Buying a home? You’ll want to buy this, too

FeaturedHome BuyingMoney

Written by:

Buying a house, for most of us, is the single largest purchase we’ll ever make — which is exactly why having the right amount of homeowners insurance is so important. “How much home insurance do I need?” is a common question that new homeowners ask themselves, and ultimately, the answer depends on factors like your risk tolerance, the requirements of your mortgage lender and how much you can afford to spend on premiums.

Let’s dig into the details so you can better assess the right amount of dwelling coverage and content coverage when it comes to your homeowners insurance policy.

Related: Quiz: Should you buy or rent a home?

Image Credit: SolisImages / istockphoto.

______________________

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.

______________________

 

 

 

Choosing the Right Dwelling Coverage

Homeowners insurance, broadly speaking, covers three separate categories: the home itself (or dwelling), the belongings inside your home and liability claims you may be vulnerable to if someone gets hurt on your property. We’re going to start with the first category: dwelling coverage.

Dwelling usually refers not only to your home itself, but also to attached structures, such as porches or garages. Outbuildings, or ADUs, may also be covered, but it’s important to check with your individual insurer, and to keep in mind that they may be covered at a lower rate than the primary dwelling.

Your dwelling is covered against damage that comes from specific perils, which will be named in your policy paperwork. It’s important to understand that not all damages are eligible for repair or replacement if they’re not one of the named perils in your policy.

Image Credit: DepositPhotos.com.

What Does it Usually Cover?

Here are the common perils covered by most homeowners insurance policies, per the Insurance Information Institute: 

  • Fire or lightning
  • Smoke
  • Windstorm or hail
  • Explosions
  • Damage caused by riots or civil commotion
  • Damage caused by vandalism or malicious mischief
  • Damage caused by aircraft, cars or other vehicles
  • Theft
  • Volcanic eruptions
  • Falling objects
  • Damage caused by the weight of snow, ice or sleet
  • Water damage from within the home

Image Credit: AntonioGuillem / Getty.

What May Not Be Covered?

However, there are certain types of natural disasters and damages that are not covered under most standard homeowners insurance policies, some of which are important to purchase riders or endorsements for, such as:

  • Flood damage
  • Earthquake damage
  • Maintenance damage (such as damage due to mold or pests)
  • Sewer backups

Once you know which perils are covered by your policy, you can figure out how much coverage you need.

Recommended: Homeowners Insurance Coverage Options to Know

Image Credit: AndreyPopov / Getty.

Standard Dwelling Coverage

Generally speaking, you want enough dwelling coverage to fully replace your home in the event it would need to be rebuilt. Importantly, that figure is not the same as your home’s value; the replacement cost may be higher or lower than your home’s value depending on its condition, location and the price of building materials in your area.

This is a hard number to pin down for sure, but your insurance company or an appraiser can help you make an educated guess. Additionally, you’ll want to review this number yearly, as it can change over time as the price of local labor and materials shifts and it’s critical to assess how much dwelling coverage you need.

Image Credit: monkeybusinessimages / iStock.

Buying Better Dwelling Coverage

While standard dwelling insurance should cover the full cost of replacing your home (in the event that it’s damaged by covered perils, don’t forget), there are additional levels of coverage that could be helpful under certain circumstances.

For instance, if there’s a storm or other local disaster that means many homeowners will be in need of repairs at the same time, the cost of labor and materials might skyrocket thanks to good ol’ supply and demand.

You might consider one of the following options, that are offered by some, but not all, homeowners insurers:

  • Extended replacement cost, which offers from 10% to 100% of additional, extended coverage to account for a spike in building costs.
  • Guaranteed replacement cost, which, as its name implies, guarantees that the full replacement cost of your home will be covered, regardless of price.
  • Of course, these additional coverages will come at an additional monthly premium cost.

Image Credit: Depositphotos.

Choosing the Right Contents Coverage

After your dwelling is covered, it’s time to move on to the stuff you keep inside it. Your contents coverage, or personal property coverage, is what you’ll rely on if you need to replace your belongings — from the clothes hanging in your closet to the food waiting in your fridge, and everything in between.

Sounds pretty great, right? The problem is, few of us actually have a handle on what exactly we own. In order to ensure you have enough personal property coverage, it’s a good idea to make an actual inventory of your possessions, or at least go through every room of your home and take photos of high-value items like electronics.

Certain high-value items, like jewelry, musical instruments, rare art or sports equipment, may require the purchase of additional coverages and should be kept on a separate inventory list.

Image Credit: theprint / istockphoto.

Replacement Value for Better Protection

You may be offered “actual cash value” for your personal property, but if your insurer offers it, it’s a good idea to upgrade to “replacement value.” That way, you’ll be paid out for the actual cost of replacing your items, rather than for their cash value — which may be less than their actual cost to replace them thanks to inflation and other factors.

Image Credit: gradyreese.

Adjusting Your Contents Coverage

Just as with your dwelling coverage, you want to ensure you’re regularly adjusting your contents coverage to ensure it’s up to date with what you actually own.

Personal property coverage is generally expressed as a percentage of your dwelling coverage — so if your home is covered for $400,000, and you have 50% in personal property coverage, you’d be paid $200,000 to replace your belongings. You can, however, adjust this figure up (or down), and you may want to do so.

Image Credit: DepositPhotos.com.

Theft Limits

Also be sure to look out for “theft limits” in your policy, which may put a cap on how much certain high-value categories of items can be covered in the event of theft. For instance, jewelry may only be covered up to $1,500 in the event of theft, which is exactly why you want to document your high-value items and potentially buy extra coverage for them.

Image Credit: LuckyBusiness / iStock.

‘Open Peril’ Coverage for Belongings

Remember those perils we talked about above? Just like your dwelling coverage, your personal property coverage only extends to damages or losses due to those named perils. However, some insurers offer an “open peril” coverage option for belongings, which will cover replacement in any event. (Always be sure to read the fine print of your policy to make sure you know how your coverage works, however.)

Recommended: Is Homeowners Insurance Required to Buy a Home? 

Image Credit: DepositPhotos.com.

Getting Better Liability Insurance

Finally, homeowners insurance also covers you in case you’re sued by someone who gets hurt on your property — for instance, someone who’s bitten by your dog or gets drunk at a party and falls on the steps. It might seem like a long shot, especially if you trust your friends, but you never know when someone might suddenly face major medical expenses… or decide to sue you.

Those kinds of costs can rack up quickly, so it may be a good idea to adjust up from the “standard” coverage of $100,000. Many personal finance experts suggest ensuring you have enough liability insurance to fully cover your assets — which is to say, the value of your home and all your other possessions, as well as the money you have in the bank.

Recommended: Personal Liability Insurance Coverage

Image Credit: DepositPhotos.com.

Getting Sufficient Loss of Use Coverage

Finally, homeowners insurance can also cover the living expenses you’ll rack up while it’s in the process of being repaired or rebuilt. That process can take time — and living on restaurant meals and hotel rooms can be costly.

Generally, loss-of-use coverage comes in at about 20% of your dwelling coverage as a default, but think carefully about whether or not you might want to adjust that figure up, especially if you live in an expensive city.

Image Credit: DepositPhotos.com.

The Takeaway

The exact amount of homeowners insurance you need will depend on both your personal risk tolerance and the requirements of your mortgage lender — not to mention, of course, the monthly premiums you can afford.

While your home might be your single biggest purchase, it’s not the most valuable thing in your possession. That privilege belongs to your life itself. And while you can’t put a dollar value on your life, you can help ensure the people you’d leave behind, if something happened to you, will be comfortable and taken care of in your absence.

Learn More:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

 

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi offers customers the opportunity to reach the following Insurance Agents:
Home & Renters: Lemonade Insurance Agency (LIA) is acting as the agent of Lemonade Insurance Company in selling this insurance policy, in which it receives compensation based on the premiums for the insurance policies it sells.
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLife policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Image Credit: Deposit Photos.

More from MediaFeed

These states have the most foreclosures in the US

Image Credit: depositphotos.com.

AlertMe