the homeowner if the company is not reputable.
How to Avoid Mistake #3
To avoid Mistake #3, don’t skip comparison shopping, don’t choose based on short term savings, don’t overlook the reputation of the insurance company, and don’t fail to compare rates and options.
Don’t Skip Comparison Shopping: Don’t automatically buy from the carrier that provided your renters’ insurance or auto insurance. Get offers from at least three potential homeowners’ insurance companies. Before you shop, get a copy of your property description, flood zone and other details. Estimate the value of your personal property, such as furniture, appliance and electronics, and the total value of your assets for liability protection.
Don’t Choose Based on Short Term Savings: The concept of bundling, or purchasing homeowners’ and vehicle insurance from the same company, is convenient and can capture some savings. However, some savings may come with coverage restrictions. Weigh long-term value against short-term savings.
Don’t Overlook the Insurance Company Reputation: When you find several offers that look good, shift your evaluation from the coverage to whether the companies provide good service and are financially sound. Rating agencies, such as J.D. Power, publish annual rankings of the best and worst performing insurance companies based on customer surveys. Local agent recommendations from colleagues are also worth considering.
Don’t Fail to Compare Rates and Options: If you’re overwhelmed by the many options for insurance coverage, consider using an independent insurance broker. A broker will represent multiple insurers and can provide objective advice on policies that suit your needs, compare coverage and rates, and answer any questions you may have.
Mistake #4: Not Reviewing and Updating the Policy
The fourth common mistake when purchasing homeowners’ insurance is not reviewing and updating the policy to account for financial or life changes.
- Some homeowners are shocked when damage to their new addition is not covered.
- If you add a swimming pool, a trampoline or a new dog, your liability risk is now higher.
- Before you adopt, know that some insurance companies will not cover certain dog breeds.
- Real estate values are soaring, but coverage does not rise along with replacement costs.
- If a fire destroys your personal property, don’t be left with no way to prove what you had.
How to Avoid Mistake #4
To avoid Mistake #4, don’t keep the insurance advisor in the dark, don’t overlook an inventory of personal property, don’t insure for an out-of-date market value, and don’t procrastinate when a risk or damage issue is found somewhere in the house.
Don’t Keep Your Insurance Advisor in the Dark: Everyday life changes can change the coverage you need. Insurance agents need to know when you get married or separated. If you build an addition, they need the value. Even adopting a dog, depending on the breed, can change your liability risk and require you to adjust your insurance policy.
Don’t Overlook Personal Property: Most homeowners’ insurance companies will want a record of lost or damaged property before they will pay a claim. Your insurance company may have an app or online form for preparing a home inventory. If not, the National Association of Insurance Commissioners offers a free app at this link.
Don’t Insure for an Out-of-Date Market Value: Real estate values have gone up rapidly over the past several years, so any homeowner who has not adjusted coverage is probably under-insured. It is important to remember that insurance must cover the replacement value, not the mortgage balance.
Don’t Procrastinate When an Issue is Identified: Homeowners’ coverage is provided with the understanding that the property will be maintained and kept in good repair. If an insurance company believes that damage from a covered hazard was caused or exacerbated by negligence on the part of the owner, coverage may be denied, or the amount paid for a claim may be reduced.
Mistake #5: Not Taking Advantage of Professional Guidance
Number five among our common mistakes when purchasing homeowners’ insurance is failing to take advantage of professional guidance from a knowledgeable insurance agent.
- Without clarification by an insurance agent, it’s easy to misinterpret policy terms and options.
- Without an ongoing relationship, it can be harder to update or modify your coverage.
- Without information on bundling options and discounts, you will miss out on savings.
- Without help from an agent, you may miss immediate and future discount opportunities.
- Without guidance, you could overlook supplemental windstorm or flood insurance.
How to Avoid Mistake #5
To avoid Mistake #5, don’t buy without seeking advice, don’t skip over unfamiliar terms, don’t overlook discounting opportunities, and don’t walk away with doubts or unanswered questions.
Don’t Buy Without Seeking Advice: If you have a trusted insurance agent, meet with that professional to discuss your needs in detail. If you don’t have an agent relationship, shop for the carrier first and then choose one of their agents based on local reviews and personal recommendations.
Don’t Skip Over Unfamiliar Terms: Actual cash value (ACV). Replacement cost value (RCV). Endorsement. Exclusion. Umbrella policy. These terms refer to specific types of protection or limits in insurance policies. Read the policy carefully, mark any unfamiliar terms, and ask your insurance agent for clarification.
Don’t Overlook Discounting Opportunities: There are many ways to get discounts from home insurers, including bundling auto and home coverage, accepting a high deductible, adding a security system, storm windows, or other safety features like carbon monoxide detectors. There are discounts for getting a new roof or living near a fire station. You can also earn discounts through loyalty, on-time payment and no claims. Your insurance advisor can show you which discounts are available today or can be earned over time.
Don’t Walk Away with Remaining Doubts or Questions: Because every homeowner has a unique property and life situation, the options presented when purchasing homeowners’ insurance can be confusing and contradictory. Take the time to read the policy. Develop a list of questions for the agent. And don’t walk away with any remaining doubts or questions about your insurance coverage.
Here is a summary of our recommended steps for avoiding the top five mistakes when purchasing homeowners’ insurance:
- Buy enough (and the right kind of) homeowners’ insurance.
- Understand what is (and is not) covered in homeowners’ insurance policies.
- Shop for the best value when choosing the coverage and insurance company.
- Update homeowners’ insurance coverage when circumstances change.
- Seek the professional advice of an experienced insurance advisor.
The Bottom Line
Homeowners’ insurance policies provide essential protection for the structure and contents of your home. The consequences of a loss without that coverage would be catastrophic – and making one or more of these five common mistakes when you purchase home insurance could cost almost as much.
To avoid these insurance mistakes, review this article, gather the information you need about your home and personal property, and before purchasing insurance, sit down to discuss your unique coverage needs with an experienced insurance professional.
By following these simple steps, you will have the security of knowing you have done all you can to purchase the right type and amount of home insurance coverage to protect your home and the things you cherish.