Homeowners insurance is one of the first financial matters to take care of once you have put an offer down on a house. You are investing in what is probably the most expensive asset you will ever own. It is an asset that could be destroyed in an unforeseen event, leaving you in hundreds of thousands of dollars in debt without a place to live. You need to have insurance right from the start.
However, most new homeowners are not prepared for the process of getting insurance. There are a lot of complicated terms and you need to know what to expect from your insurance provider.
You may know that homeowners insurance covers you in case of named perils. But what are named perils and what is excluded? Do you need extra coverage?
Here are 5 things to keep in mind before buying homeowners insurance.
1. The 16 Named Perils
Homeowners insurance covers your home itself and the contents in the face of sudden, unexpected events. The events included are called ‘named perils.’ In other words, they are specified by insurance providers as being included in your policy.
There are 16 named perils in most states. These are losses caused by:
- Fire or lightning
- Windstorm or hail
- Falling objects
- Weight of ice, snow, or sleet
- Accidental discharge or overflow of water or steam
- Sudden and accidental tearing, cracking, burning, or bulging
- Sudden and accidental damage due to short-circuiting
- Volcanic Eruption
If any of these things happen to your home or possessions – whether or not they are in your home at the time – you can claim from insurance. There are exceptions, as in some states not all of these named perils are covered.
2. Common Exclusions
In addition to knowing what your homeowners insurance will cover, you also need to know what won’t be covered. You don’t need to revise what you know about the named perils every time you consider what is excluded. Rather, simply ask whether the losses were caused by an event that was sudden and unexpected. If not, you won’t be covered.
For example, damages caused by a leaking roof are often not covered because the leak has come about due to lack of maintenance. In this case, the loss was not sudden and could have been prevented.
3. The Value of Contents Insurance
Homeowners insurance covers the contents of your home, but you need to specify an estimated value of the contents. This will require you to go through your home and take note of everything you own. You will have to estimate a value for everything and get a policy that covers that value.
Keep in mind that some things have limits or need to be added as extras. For example, most insurers will limit the amount you can claim for electronics without specifying add-ons. Jewelry may also need to be added on, especially if you own items worth thousands or tens of thousands (or more) each.
4. Federal Insurance Provision
Many people are unaware that certain perils are not included by private insurers because of the high risk they present. The most common example of this is flooding insurance, which in most states is administered by the Federal Emergency Management Agency (FEMA). They now price flooding insurance according to the level of risk, and you will need to pay this in addition to your regular homeowners insurance.
Similar provisions apply to wildfires in high-risk parts of California.
Finally, it is important to keep in mind that insurance will not cover maintenance and repairs. These are left to you to cover, and they will cost you a significant amount each year. The rule of thumb is that you should expect to spend 1% of the value of the home on maintenance every year.
If you neglect your home, insurance may not agree to pay when disasters strike. This may even be the case if they can prove that a named peril would not have caused damage if your home had been better maintained.
Homeowners insurance needs to be arranged immediately. Without it, you are putting way too much at risk. However, it is important that you know what to expect when looking for homeowners insurance.