Anuj Kasera
By Anuj Kasera
One of your most important assets is your home. Having adequate insurance to protect the property in case of unforeseen circumstances is not only recommended but also mandatory if you have a mortgage. In this article we will talk about home insurance, especially for first time home buyers. We will then explore the details in future articles.
Congratulations for achieving the American dream of owning your home! Along with the excitement, comes the overwhelming process of the many decisions you will need to make, including getting the right homeowner insurance. Process to get your homeowner policy starts much before the actual closing.
Once your offer is accepted, you need to shop around to get the best insurance quote – best not just in pricing but also in terms of coverage. Make sure that you fully understand the coverages, deductibles and exclusions to avoid nasty and expensive surprises. The lowest or cheapest quote may not be the best one if it does not adequately meet your requirements.
Ask a lot of questions – One thing I have learnt is that there are no wrong questions – answers may be wrong but not questions. Make sure that you understand what is covered and how much you need to pay as a deductible. I have had some clients who were not aware that under their current policy, their deductible was much more than what they could afford. One of the main reasons that I have entered the insurance business is to spread awareness about this very important topic among our community. One mistake and your entire life’s savings can be wiped out if you do not have proper insurance. It is important to understand that insurance is not just a cost of ownership but also a crucial risk management tool.
The main cost drivers are of course, the amount of coverages, type of construction, risk mitigation devices like sprinklers and home monitoring systems. Other factors which impact your quote include neighborhood crime rates, previous claims on the property, distance to nearest fire station and hydrants, age of equipment (HVAC, roof, appliances etc.). The agent should be able to sit down with you and answer any specific concerns that you may have.
Mortgage companies will require proof of homeowner insurance before the closing process. You will need to add your mortgage company to the policy so that if there is any major loss, the mortgage company is protected as well. Mortgage companies will usually require you to take full replacement coverage, for example.
If the house were to completely burn down, what would it take to rebuild a similar house? Note that replacement value is different from market value. You may have purchased the house for $500K but the cost of rebuilding similar house may be $450K or $550K. So, you will need to buy insurance coverage based on replacement to ensure that in the event of a total loss, you will have enough funds to rebuild the house.
Your policy may not cover you if the loss is caused by certain events. Most policies don’t cover floods, earthquakes or other expressly stated exclusions.
If your property is in an identified flood zone, most likely the mortgage company will require you to have flood coverage.
Finally, pay close attention to the deductible amount. Deductible is the amount that you will need to pay out-of-pocket for a covered loss before the insurance company pays the remaining amount. For example, if your deductible is $500 and you suffer a covered loss of water damage for $5,000, the insurance company will pay you $4,500. Naturally, higher the deductible, lower the premium and vice-versa.
In the above example, if your deductible was $1000, you may have saved few dollars on the premium but then insurance would have paid only $4,000. So, make sure you understand the risk associated with choosing a higher deductible. Make sure that you have enough money set aside to account for the deductible in case of a claim.
Once you have understood your policy and want to go ahead with the purchase, you will need to decide whether you want to escrow the payment or pay it together at once. Usually there is a discount for paying the entire amount.
The first insurance payment is considered part of closing cost and so can be paid out of closing rebates, if any. Alternatively, you can decide to pay the premium through escrows – in that case, your payment you make to your mortgage company will be increased by the insurance amount and will be paid monthly.
Again, good luck with your investment and hope that you and your family enjoy the benefits of home ownership without having to worry about catastrophic events.
In the next few articles, we will go deeper into the coverages as your home policy provides a lot of benefits.
Anuj Kasera is a long term resident of Charlotte, NC and owns an insurance agency, focusing mostly on home, auto and business insurance. He can be reached at anujkasera@gmail.com.
